In Pursuit of Learning Investments’ Whereabouts

Students at Stanford University erected a giant milk carton on campus last month to symbolize their new cause.

“Missing: $12.2 billion, one endowment,” the prop declared, taking a page from milk carton photos of missing children. “Do you know where it is invested?”

At Yale, like-minded activists recently called on university finance officials to detail how their school’s $12.7-billion endowment had been invested.

And at the University of Pennsylvania, about 75 true believers in the cause from 15 colleges and universities gathered this fall to brainstorm ways to prod traditionally secretive -- and increasingly rich -- campus endowments into a new era of sunshine and full disclosure.

“I think now, maybe because of all the corporate scandals, there’s less trust of the system,” said Anna Letitia Mumford, a Stanford graduate student in international education who participated in the milk carton protest.

“We want to know where the money is going. We want there to be public oversight. We want the system to be more transparent.”

As battle cries go, “throw open the books” may never stir the passions raised by war, human rights, poverty or the environment. But in a sign of the post-Enron times, the goal of financial transparency has captivated a small and sophisticated group of campus activists.

They’re trying to remove the veil of secrecy that covers more than $230 billion in campus endowments, which are invested in such diverse holdings as blue-chip public companies and freewheeling hedge funds.

The endowment pot has become increasingly important to many schools, paying for bigger portions of operating budgets and, in some cases, surpassing tuition and fees as a source of annual income.

To campus critics, the lack of disclosure raises questions and concerns. Activists who once might have asked whether their schools had invested in separatist South Africa or fielded sports teams in sweatshop-sewn uniforms are asking a different sort of question: Where is all the money going?

“In a college and university environment, openness and free-flowing information are core tenets,” said Mark Orlowski, executive director of the Responsible Endowments Coalition, which organized the October meeting of campus activists at the University of Pennsylvania’s Wharton School. Yet, “encouragement and support of the free flow of information usually stop at the investment office’s door.”

The demand for greater financial transparency by colleges and universities comes as public companies and mutual funds are under regulatory pressure to remove some of the curtains around their operations.

This year, for example, mutual funds for the first time were required by the Securities and Exchange Commission to reveal the proxy votes they cast at corporate meetings. The requirement, which many funds had opposed, was designed to prevent funds from quietly siding with management in return for lucrative business, such as running a company’s retirement plan.

As some see it, the SEC decision was grounded in trust law. In theory, the same principle could apply to trustees of other large capital pools, including pensions and endowments.

“If you accept that [SEC] logic, it’s very hard not to argue that all trustees have this obligation,” said Peter D. Kinder, president of KLD Research & Analytics Inc., a Boston firm that monitors companies’ social track records for institutional investors.

Endowments are largely financed by alumni contributions, and in many cases they have ballooned in value under professional money managers. As some students see it, the secrecy has stifled what should be an open debate about where to invest the money.

“Through our investments we can actually put forth some of the values we have,” said Andrea Johnson, a Yale graduate student in environmental science. “Through our investments we can make positive changes in the world.”

She adds: “If you can’t even know where it is, you can’t even have the discussion.”

Much of the controversy centers on the use of hedge funds, the lightly regulated money pools that offer the potential for outsized investment returns.

Hedge funds can pursue an array of speculative strategies, including short-selling stock. The funds insist on secrecy because, as in chess, the success of a move can hinge on the masking of intent.

University officials say that if they hope to reap the gains of hedge fund investments, they have to play by hedge fund rules.

“There are investment opportunities that would not be available to the university if the university were to disclose them,” Yale spokesman Tom Conroy said.

Conroy noted that the investments were all aboveboard and that removing them would threaten the endowment’s ability to “support all the essentials and worthwhile research and education” that it underwrites.

Much of the activist ire has been directed at Farallon Capital Management, a San Francisco-based hedge fund that students say symbolizes the secrecy surrounding university investments.

In November, students from Yale, Stanford and seven other universities asked Thomas F. Steyer, senior managing member of the company, to authorize their schools to disclose financial information about their ties to Farallon, and for the hedge fund to turn over information -- including its list of investment partners.

