The Stewards of an Elite University, or a "Politburo" of "Shadow Bankers?"

We have postulated that one of the key reasons US health care has become so dysfunctional is that the leaders of some of the most august health care institutions have strayed from, if not totally abandoned their organizations' fundamental missions.  There are many possible reasons for this phenomenon, but one is that the ultimate stewards of not-for-profit health care organizations, their boards of directors or trustees, have become uninterested in the mission, or impotent to uphold it.  So, we have tried to figure out what has happened to these boards that has lead to this sorry state.

Dartmouth College: the Packing of the Board of Trustees

One example we have come frequently discussed (beginning here) is that of Dartmouth College, despite its name, really a university, and one of the elite American universities which includes a well-regarded medical school.   For a long time, Dartmouth had one of the more accountable and representative systems of governance found in US universities.  Recently, however, this accountability and transparency was challenged by some of the College's own leaders. 

Most boards of trustees are self-elected.  When an old member leaves, the new members elect his or her successor.  Dartmouth alumni, however can elect eight members of the board of trustees. Until recently, eight others were "charter trustees," who were individually chosen by the other charter trustees, and two were ex-officio. Although the College's Association of Alumni traditionally nominated alumni to run for trustee positions, candidates could be nominated by petition, and starting in 2004, four such petition candidates were elected.

As described by FIRE, the Foundation for Integrity and Responsibility in Medicine, this more open process fostered change in how the university was lead, and seemed to foster renewed attention to the institution's mission:

These trustees spoke out when they perceived their alma mater as not living up to its mission, and Dartmouth students benefited. In May 2005, the college repealed its speech code, and it immediately moved from FIRE's 'red-light' rating and became a 'green-light' institution.

As might be expected, the reigning leadership was not pleased.

Some campus officials viewed the propensity of petition candidates to voice their opinions on illiberal policies as detrimental to the school's image. The Wall Street Journal profiled T.J. Rodgers, a petition-nominated trustee, who explained the criticisms leveled at the 'divisive dissidents.'

'If 'divisive' means there are issues and we debate the issues and move forward according to a consensus, then divisive equals democracy, and democracy is good. The alternative, which I fear is what the administration and [Board of Trustees Chairman] Ed Haldeman are after right now, is a politburo-one-party rule.'

In 2007, in apparent response to the "divisiveness" of the petition trustees, the Charter Trustees proposed increasing their own numbers. Chairman Ed Haldeman's rationale for this, as we discussed here, was to ensure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed," and that the board members would possess "even more diverse backgrounds."

Charter Trustees or "Shadow Bankers"?

Yet when we examined the backgrounds of the current charter trustees, we found that they exhibited little diversity. Remarkably, three-quarters (6/8) were in leaders of the finance sector. The board chairman, Ed Haldeman, was then the leader of Putnam Funds.  Now, he is the CEO of "Freddie Mac."  In 2007, the significance of this kind of lack of diversity were not clear.  However, it did seem strange that those accused of seeking to form a "politburo" came from the Wall Street, the street that the left once loved to hate.

However, by late 2008, the world economy descended into an unprecedented financial collapse. Many concluded that the global economic collapse was caused by arrogance, greed, and corruption within the financial sector. This suggested that leadership of academia, and academic medicine in particular, by leaders of the finance sector might not, in retrospect, have been a such a good idea. When we reexamined the composition of the now enlarged cohort of Charter Trustees, however, we found nine of 13 "charter" trustees were leaders in finance, now including three in asset management, two in private equity, one in the field formerly known as investment banking, one in venture capital, one in mutual funds, and one in strategic consulting and investment. Of the remaining four, one was the CEO of a large diversified corporation that has a major finance subsidiary. The remaining three were two physicians and a pharmaceutical corporate CEO.

Given the ongoing financial chaos at the time, we again suggested that a board dominated by business leaders in the finance sector might not be a good idea. Last week, a report came out suggesting why we were right.

Charter Trustees as Dartmouth's Own "Shadow Bankers"

"Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System," published by the Center for Social Philanthropy, Tellus Institute, focused on how prominent educational institutions, including Dartmouth College, came to invest much of their endowments in risky, illiquid "alternative" investments, the sort provided by the "shadow banking system." The report noted that this change lead to greater financial risks, leading to recent losses and consequent sharp cutbacks in spending, programs, and employment at the affected institutions. In particular, however, it focused on leadership and governance problems at the institutions that lead to this state of affairs.

Although the emergence of the high-risk Endowment Model of Investing has taken place against the backdrop of powerful forces of financial globalization and the influence of Modern Portfolio Theory, its consolidation and influence today at colleges and universities depend vitally on college leaders: senior administrators, trustees, and investment managers, especially the increasingly prominent role of chief investment officer, or CIO. The financial crisis has in many ways been a crisis of leadership. The precipitous declines endowments have suffered during the credit crisis need to be understood as the logical outcome of the Endowment Model’s high risk strategies, but behind the model stand those who are ultimately responsible for its execution: whether as professional money managers, investment officers, affiliated investment management companies, outside managers, or investment consultants, or as the fiduciaries sitting on governing boards and investment committees.

At Dartmouth, in particular, the report focused on conflicts of interest among the board of trustees:

When it comes to weakened endowment oversight, the most glaring problem arises from trustees from the finance industry whose firms provide investment management services. One of the most disconcerting cases in this respect is that of Dartmouth College, where the sudden departure of CIO David Russ in 2009 created a leadership vacuum over endowment management. The college’s investment committee chair and trustee Stephen Mandel has played the CIO role on a voluntary, part-time basis since last summer and will continue to do so until he becomes chair of the board of trustees later this year. At the same time, Mandel’s firm, Lone Pine Capital LLC, a well known hedge-fund complex he founded in 1997, has also managed an investment mandate from the college’s endowment valued originally at $10 million. Although the college has a conflict-of interest policy and is required to disclose such 'pecuniary benefit transactions' with the state of New Hampshire, it would seem difficult for fellow trustees to provide proper oversight of investments managed by a fellow trustee serving as the de-facto CIO. Additionally, if Mandel recuses himself from committee or board deliberations related to his firm, then the investment committee must function without its chair.

However, the problem is magnified because Mandel is only one of more than half a dozen Dartmouth trustees whose firms manage multimillion-dollar investments for the endowment, according to the college’s filings with Charitable Trusts Unit of the New Hampshire Department of Justice. Leon Black’s firm Apollo Management has reportedly managed at least $40 million in Dartmouth investments. Russell Carson’s private equity firm[Welsh, Carson, Anderson and Stowe] has reportedly received at least $45 million in commitments of capital from Dartmouth. William Helman, IV’s venture capital firm Greylock Partners, has reportedly received $10 million investment mandates from the college, while R. Bradford Evans’ firm Morgan Stanley has done multiple transactions
with the college, varying from investments in international real estate and hedge funds to bond issuances, all at undisclosed levels. P. Andrew McLane [T A Associates] and Jonathan Newcomb [Leeds Weld and Co] have also had reported interests in college investments at undisclosed levels. For an endowment of its size— Dartmouth’s endowment fell to less than $3 billion in fiscal year 2009—the deep dependence on trustees’ own businesses for endowment management seems disproportionate.

Thus, one half of the membership of Dartmouth's Charter Trustees were also being paid by Dartmouth to manage its endowment investments.  However, as the Tellus Institute report noted,

Leading experts on nonprofit board governance, such as Richard Chait at Harvard University, stress that colleges should simply not do business with the companies of their board members, in order to avoid inevitable distractions and the sense of divided loyalties that arise, to say nothing of appearances of self-dealing and personal enrichment

Another "Missing Link": Board Members Doing Business with the Organizations They are Supposed to Steward

We have frequently discussed the web of conflicts of interest that now permeates health care.  Most of the conflicts we have discussed up to now involve physicians or academicians who have financial ties to pharmaceutical, biotechnology, and device companies.  Health care organizational leaders also do business  with the organizations they lead have not until recently been a topic of discussion, mainly because such conflicts of interest have rarely been disclosed.

It looks like this is going to change.  The US Internal Revenue Service sought disclosure of such conflicts of interest affecting hired executives and boards of trustees of not-for-profit organizations beginning in 2009.  These disclosures, reported on IRS form 990, are just beginning to be made public.  We just posted about members of the board of directors of a large academic health care system who also lead or owned companies that did substantial business with the system.  Now we see that a substantial portion of the board of trustees of Dartmouth lead financial firms that managed a major portion of the College's endowment, perhaps to the overall detriment of the endowment's performance.  No wonder the Charter Trustees got nervous about petition trustees poking about their business.

 As summarized by BoardSource, there are three traditional duties of members of boards of trustees of not-for-profit organizations:

Duty of Care

The duty of care describes the level of competence that is expected of a board member, and is commonly expressed as the duty of "care that an ordinarily prudent person would exercise in a like position and under similar circumstances." This means that a board member owes the duty to exercise reasonable care when he or she makes a decision as a steward of the organization.

Duty of Loyalty

The duty of loyalty is a standard of faithfulness; a board member must give undivided allegiance when making decisions affecting the organization. This means that a board member can never use information obtained as a member for personal gain, but must act in the best interests of the organization.

Duty of Obedience

The duty of obedience requires board members to be faithful to the organization's mission. They are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public's trust that the organization will manage donated funds to fulfill the organization's mission.

Letting a board member's firm manage millions of dollars worth of the institution's endowment portfolio seems an obvious violation of the duty of loyalty. (Letting a board member's legal firm handle the institution's legal issues, or having a board member's advertising firm do its marketing, as described in our earlier post, also seem to be obvious violations of this duty.) A board member who sees nothing wrong with doing business with the organization he or she is supposed to steward would likely see nothing wrong in allowing the organization's mission to become a casualty of the means used to protect that business relationship.

I suspect we are soon to see many more examples of hired executives and board members of revered not-for-profit organizations who have been doing business on the side with the organizations of which they are supposed to be leaders or stewards.  These sorts of conflicts of interest may be another "missing link" explaining why the leadership and governance of health care organizations has gone so far astray. 

As disclosure continues, maybe enough outrage will ensue so that improved leadership and governance will become possible. 

Post Title → The Stewards of an Elite University, or a "Politburo" of "Shadow Bankers?"

Why Have Governing Boards Forsaken Their Duties? - Ideas from Silverglate and Malchow

We have posted frequently about the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling reputations got this way has been unclear.

Now there are new insights from the ongoing discussion of one of the most interesting and controversial cases of disputed organizational governance. We have often come back to the example of Dartmouth College, of which Dartmouth Medical School is a significant component. We most recently discussed here an ongoing dispute about the extent that the institution's board of trustees ought to represent the alumni at large, or instead, ought to be a self-elected body not clearly accountable to anyone else. (For our take on this complex case, start here and follow the links backward.) The latest development in the case is a lawsuit filed by Dartmouth alumni challenging an increase in the number of self-elected, or "charter" trustees, which they charged broke an 1891 agreement that established numerical parity between alumni-elected and charter trustees.

Soon after this lawsuit was filed, an important article by Harvey Silverglate (one of the founders of FIRE, the Foundation for Individual Rights in Education) and Joseph Malchow appeared. For those interested in the case, the article includes extensive detail, with multiple citations, on all the twists and turns of the case, and is very much worth reading. (See this post on FIRE's Torch blog for more background and discussion.)

However, the article also features extensive scholarship on governance of US not-for-profit institutions, focused on academic institutions (including medical academia), and with relevance to other not-for-profit or non-governmental health care organizations. In particular, the article sheds light on how the governance of such organizations has become so degraded.

First, Silverglate and Malchow summarized the duties of governing boards:

Traditionally, fiduciary duty [of the board of trustees] has been understood as having two components: the duty of loyalty and the duty of care. The duty of loyalty requires a fiduciary to act in a manner he or she reasonably believes to be in the best interests of the organization. The duty of care obliges directors to inform themselves of reasonably available information prior to making a business decision. More recently, courts have considered the duty to act in good faith [the duty of obedience] as a fiduciary requirement. This component, similar to the duty of care, is satisfied when a director makes informed decisions without conflicts of interest.

The question central to the dispute regarding Dartmouth governance is to what or to whom do fiduciaries owe their duty. Corporate directors have a relatively straightforward task of serving the corporation and its shareholders. In the case of a charitable trust, however, which generally does not have 'ascertainable beneficiaries who can enforce their rights,' the duty of fiduciaries is instead directed toward fulfilling or furthering the organization’s mission

So just to summarize, considerable discussion, scholarship, and I believe some some laws support the notion that the board of a not-for-profit organization is obliged to take reasonable care to make informed decisions free of conflicts of interest to uphold the organization's mission.

However, currently, many boards value deference to the organization's (usually hired) top managers and avoidance of internal conflict within the board more highly than these obligations:

Dartmouth, to be sure, is far from the only place where fealty to organizational leaders—and the notion of 'going along in order to get along' —has been placed before true fiduciary duty.

Silverglate and Malchow have some important ideas about how we came to this.

Not-for-profits became more like for-profit corporations:

During the 1980s, traditional nonprofit organizations supported by donations and governed by donors and volunteers became increasingly displaced by professionally staffed commercial nonprofits, supported by grants, contracts, and earned income, and governed by insider boards. The shift in governance was armored by progressively professionalized and entrepreneurial management, which was perceived to be more adept at control of the ebb and flow of funds in the American market.

Top hired not-for-profit executives assumed more power at the expense of other constituencies, including the professionals who did the work:

By the 1990s, with faculty power firmly institutionalized at colleges and universities, a notion that university presidents were bereft of power took hold. The AGB [Association of Governing Boards], in 1996, argued that university presidents needed to regain power with a pivotal document of its own: Renewing the Academic Presidency: Stronger Leadership for Tougher Times. Though this outlook was applied to varying degrees at colleges and universities, an imperative toward greater executive power in universities was thus established.

Presidential and professorial decision-making power, combined with the rise of the administrative bureaucracy in academia, have generally relegated trustees to a secondary role in campus affairs.

Attempts at reforming governance were inappropriately based on a for-profit corporate model, and particularly the need to project unity and avoid confrontation among the leadership trumped transparency:

Aligning academic boards with the cultural trends of increased critical oversight has obvious benefits, but some boards have moved to adopt the norms of for-profit corporate governance that are simply not applicable to the university context. Admittedly, this is a thin distinction when considered on a theoretical level. But in practical terms, misguided nonprofit reforms—some of which, upon close examination, actually violate an institution’s mission—are readily evident.

For example, some nonprofit boards have emphasized the adoption of formal nondisclosure pledges or confidentiality agreements that step well beyond nondisclosure of proprietary information. This is hardly uncommon in the business sector, where bottom-line strictures demand a certain degree of internal accord and non-transparency. And though there is evidence that nonprofit board directors have, from time to time, attempted to hush public dissent, only recently have dominant majorities of some nonprofit boards proposed and ratified binding pledges not to publicly air differences. According to a 2006 BoardSource publication, 'If a board member does not support a decision for whatever reason, [he or] she has a responsibility to remain silent or step down from the board.' (Recall the resignation offer made to Zywicki before his second term was denied.)

These directives, written in highly influential publications in the realm of university governance, disregard the important role that public discussion has on decision-making at universities and nonprofits in general. 'In the nonprofit context, nondisclosure agreements or the use of 'executive session' rules to curtail debates about policy and procedure depart from established norms. They shut down opportunities for public dialogue and for communication with other concerned and influential parties, including reporters,' nonprofit specialist Norman I. Silber wrote in the Oregon Law Review.