Farallon, with $10.8 billion in assets, is among the nation’s largest hedge funds. It won’t reveal the names of clients but hasn’t denied that they include Yale and Stanford.

In response to the students, Steyer wrote that the company communicated extensively with investors but said it would steer clear of greenlighting colleges to disclose information.

“As investors, we cannot comment on the appropriate approaches for universities to take regarding issues of community oversight -- this is not a matter for us to decide,” he wrote.

Steyer declined to be interviewed for this article.

“As our university investors oversee community issues of social responsibility and disclosure, we recognize they need to be sensitive to their diverse constituencies,” the company said in a statement. “They must, however, also protect the privacy of other investors and the competitive interests of their investments.”

Linda Kimball, manager of investment responsibility at Stanford, said the student demands were thought-provoking, although not simple to accommodate.

“It’s not easy to automatically disclose,” Kimball said. “We’re examining the issue.”

Overall, endowments have burgeoned in size, growing at an annual rate of about 10% for the last decade, said Mimi Lord, who analyzes endowment-related issues for the TIAA-CREF Institute that is part of a large group of retirement funds including the Teachers Insurance and Annuity Assn.-College Retirement Equities Fund.

And there are signs that universities are relying on endowments more than ever. At Yale, for example, the $12.7-billion endowment is providing $562 million this year, about one-third of the university’s operating revenue and more than double the share of revenue provided by tuition and fees.

At Stanford, annual payout from its $9.9-billion endowment covers about 16% of the operating budget, compared with roughly 10% of the budget paid for by tuition and fees. (Officials dispute the $12.2-billion figure that appeared on the milk carton.)

Longtime observers are struck by a change in the approach of activists -- whose parents may have lobbied schools to unload investments in South Africa in the 1970s.

“Thirty years ago, the knee-jerk reaction was, ‘Let’s sell our shares,’ ” recalled Timothy Smith, president of the Social Investment Forum, a trade association for socially conscious investment funds, and senior vice president of Walden Asset Management.

“The sophisticated reaction now says, ‘Wait -- there are other ways we can try to change a company’s sweatshop practices.’ ”

Examples, he said, include shareholders using their ownership to engage a company’s management in dialogue, such as through proposals at annual meetings and public forums.

Seeking to bring university officials into the new debate, students from Duke University, the University of Pennsylvania, Swarthmore College, Barnard College and Williams College launched the Responsible Endowments Coalition this spring. The loosely knit group discussed shareholder advocacy and other related issues during their conference in October at the Wharton School.

Advocates understand that they may not electrify masses of students. Nonetheless, they say the quest is just getting off the ground.

“Clearly, people left with more energy and more knowledge,” said Orlowski, a Williams College graduate, noting that the coalition now has representatives from 35 schools boasting combined endowments of $102 billion.

“We were ecstatic at the level of excitement and energy in the room.”

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Looking back on student activism in America

1930s: National Student League and Student League for Industrial Democracy form the American Student Union. From 1936 through 1939, 500,000 college students are mobilized into annual one-hour strikes against the Spanish Civil War.

February 1960: Four black students request service at a Greensboro, N.C., Woolworth’s whites-only restaurant. The students are refused service and begin a sit-in, which leads to additional sit-ins throughout the South.

June 1962: The left-wing Students for a Democratic Society issues its manifesto, the Port Huron Statement, the beginning of the group’s debate and involvement in American political and social life.

May 1970: Four students are killed at Kent State University in Ohio during an anti-Vietnam War protest.

November 1978: College boycott of Nestle products over the company’s marketing of infant formula in the Third World begins at Wellesley College and spreads to the University of Minnesota, Colgate and Yale.

April 1986: College students observe a National Divestment Protest Day aimed at getting campus trustees to discontinue investments in South Africa. Boycotts of corporations with interests in South Africa, including Coca-Cola, IBM and Ford, eventually lead many universities to divest themselves of stock in those companies.

Compiled by Robin Mayper Los Angeles Times