Emphasis on raising money rather than upholding the mission has lead to board deference to hired executives.

Fidelity to institutional leaders, rather than institutional mission, is now paramount in higher education, as deviation from accepted decisions is perceived as potentially shrinking the donor base. Administrators cringe at public disagreement; rather than focusing on the long-term likelihood that competing ideas will result in implementation of the fittest, they tend to focus on the short-term possibility that a particular alumni subset may be offended. This shortsighted outlook is not only an insult to the intelligence of alumni and other constituencies, but it is ultimately detrimental to the institution, as established ideas are enthroned and unchallenged. It is also based on false premises: as in the case of Dartmouth, there is no established correlation between public criticism and donor decline.

Boards are increasingly composed of executives of for-profit corporations, particularly in the finance field, who may grant the same deference to the organizations' leaders that they would like from their own board. That is, hired executives identify more with other executives than with the organizations they are supposed to be leading:

Judge Cabranes noted that trustees, especially business executives, tend to act toward university presidents as they wish their boards would act toward them—deferentially. And the phenomenon of board members believing they serve at the pleasure of the executive is what one nonprofit attorney and blogger, has termed 'upside down board.' The ascendance of the hedge-fund community, a peculiar province of graduates of elite institutions, has contributed to the prevalence of the upside down board....

The article suggests some issues that need to be addressed to make governance more accountable, transparent, ethical and honest. Boards need to be reminded of their duties, and that their loyalty should be to the mission, not the organization's executives, or the views of the board's majority. Transparency and open discussion are more important than projecting the (sometimes false) impression of unity. New board members should be chosen for their loyalty to the mission rather than their similarity to and congeniality with current board members.

I strongly suggest that anyone who cares about how health care organizations are run ought to read Silverglate and Malchow's full article. It should be required reading for current and would-be board members of academic and health care not-for-profit organizations (but I will not hold my breath waiting for them to read it.)

Post Title → Why Have Governing Boards Forsaken Their Duties? - Ideas from Silverglate and Malchow

BLOGSCAN - Accountable Academic Governance Under Threat

On The Torch blog, hosted by FIRE (Foundation for Individual Rights in Education), this post by Kyle Smeallie summarized the travails of "petition candidates" for the boards of trustees of two elite American universities (Dartmouth and Harvard). As we have noted, at most universities, the boards of trustees, the bodies ultimately responsible for upholding the universities' missions, are closed shops. At most universities, the boards appoint new members to replace departing ones, without input from alumni, parents, students, faculty or anyone else who might be considered constituents. Thus, at most universities, even though the boards are ultimately responsible for the stewardship of the institutions, and upholding the institutions' missions, practically, they are accountable to no one. At very few universities, there may be contested elections for a few board seats, and an opportunity for those outside the board, usually alumni, to place candidates on the ballot. However, even at those somewhat more enlightened universities, those candidates face an uphill battle. Thus, while Dartmouth and Harvard have somewhat more transparent, accountable, and representative governance than do most academic institutions, even that is under threat.

Post Title → BLOGSCAN - Accountable Academic Governance Under Threat

Pension Fund Scandals, Payment Agents, "Chooch" and the Anechoic Effect

As we get closer to graduation season for most institutions of higher education, another story about the leadership and governance of higher education, involving an institution housing a prominent medical school, has come into view, albeit indirectly. Let me try to explain this complex story, which on its surface has something to do with the ongoing financial crisis, but nothing to to with academia, by quoting, as usual, from media coverage.

We start with an article from the New York Times last week:

The man leading the Obama administration’s efforts to restructure the auto industry has been described in Securities and Exchange Commission documents as having arranged for his investment firm to pay more than $1 million to obtain New York State pension business.

Although he is not named in the documents, a person with knowledge of the inquiry said the investment executive is Steven Rattner, co-founder of the Quadrangle Group, the prominent private equity firm.

The S.E.C. complaint, filed as part of an expansive state and federal investigation into corruption at the state pension fund, details the efforts of Quadrangle to gain business from the pension fund beginning in 2004.

The person who received most of the $1 million-plus payment has been indicted, accused of selling access to the fund.

Here are the details of allegations of how Mr Rattner interacted with intermediaries to get NY state pension fund investments into his company.

Investigators are scrutinizing the fees paid by investment firms to intermediaries who arranged deals with the $122 billion pension fund. While such payments are legal, they often raise questions about conflicts of interest and would be illegal if used to bribe public officials.

In a 123-count indictment issued last month, two aides to Mr. Hevesi were accused of selling access to the fund. The aides, Hank Morris, who was Mr. Hevesi’s top political consultant, and David Loglisci, the fund’s chief investment officer, have denied any wrongdoing.

The S.E.C. complaint, which was released Wednesday, describes steps undertaken by the Quadrangle executive to win $100 million worth of business from the pension fund in 2005. That amount accounted for nearly 5 percent of a Quadrangle private equity fund and helped the company raise money from other investment funds.

In October 2004, the executive met with Mr. Loglisci to seek the pension fund investment and Mr. Loglisci 'reacted favorably' and 'began taking the necessary steps to secure approval' for the investment, the complaint said.

Two months later, in December, the same executive met with Mr. Morris, who, according to prosecutors, was working in tandem with Mr. Loglisci to generate millions of dollars in fees from the investment firms, and within weeks had agreed to a deal to pay an obscure securities firm that employed Mr. Morris 1.1 percent of any money that the retirement fund invested with Quadrangle, as a placement agent fee. That worked out to $1.1 million, of which Mr. Morris received 95 percent.

The timing of the meeting with Mr. Morris was significant, the complaint indicated, because the Quadrangle executive had already met with Mr. Loglisci and would presumably not need a placement agent. In addition, Quadrangle had previously retained a separate placement agent.

The executive also met with Mr. Loglisci about a low-budget movie Mr. Loglisci was producing, 'Chooch.' Soon afterward, GT Brands Holdings, a company owned by one of Quadrangle’s private equity funds, made a deal to acquire the DVD distribution rights to 'Chooch,' an agreement that made the film’s producers nearly $90,000.

The Quadrangle executive called Mr. Morris after the distribution deal was closed, and told him of the deal’s 'connection to Loglisci.' Three weeks later, Mr. Loglisci 'personally informed the Quadrangle executive that the retirement fund would be making a $100 million investment' in Quadrangle, the complaint said.

Later, the Washington Post published an article which alleges possible conflicts of interest affecting Mr Rattner in his current position as "automobile czar,"

The questions around Quadrangle and Rattner follow others that came to light soon after he emerged as a candidate to lead the Obama administration's efforts to prop up Chrysler and General Motors.

Quadrangle was, at least indirectly, previously involved in a deal involving Chrysler's majority owner, Cerberus Capital Management, a private equity firm.

That connection has led some Chrysler investors to doubt whether Rattner can decide without bias how the government should aid Chrysler.

In the summer of 2007, Quadrangle purchased Dennis Publishing, the owner of magazines including Maxim and Blender. The estimated price was $250 million.

Quadrangle's new magazine company was renamed Alpha Media and it took a loan of $125 million, much of it coming from Cerberus.

A year after Quadrangle's purchase, the publishing company's profits began to plummet.

The company announced last month that it would cease publication of its Blender magazine. Quadrangle has written the Alpha Media investment down to zero on its books, and Cerberus, the company's major creditor, is now effectively in control of Alpha, a person familiar with the matter said.

This week, a NY Times article revealed that Mr Rattner and Quadrangle are facing a wider investigation, and may be a target of investor lawsuits:

Two months after Steven Rattner left Wall Street for Washington, his private investment company is facing a widening investigation into corruption in public pension funds — and fighting for its future.

As state and federal authorities examine Mr. Rattner’s dealings with the New York State retirement fund, questions are emerging about his efforts to gain business from several other public funds, including ones in New Mexico and New York City. His private investment firm, the Quadrangle Group, is moving to calm anxious pension managers, who have entrusted the firm with hundreds of millions of dollars.

Mr. Rattner, who is leading the Obama administration’s efforts to revamp the auto industry, has left his small but prominent firm in a bind. Because he was integral to Quadrangle, investors can try to withhold additional money that they have pledged to the firm now that he has left.

No charges have been filed against Mr. Rattner, who did not respond to e-mail messages on Tuesday, or against Quadrangle, whose executives declined to comment.

While Quadrangle’s funds have not suffered as much as some other private equity funds, its investors have suffered losses in other parts of their portfolios. Some of them might try to capitalize on the inquiry to avoid making good on their pledges.

Another crucial question, however, is whether money from one Quadrangle fund was used to lure investors to a second fund. That possibility that might expose Quadrangle to investor lawsuits.

Furthermore, a Washington Post article raised the question of a failure of honest disclosure:

Government officials are expanding their investigation of Quadrangle, the private-equity firm founded by the Obama administration's lead auto negotiator, as new details emerge about an alleged kickback scheme involving the New York state pension fund.

On Wednesday, the New York City Comptroller William C. Thompson Jr. said he is working with the state's attorney general, Andrew M. Cuomo, to determine whether the city's pension funds were 'intentionally misled or deceived' by Quadrangle's failure to disclose the use of a middleman who has since been indicted, Hank Morris.

New York City's comptroller on Wednesday said Quadrangle never disclosed that it had paid Morris fees in connection with the city pension funds' investment in Quadrangle. The city invested $85 million in 2005 and $40 million in 2006.

The city has a rule that use of placement agents must be disclosed, but that rule was implemented in 2008 and does not apply to the Quadrangle investments.

But as part of the due diligence for receiving the investment, Quadrangle said in writing at the time that it used only two placement agents, Monument Group and London-based Helix Associates, the comptroller's office said.

'We take any ethical lapses by our managers seriously and will consider any remedies available to investors,' Thompson, the city's comptroller, said in a statement.

In response to all this, New York state government officials decided to ban middle-men from influence over pension fund investment decisions, according to the Wall Street Journal:

New York state said its public pension fund, one of the nation's largest, would ban the use of middlemen to help private-equity funds and other investors secure its business.

The move marked a pivotal development in a burgeoning controversy that has grown from a local corruption probe to a broader examination of the tactics that investment firms used to win lucrative business from vast public pension pools.

In most states, charging placement fees is legal if they are disclosed as required. But potential conflicts of interest are rife, especially for officials with a legal obligation to make informed, well-intended decisions about how pension-fund money is spent. Lawyers say a gray area emerges when finder's fees are paid to individuals or firms that do little more than trade on their access to public-pension-fund executives.

Such alleged behavior is at the heart of the scandal unfolding in New York. The state attorney general and the SEC have accused a former top fund official and a political adviser of giving investment funds access to billions of dollars of state pension money, in exchange for kickbacks and other payments for personal and political gain. One such middleman already has pleaded guilty to securities-fraud charges.

Some officials across the country have expressed concern about so-called pay-to-play practices -- that is, paying to influence people who direct the investments of public-employee retirement funds. Pay-to-play can range from illegal kickbacks, which in some instances have led to jail time, to legal activities such as campaign contributions to elected officials on the boards of pension funds. Pension funds are especially vulnerable to such accusations because their boards are often populated by elected officials or people with limited financial experience who need to rely heavily on outside advisers.

New York state's comptroller, Thomas DiNapoli, said that in light of the allegations contained in the case brought by the state's attorney general and the SEC, 'the best way to restore the pension fund's reputation is to say we won't be involved with any transactions that involved placement agents.'

Meanwhile, several commentators raised questions about Mr Rattner's suitability to be "automobile czar."

David Rothkopf, the author of Superclass, dubbed Mr Rattner the "kickback czar" on the Foreign Policy blog,

Are you joking? The Obama Administration somehow thought that it was okay to give a pass to Steve Rattner? They thought it was okay to appoint a guy to a key job after he apparently acknowledged to them that he was under investigation for providing a million dollar payment to pension consultant in exchange for receiving an assignment to manage a big chunk of pension fund money for New York State?

They thought it was okay in the middle of a justified surge of global disgust with Wall Street to embrace a big time Wall Street player who is smart enough to be arguing the legal technicalities of the transaction but not smart enough to recognize that it might just seem to be sleazy, dubious and a gross disservice to the people who were depending on the State to use appropriate methods and metrics to find stewards for their retirement money?

They even thought it was okay when part of the deal involved payments to support a movie called 'Chooch.' (What’s worse than bad ethics and bad taste all wrapped up into one sordid exchange? The New York Post called 'Chooch' which scored an amazing 00 rating from Rotten Tomatoes “the kind of vanity project that gives amateurs a bad name.”) What's more they did all this while giving Rattner the job of auto czar for which he had no material auto industry experience? I thought the way high ethical standards worked was that you didn't just bar people convicted of crimes, you tried to weed out people who had done things that were wrong or contrary to the public interest.

On BlackStarNews, Edward Manfredonia wrote:

I believed Rattner’s efforts to take the Times private should have disqualified him from an appointment with the Obama Administration; especially the key post of trying to stabilize the collapsing auto industry.

The White House still insists that the Administration fully supports Rattner; that reminds me of Bush proclaiming backing for Don Rumsfeld when it was clear he should have been shown the door as defense secretary.

Here's why Rattner deserves the boot.

An even more egregious form of activity that what I previously covered has become public. Rattner, who has extensive ties to Bill and Hillary Clinton, has been identified in several published news reports as the Quadrangle Fund executive who paid $1.1 million to receive more than $100 million from New York State’s multi-billion dollar pension fund to manage. The manner in which the payments were made leaves no doubt that they were meant for 'pay to play', which is illegal in my opinion.

Not surprisingly, a NY Times editorial was milder, but did allow,

Mr. Rattner showed some bad judgment in the 'Chooch' deal, and the public has a right to expect more of him in his new, highly sensitive position.

It's an interesting story, with implications in many areas, and it has hardly played out. Anyone reading this far is probably wondering, however, what this has to do with leadership, governance, and ethics in health care. None of the articles quoted above mentioned anything related to health care, or academics for that matter.

Here is where I pull the rabbit out of the hat.

Steven Rattner, in fact, has an important leadership position relevant to academics, and to academic health care. He is a member of Brown University's Board of Fellows, the "upper house" in the university's bicameral board of trustees, called the Brown Corporation. Brown University includes the Alpert Medical School, and the Division of Biology and Medicine. (Full disclosure: I am an alumnus of the College at Brown, and of the Medical School. I am a former full-time Brown faculty member, and currently a voluntary Clinical Associate Professor.)

And thus the issue here is really about the anechoic effect. Even though this convoluted case raises issues about Mr Rattner's role at Brown analogous to the issues it raises about his role as "automobile czar," there has been to date not even any media mention of his role at Brown, much less discussion of its implications for the university, academic leadership and governance, etc.

To survey the local coverage, the Providence Journal has not published any relevant news stories so far. It did print an op-ed questioning Mr Rattner's suitability for the "automobile czar" position, which had to do with the lack of sympathy an "investment banker" might have for the United Auto Workers. The Boston Globe ran a story from the Washington Post about the case, but one that had nothing on the local, or the academic angle. The Brown Daily Herald published a two news stories (here and here) about Mr Rattner's appointment as "automobile czar," which did note he is a "corporation member," but has not covered the current controversy. I am aware of no recent open discussion, or any discussion at all of Mr Rattner as a member of the Board of Fellows, in light of the recent unpleasantness.

Thus, our local angle on the New York pension/ placement agents/ Quadrangle/ "Chooch" affair mainly demonstrates how at many academic institutions, it is simply not done to bring up issues that question leadership and governance, especially at the highest levels.

Parenthetically, we have posted many times, most recently here, about the leadership and governance of Dartmouth College. Some might have interpreted these posts as hostile to that institution. They were anything but. In fact, it has only been possible to discuss leadership and governance at Dartmouth so thoroughly because that institution is much more open about its leadership and governance than is the typical US academic institution. Half of the he Dartmouth Board of Trustees, as we noted, used to be elected by vote of the alumni. The alumni could nominate their own candidates for the Board, through a petition process. The successful attempt to decrease the overall proportion of elected Trustees sparked a tremendous amount of open discussion and debate. Issues of leadership and governance at Dartmouth seem to be frequently discussed in local publications, on blogs, and sometimes even in the national media. I suspect that a governance system at Dartmouth marked by more than average representativeness and accountability has lead to much more vigorous debate and discussion of academic governance and leadership than occurs at more typical universities. (Note that even after the "board packing," Dartmouth still has a larger proportion of alumni-elected trustees than does the typical university, and it is still possible for alumni to put people on the ballot via petition.)

Brown University, on the other hand, is lead by a Corporation most of whose members are appointed by the Corporation itself. While a minority (14 of 42) of the Board of Trustees (the lower house) of the Corporation are elected by alumni, to my knowledge, all the election candidates are hand-picked by the Brown Alumni Association, and there is no provision for petition candidates. Although a few fiesty students occasionally call for more light to shine on the Brown Corporation, (e.g., see here), for the most part, questioning the leadership and governance of the university is simply not done. Thus, Brown seems to be typical of most major US academic organizations.

However, more transparent, accountable, governance, clearly guided by ethical principles and the organization's mission might allow US academia, and academic medicine to address some of the problems that we too often have opportunities to discuss on Health Care Renewal.

Post Title → Pension Fund Scandals, Payment Agents, "Chooch" and the Anechoic Effect

The "Investment Bankers" Strike Back: A Dissident is Thrown Off the Dartmouth Board

We have posted frequently on the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling reputations got this way has been unclear.

We have often come back to the example of Dartmouth College, of which Dartmouth Medical School is a significant component. We most recently summarized here an ongoing dispute about the extent that the institution's board of trustees ought to represent the alumni at large, or instead, ought to be a self-elected body not clearly accountable to anyone else. When we first addressed the dispute, we noted that the self-elected, or "charter" members of the board were mostly leaders in finance, and when they succeeded increasing the proportion of self-elected members, the additions were again, mainly from finance.

The latest development at Dartmouth is that the board, whose majority is now self-elected, is going to boot off one of the few members who was elected by the alumni at large after being nominated by petition of alumni. As described in an editorial in the college newspaper, The Dartmouth,

We were dismayed to learn of the Board of Trustees’ decision not to reelect Trustee Todd Zywicki ‘88 for a second term ('Board votes not to reelect Zywicki ‘88,' April 7). Even in the wake of Zywicki’s open letter to the Dartmouth community on Tuesday ('Zywicki ‘88 criticizes Board in open letter,' April 15), the Board has yet to provide the Dartmouth community with a sufficient explanation for the removal.

Since 1990, when the power to reelect alumni trustees was transferred from alumni to the Board itself, reappointment to the Board for a second term has generally been routine; Zywicki is the first trustee in recent history to be denied reelection.

Zywicki said in his letter that comments he made during an address at the John William Pope Center in October 2007 'might have been' one of the reasons behind the Board’s decision. In the address, Zywicki made a series of controversial and inflammatory statements, including calling former College President James Freedman 'truly evil.'

Assuming that no egregious act remains undisclosed (and there has been no indication that this is the case), Zywicki’s removal disregards the will of the alumni who put him on the Board, and contradicts the democratic manner in which alumni elect trustees.

Dissenting opinions are essential to the operation of any governing body. While Zywicki may have behaved unprofessionally, the public reprimand issued by the Board was sufficient punishment. It is one thing to reprimand a trustee for making statements against the College in a public forum, but to remove dissenting opinions from the boardroom is to undermine the will of the alumni who voted in support of those very views.

Further news coverage in The Dartmouth suggested a flawed process was used to get rid of Zywicki,

Trustee T.J. Rodgers '70, who like Zywicki was nominated to be a candidate for the Board via petition and was successfully reelected at the April meeting, compared the reelection process to a 'witch-hunt trial' and said it was 'an affront to due process' in an e-mail to The Dartmouth.

'[Zywicki] was ejected by a secret vote — he was not allowed to know the vote count or even the reasons behind his ejection,' Rodgers said in the e-mail.

Rodgers added that he believes the decision not to reelect Zywicki was 'an embarrassment for the Board.'

'The effect of Todd’s ejection has been to warn me and any other trustee likely to speak his or her own mind to watch our step,' he said in the e-mail.

Finally, Mr Rogers wrote his own commentary in The Dartmouth,

'Hang one, warn a thousand' says the ancient Chinese proverb. In its April meeting, the Dartmouth Board of Trustees hanged Todd Zywicki '88, thus warning the petition trustees — and any others tempted to express independent views — not to cross the party line. The Board’s action was coldly deliberate. The legal machinery by which it was achieved took two years to construct.

Every 20 years or so, when a majority of the alumni body decides that the College is ignoring a critical problem, it elects petition trustees to promote change. That tradition, a healthy method of governance that sets Dartmouth apart, goes back to 1891, when alumni were formally granted one-half of Dartmouth’s Board seats in return for financing the College.

[After Rogers' election,] Subsequently, the alumni elected three more petition trustees with views similar to mine: Peter Robinson ‘79, Todd Zywicki ‘88 and Stephen Smith ‘88. It was no accident that each of them was a university professor or scholar. The Board Majority, predominantly composed of investment bankers, could have benefitted greatly from the new trustees’ education-first viewpoint, but instead, we were treated as if we were attacking the College. We were actually called a 'radical cabal' trying to 'hijack' the College by the Board member whose seat I had taken. The petition trustees had successfully overcome the penny-ante counterattacks, such as denying us the ability to mail our petitions to alumni to request signatures, and raising the required number of petition signatures, so it came time for the Board Majority to fix the petition trustee 'problem' permanently.

First, the Majority Board members simply declared the right to double their number from eight to 16 without adding an equivalent number of alumni trustees, despite an Association of Alumni poll of 4,000 alumni, who responded in favor of alumni trustee parity, 92 percent to eight percent. Then, the Majority threw its weight and College funds into a campaign to remove the Association leaders who had sued the College for breaking the 1891 Agreement.

In the boardroom, the Majority rewrote the 50 year-old Trustee Oath into an oath of loyalty, which was designed, in part, to limit trustees’ ability to express dissenting viewpoints without the direct threat of being ejected from the Board. And finally — fatally for Todd Zywicki — the Majority installed a formal review process that judged trustees against the new oath on a line-by-line basis.

On the day of his trial, Zywicki was asked if he wanted to make a statement. He apologized again for his Pope Center speech and exited. In order to maintain the confidentiality of board proceedings, I cannot give details. However, I can say from personal knowledge that many of the statements made in that meeting about Todd Zywicki were factually incorrect, but Todd was not there to respond. In my opinion, all of the issues, including his speech, did not rise to the level of negating the votes of the alumni who elected Todd. Despite my objection, the vote — for the only time in my five years on the Board — was secret.

Todd Zywicki’s greatest achievement as a Dartmouth trustee may well be having the personal courage to force the Board Majority to take responsibility for a political lynching.

Since I started writing about the governance of health care organizations, I used the example of Dartmouth (again, really a university with a medical school as a major component) as an example of governance that was more representative and accountable than that of many other health care organizations. Most universities that contain medical schools, for example, do not allow alumni to vote on the membership of more than a few board seats, and most only allow them to vote for alumni candidates hand-picked by the administration, not nominated by alumni petitions. However, since I started writing about Dartmouth, it seems that the self-elected majority of its board has done its best to make the board less representative and less accountable. Furthermore, it seems that some of the board's self-elected members regard anyone who disagrees with them as an enemy of the institution. Thus, their attitude seems to be: "l'universite c'est moi."

However, the duties of boards of trustees include the duty to uphold the institution's mission, not the board members' personal whims.

When I first started writing about these issues, I was surprised to find that the majority of the Dartmouth's boards self-elected, that is, "charter" trustees were from the finance sector. Now, having seen poor, sometimes arrogant, greedy, or even corrupt leadership of that sector bring down the world economy, I ask again whether people brought up in that culture ought to be dominant among the leadership of higher education?

Post Title → The "Investment Bankers" Strike Back: A Dissident is Thrown Off the Dartmouth Board

Hedge Fund U, Version 2

We have posted frequently on the governance and leadership of academic medical organizations. While one would think that health care organizations, and especially academic health care organizations ought to be held to a particularly high standard of governance, we have noted how their governance is often unrepresentative of key constituencies, opaque, unaccountable, unsupportive of the academic and health care mission, and not subject to codes of ethics. How the governance of organizations with such exemplary missions and sterling repuations got this way has been unclear.

In 2007, we reported on one famous institution which had a more representative, transparent, and accountable form of governance. Let me provide a summary of the background from FIRE, the Foundation for Individual Rights in Education,

For over a century, Dartmouth College provided alumni with an avenue for direct participation in selecting leadership, with eight of the 18 members of Dartmouth's Board of Trustees coming from popular vote (the other ten were appointed by the Board). Starting in 2004, petition candidates—those who had to gather alumni signatures to be nominated—challenged those selected by the Association of Alumni in the annual trustee elections. Alumni responded in kind: over the next four years, four petition candidates were elected to the Board of Trustees.

These trustees spoke out when they perceived their alma mater as not living up to its mission, and Dartmouth students benefited. In May 2005, the college repealed its speech code, and it immediately moved from FIRE's "red-light" rating and became a 'green-light' institution.

These developments did not please everyone, however. Some campus officials viewed the propensity of petition candidates to voice their opinions on illiberal policies as detrimental to the school's image. The Wall Street Journal profiled T.J. Rodgers, a petition-nominated trustee, who explained the criticisms leveled at the 'divisive dissidents.'

>> If 'divisive' means there are issues and we debate the issues and move forward according to a consensus, then divisive equals democracy, and democracy is good. The alternative, which I fear is what the administration and [Board of Trustees Chairman] Ed Haldeman are after right now, is a politburo-one-party rule. <<

As the petition candidates grew in numbers (including George Mason Law Professor Todd Zywicki), so too did the official criticism. After Zywicki expressed disagreement with Dartmouth's leadership, the Board's chairman responded.

Haldeman and his cohorts wrote in a statement on the board's Web site that Zywicki 'violated his responsibilities as a trustee of Dartmouth College, which includes acting in the best overall interests of Dartmouth and representing Dartmouth positively in words and deeds.'

It was clear that a frank discussion of the issues at Dartmouth was not welcome on the governing board. The Trustees thus moved to alter the playing field. In September 2008, the Board declared that it would add five new positions—all hand-picked by current Trustees. The century-long tradition of parity between alumni-elected Trustees and the self-perpetuating Board members was erased. It came as no surprise when the Association of Alumni announced in January that the 2009 election would feature no petition candidates.

In 2007, what really got our attention was the stated rationale for this push towards less representative and accountable governance. Mr Haldeman, the chairman of the board of trustees, announced a smaller proportion of elected trustees would ensure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed," and that the board members would possess "even more diverse backgrounds." Yet when we examined the backgrounds of the current charter trustees, we found that they exhibited little diversity. Remarkably, three-quarters (6/8) were in leaders of the finance sector. In 2007, they seemed not very diverse, but why the majority should be in the financial sector, and what implications that had, was then obscure.

Things have changed. In the fall of 2008, the world economy descended into an unprecedented financial collapse. Many concluded that the global economic collapse was caused by arrogance, greed, and corruption within the financial sector.

This suggested that leadership of academia, and academic medicine in particular, by leaders of the finance sector might not, in retrospect, have been a such a good idea. Furthermore, when we had other occasions to look, we found that Dartmouth College was not an isolated case.

We noted that half of the Fellows of Harvard, the university's equivalent of a board of trustees, were from finance, and two were affiliated with corporations at the center of the global financial collapse. We recently found that almost 40% of the board of Yeshiva University were from finance as of the end of 2008. One former board member was Bernie Madoff, now in jail for running a giant Ponzi scheme disguised as an unregistered hedge fund. Yeshiva lost $110 million of its investments with Madoff. Another former member was indicted, accused of fraudulently abetting Madoff's operations. One current member runs a hedge fund that had to pay $180 million to settle other fraud allegations.

So we raised the hypothesis that some of the problems of academia, and particularly the problems of medical academia, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission. Simultaneously, a commentary in the Chronicle of Higher Education put it this way,

Most college and university boards are composed largely of wealthy people, usually from the worlds of finance, law, and private enterprise. They are sometimes alumni but are often selected for their personal capacity to give, their links to other people who might give, or their historical record of having given.

Many trustees today have in fact been part of the elite sectors of finance, law, and enterprise that have proven improvident, shortsighted, and badly governed. Can they be seen as the wisest of our wise who will bring both generosity and wisdom to the academy?

News items from last week, some generated by release of financial disclosure forms from new members of the current US administration, add insight into what now appears to be a pervasive web of entanglements among academia and the finance sector.

One set of stories was about Lawrence Summers, now chief economic advisor to the US President, but president of Harvard University from 2001-2006. Just after resigning as president, and while still a professor at the university's Kennedy School of Government, Mr Summers suddenly began lucrative relationships with multiple players in the financial sector. Per the New York Times, Mr Summers assumed an amazingly well-paid part-time position at a hedge fund,

Mr. Summers, the former Treasury secretary and Harvard president who is now the chief economic adviser to President Obama, earned nearly $5.2 million in just the last of his two years at one of the world’s largest funds, according to financial records released Friday by the White House.

Impressive as that might sound, it is all the more considering that Mr. Summers worked there just one day a week.

Much is known about Mr. Summers’s days in Washington and Cambridge, but little attention has been paid to his two years in New York, from late 2006 to late 2008, advising an elite corps of math wizards and scientists devising investment strategies for D. E. Shaw & Company.

Mr Summers also collected prodigious speaking fees from many financial corporations, some of which subsequently failed or had to be bailed, out, as per the Washington Post, he

was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations.

Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form. Summers reported donating two fees totaling $70,000, including the payment from Merrill Lynch, to charity.

Summers received all this money why he was still a faculty member at Harvard. As noted by the Washington Post, he did not leave his faculty position there until 2009.

Although there is no evidence that Summers had financial relationships with corporations in the finance sector while president of Harvard, his sudden and very lucrative jump into that sector after leaving the presidency, and while nominally a full-time faculty member, suggests at least a major alignment of interests. Some commentators have made this point more forcefully, for example, Robert Scheer in the Nation,

Not surprisingly, Lawrence Summers is convinced that he deserved every penny of the $8 million that Wall Street firms paid him last year. And why shouldn't he be cut in on the loot from the loopholes in the toxic derivatives market that he pushed into law when he was Bill Clinton's treasury secretary? No one has been more persistently effective in paving the way for the financial swindles that enriched the titans of finance while impoverishing the rest of the world than the man who is now the top economic adviser to President Obama.

Perhaps this alignment was related to charges that while president of Harvard, Summers helped stifle someone who tried to blow the whistle on excessively risky investment practices involving financial derivatives at the Harvard Management Company. Per the Harvard Crimson,

After a year-long stint at a European investment bank and another at Enron, Iris M. Mack signed on to be a quantitative analyst for Harvard Management Company in early 2002, hoping, she says, to find job security and distance from the risky trading and accounting practices that forced her last employer into bankruptcy in the company charged with managing Harvard’s endowment.

But only a few months later, Mack says she was fired after she raised concerns to University officials about managers’ qualifications and possibly irresponsible usage of financial instruments that could have contributed to the recent and sudden decline in Harvard’s endowment.

In an e-mail sent May 30, 2002 to Marne Levine, chief of staff for then-Harvard President Lawrence H. Summers, Mack detailed her concerns regarding what she deemed HMC’s 'frightening' usage of derivatives and statistical modeling techniques, as well as the Company’s lack of a timely and portfolio-wide risk management system, high employee turnover rate, and low level of productivity in the workplace, specifically among managers.

According to documents and e-mail records, all provided by Mack, Levine had initially assured Mack that their correspondence would remain confidential. But on July 1, HMC chief Jack R. Meyer called Mack into a meeting, in which she was presented with copies of her e-mails, according to a letter sent to Levine and Summers by Mack’s attorney.

The next day, Meyer dismissed Mack, pointing to 'these baseless allegations against HMC [that you sent] to individuals outside of HMC,' the letter says.

Ultimately, Mack says she reached an out-of-court settlement with Harvard over her firing because her lawyers felt that the University did not want to attract media attention from the dismissal....

Now, with the economy in an unprecedented slump in part due to the widespread and unregulated use of derivative contracts, Mack says she feels 'vindicated' but also sad.

'I’m not trying to pretend I’m omniscient or anything, but a lot of people who were quantitative traders, in the back of our minds, we knew a lot of these models were just that: guestimates,' Mack says. 'I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.'

So now we wonder whether the poor governance practices, and resultant poor leadership of many academic health care institutions may have resulted from the increasing dominance of the governance of these organizations by people from the "improvident, shortsighted, and badly governed" finance sector?

Post Title → Hedge Fund U, Version 2

The Leadership of an Elite American University - Brought to You by the People Who Brought You the Global Financial Collapse

In which we revisit some questions about the leadership and governance of Dartmouth College, a leading US university....

Last year, we posted several times, most recently here, about the leadership and governance of Dartmouth College, which is, despite its name, one of the elite American universities, and home to a prestigious medical school. Dartmouth is unusual in that it allows some of its board of trustees to be elected by alumni. Furthermore, it allows candidates to be nominated by petition of the alumni. Many US colleges and universities' boards are entirely self-appointed. Those that allow elections usually restrict these to a few seats, and usually only permit candidates chosen by the board, university administration, or their agents. Therefore, the top leadership of most US higher educational institutions is mostly self-appointed. Dartmouth is a partial exception to this pattern, and seems to have a governance structure that is more representative (at least of one key constituency, alumni) and more transparent than most US institutions of higher education.

However, the unelected members of the Dartmouth board felt uncomfortable with the proportion of elected board members, once nearly half of the board. They proposed to increase the number of self-appointed trustees. The board chairman, Charles E Haldeman, Jr, justified this change as a way to make sure that the board "has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed to steward an institution of Dartmouth's scope and complexity." He also asserted that the enlarged board would be "representing even more diverse backgrounds [which] will help us enhance board engagement with key areas of the college."

At the time, it was not clear to me whether these supposed advantages would compensate for the possibility that the new board, more enriched with self-appointed members, would be less representative and transparent.

Although there was considerable opposition to this plan, it was eventually put into action in 2007. The board has now been enlarged. I thought it would make sense, one year later, to see what the enlarged board looks like, and especially to see how broad its "backgrounds, skills, and expertise" are, and whether its members have "even more diverse backgrounds."

Dartmouth at least makes the biographies of its trustees easily available (link here), so here is a brief summary of the current roster of self-appointed trustees, first those whose appointments came before 2007:

- Leon D Black - "Leon Black founded Apollo Management, L.P. a global alternative asset manager, with a proven track record of successful private equity, distressed debt and mezzanine investing."
- Russell L Carson - "Mr. Carson has been a General Partner of Welsh, Carson, Anderson & Stowe (WCAS), one of the country's largest private investment firms, which he co-founded."
- R Bradford Evans - "Brad Evans is a Managing Director of Morgan Stanley and a Vice Chairman of the Firm's Investment Banking Department. "
- Karen C Francis - "Currently Ms. Francis is consulting with venture capital firms and Silicon Valley companies...."
- Charles E Haldeman Jr (Chair) - "Ed Haldeman is Chairman of Putnam Investment Management, LLC. He has been a Trustee of the Putnam Funds since 2004 and President of the Funds since 2007."
- Pamela J Joyner - "Pamela J. Joyner has more than 25 years of experience in the investment industry. She is the Managing Partner and Founder of Avid Partners, LLC. Ms. Joyner's expertise is advising investment managers and private investment groups in developing and implementing investment strategies in the alternative investment arena."
- Albert G Mulley Jr - "Albert Mulley is Chief of the General Medicine Division and Director of the Medical Practices Evaluation Center at Massachusetts General Hospital and Associate Professor of Medicine and Associate Professor of Health Policy at Harvard Medical School."

So, six of seven "charter" trustees appointed before their numbers were expanded are leaders of finance, and one is an academic physician. The six in finance are "diverse" to the extent that two appear to be in asset and investment management, one in private equity, one in what used to be investment banking, one in venture capital, and one in mutual funds.

Now, consider the new appointees:

- Jeffrey R Immelt - "Mr. Immelt was appointed as CEO in 2001 to lead GE...."
- Stephen F Mandel Jr - "Steve Mandel is the founder of Lone Pine Capital (LPC), a long/short and long-only equity money manager which he started in 1997."
- Sherri C Oberg - "Ms. Oberg is president, chief executive officer and director of Acusphere, Inc., a specialty pharmaceutical company."
- John A Rich - "Chair, Department of Health Management and Policy and Director, Center for Academic Public Health Practice, Drexel University School of Public Health."
- Steven Roth - "Chairman and Chief Executive Officer, Vornado Realty Trust"
- Diana L Taylor - "Ms. Taylor joined Wolfensohn & Company, a strategic consulting and investment firm, in 2007...."

So with the addition of this new group, nine of 13 "charter" trustees are leaders in finance, now including three in asset management, two in private equity, one in the field formerly known as investment banking, one in venture capital, one in mutual funds, and one in strategic consulting and investment. Of the remaining four, one is the CEO of a large diversified corporation that has a major finance subsidiary. The remaining three are two physicians and a pharmaceutical corporate CEO.

This is a diverse board? Chairman Haldeman had to be joking, or maybe his idea of diversity means including private equity along with investment banking and mutual funds, etc...

So the ostensible changes made to make Dartmouth leadership more diverse and broadening their array of talents seems instead to have maintained a leadership dominated by people in only one small sector of the economy, finance.

Maybe this could be justified if we knew that leaders of finance were particularly brilliant, and had skills and values particularly useful to the supervision of academic institutions.

Up to this year, there were those who did believe that people in finance were particularly brilliant. That, of course, was before the global economic meltdown, or financial collapse of 2008, or whatever it will be called. There is considerable consensus about the causes of this collapse, so I think it would be apt to quote the Conference Declaration from the recently concluded 13th International Anti-Corruption Conference:

In the final months of 2008, the world has faced a financial and economic crisis unprecedented in recent history. Illuminating a new level of interconnectedness; market failure has moved outwards from the mortgage sector to engulf credit and stock markets, and the global economy more broadly.

Facing a prolonged and painful recession, the gains of emerging economies are already being erased and the economies of the lowest-income countries are being put under further strain. We recognised the central role of transparency and accountability in mitigating the crisis and preventing future failures. And we underscored that the poor are not able to bear the cost of the greed and mismanagement of financial professionals half a world away and that better development - to which the fight against corruption is central - must remain at the top of the global agenda.

There is considerable consensus that globally the leaders of finance exhibited stunning "greed and mismanagement," and many have also charged they have exhibited arrogance, stupidity, and in some instances corruption. At the moment, and in retrospect of course, it would be hard to identify a group of people less appropriate to lead an elite academic institution than members of the group once dubbed "the masters of the universe."

Yet leaders of the now mostly discredited finance sector had managed to take over the leadership of a storied academic institution, home to a renowned medical school. It is quite possible that further investigation will show that the former "masters of the universe" took over the leadership of quite a few revered academic institutions, including academic medical institutions. Perhaps this will turn out to explain some of many problems that have afflicted academia, and academic medicine in the last 20 years.

In any case, all who care about education, and about academic health care, need to start thinking about how to re-engineer the leadership and governance of our formerly admired institutions.

Post Title → The Leadership of an Elite American University - Brought to You by the People Who Brought You the Global Financial Collapse

Oceania in New Hampshire?

We recently discussed a proposed attempt to "reform" the governance of Dartmouth College, an elite US educational institution and home to a well-regarded medical school. As noted earlier, Dartmouth is unusual in that it allows almost half of its board of trustees to be elected by alumni. Furthermore, it allows candidates to be nominated by petition of the alumni. Many US colleges and universities' boards are entirely self-appointed. Those that allow elections usually restrict these to a few seats, and usually only permit candidates chosen by the board, university administration, or their agents. Thus, the top leadership of most US higher educational institutions is mostly self-appointed. Dartmouth was a partial exception to this pattern.

Now the Dartmouth board has decided to become more like its peers. The board just announced that it will expand its membership by eight. All the new members will be chosen by the current board. None will be elected. (See Dartmouth press release here.)

This is a setback for a nascent movement to make the governance of academic institutions more representative, accountable, and transparent.

What may be most notable about the current dispute at Dartmouth is how it has thrown some light onto the thinking of those who have been made uncomfortable by the college's modicum of democratic governance. At most colleges and universities, the leadership does not need to attempt to justify its power. When some Dartmouth leaders were forced to do so, the results were Orwellian.

First consider some assertions by the current Chairman of the Board, Charles E. Haldeman Jr, in a letter to alumni here.

• "The changes we are making preserve alumni democracy at Dartmouth by keeping eight alumni-nominated trustees. They expand the board with eight additional charter trustees...."
• "We are maintaining alumni trustee elections at their current level...."

But rather than making up 44% of the board, now the elected trustees will make up 31%. That clearly reduces the power and influence of the elected trustees, while increasing the power and influence of trustees appointed by other trustees. The current changes obviously reduce rather than preserve alumni democracy.

Then there was this,

• "We are expanding the Board from 18 to 26 to ensure it has the broad range of backgrounds, skills, expertise, and fundraising capabilities needed to steward an institution of Dartmouth's scope and complexity."
• "We also are giving the Board more flexibility to select trustees who offer the specific talents and experiences that the College needs, which elections don't ensure."
• "A larger group of trustees representing even more diverse backgrounds will help us enhance board engagement with key areas of the college."

But up to now, having the board appoint its own new members did not ensure that these appointed members would have "diverse backgrounds" or a "a broad range of backgrounds, skills, expertise." Of the current eight board appointed trustees:

• 6 are executives of investment or financial services firms,
• 1 is an executive of an advertising agency, and
• 1 is an academic physician.

Of the four alumni trustees who were not nominated by petition:

• 1 is an executive in an investment of financial services firm,
• 2 are a former or current executives of e-commerce firms, and
• 1 is a lawyer.

(See board membership here.)

Since in the past the board has used its power to select new members with homogeneous backgrounds, skills, and expertise, Chairman Haldeman's assertion that allowing it to select even more members would produce the opposite result makes no sense.

So Haldeman made two bald assertions that seem contradicted by facts. Orwell would have understood. In 1984, the protagonist, Winston Smith, wrote that "freedom is the freedom to say that two plus two makes four." The power of Big Brother and the Inner Party was to make two plus two equal to five.

Chairman Haldeman also revealed his intolerance for "divisiveness," that is, disagreement with him and the rest of the self-appointed Dartmouth leadership.

• "Dartmouth's trustee elections have become increasingly politicized, costly, and divisive."
• "But some of the recent rhetoric in this debate has become so harsh and divisive it is now doing harm to Dartmouth. "
• "Given the divisiveness of recent elections we did not believe that having more elections would be good for Dartmouth."

Apparently, Chairman Haldeman seems to believe that someone who disagrees with him is "divisive." Furthermore, he also believes that such "divisiveness" is bad for Dartmouth. The implication therefore is that anyone who disagrees with the Chairman is "doing harm to Dartmouth." Thus, Chairman Haldeman expects the orthodoxy of goodthinkers, even if this means, as Orwell put it, "a loyal willingness to say that is black is white when Party discipline demands this."

A final Orwellian theme emerged in a New York Times article about the run-up to Chairman Haldeman's assertion of power,

• "Now there is debate about whether all this democracy is such a good thing. Some in the administration, and some alumni, see the petition trustees as a throwback to the more conservative Dartmouth ethos of years ago, bent on undoing the liberalization of the campus ...."

Orwell would have recognized the notion that to defend "liberalization," one should attack liberal democracy. This is akin to one of the Party's slogan's, "freedom is slavery." Here is his explanation,

Oceanic society rests ultimately on the belief that Big Brother is omnipotent and the Party is infallible. But since in reality Big Brother is not omnipotent and the Party is not infallible, there is need for an unwearying, moment-to-moment flexibility in the treatment of facts.

Thus, the controversy about the administration's packing of Dartmouth's board of trustees brought out the Orwellian set of contradictions that those in power used to justify their actions. Although I fear the immediate future of Dartmouth's governance does not include much representativeness, transparency, and accountability, I believe there is a pronounced silver lining in these events.

First, those with loyalty to Dartmouth will realize that the college is not a province of Oceania, and Chairman Haldeman does not have the backing of the Inner Party nor the power of Big Brother. Although there may be no dissent permitted at the moment on the Dartmouth Board of Trustees, the Dartmouth Association of Alumni, purporting to represent 68,000 alumni, condemned the illiberal new way Dartmouth is to be governed. If a good fraction of alumni are stirred to action, they could exert sufficient influence to ensure that Dartmouth will never come any closer to being an outpost of Oceania.

Second, this episode may make alumni worry whether whether the endlessly upbeat missives from their institutions conceal a leadership closer to Ingsoc than Mister Chips. When alumni (and students, faculty, and parents) start to question how much power academic leaders have, and what they are doing with that power, universities may be tempted to teach more about 1984, and emulate it less.

Finally, in case this seems too remote from the issues we usually address on Health Care Renewal... Every US medical school is part of a larger college or university. All US academic medical centers and teaching hospitals are tied to US medical schools. Thus all of US academic medicine, and thus a good chunk of US health care, is tied to American universities. Many of these universities have governance that may be as Orwellian as that of Dartmouth. (For some examples, see the web-site of FIRE, the Foundation for Individual Rights in Education.) Such governance cannot help but have a major deleterious impact on health care. If this impact seems obscure, it is because we have not been looking for it.

Post Title → Oceania in New Hampshire?