February 08, 2014
Book Review: Trusting Harvard: The Cost of Unprincipled Investing, by Robert A.G. Monks and Marcy Murninghan
by Robert Kropp
Two notable advocates for the practice of sustainable investment—both graduates of Harvard
themselves—address the discrepancies between the university's academic mission and the investment
policies of its endowment.
Last year, as the campaign to persuade college and university endowments to divest their holdings
in fossil fuel companies began to attract widespread media notice, almost three-quarters of Harvard
students that voted on the issue supported divestment by the nation's largest college endowment.
But writing in
response, university President Drew Faust offered a view of fiduciary duty that is surprising
in the degree to which it seems to depart from Harvard's educational mission.
in the endowment have been given to us by generous benefactors over many years to advance academic
aims, not to serve other purposes, however worthy,” Faust wrote. “As such, we maintain a strong
presumption against divesting investment assets for reasons unrelated to the endowment’s financial
strength and its ability to advance our academic goals.”
It may be the case that
the writing of Trusting Harvard: The Cost of Unprincipled Investing was prompted by the relatively
high profile of the fossil fuel divestment debate. Or it may not be, for as the book makes clear
co-author Robert A.G. Monks has engaged for
years with his alma mater regarding the incorporation of environmental, social, and corporate
governance (ESG) policies into its investment policies and practices.
To describe Monks as
one of the most effective advocates for the practice of sustainable investment would be an
understatement. He founded Institutional
Shareholder Services (ISS), an influential proxy advisory service. He founded Trucost, a leading environmental research
provider. And he founded the Corporate Library, now part of GMI Ratings, which rates corporations according to the
effectiveness of their governance practices.
Whether to divest an institution's holdings
in fossil fuel companies, or engage with them in hopes of their improving their business
operations, is a complex issue. Sustainable investors have come down on both sides of the debate.
But what Monks and co-author Marcy Murninghan are concerned with
in Trusting Harvard seeks to address a deeper concern: the proper role in society of the endowments
of institutions of higher learning.
“Harvard, along with universities in general, has a
special obligation to broaden, deepen, and connect its fiduciary obligations as an investor to its
fiduciary obligations as an academic institution,” they write. “Who else can help transfer the
human values of one generation to the next, and beyond?”
“Harvard needs to disclose some
broader, and substantive, beliefs, values, and commitments that inform multiple strategies and
tactics— covering both investment and academic operations...A principles-based academic and
investment policy equips graduates and professionals with the flexibility and adaptive capabilities
needed in a dynamic and volatile environment.”
The authors locate the controversy at
Harvard in the concept of fiduciary duty. They characterize the investment policies of the Harvard
Management Company as those of the “myopic fiduciary,” who not only “fails to acknowledge the
vastly different operating environment affecting today’s capital markets and corporate management”;
the policies of the myopic fiduciary “fail to acknowledge the ethical outcomes and impacts of
investment decisions on human, natural, social, and other forms of capital,” as well.
other words, the myopic fiduciary, who focuses only upon short-term financial returns, turns a
blind eye to what the authors describe as a decades-long “massive transformation of our
expectations of investor and corporate governance and accountability, particularly affecting ESG
performance.” As an alternative to this anachronistic figure, the authors offer that of the ethical
or integrated fiduciary. “The ethical fiduciary harmonizes the civic moral values governing its
institutional mission with the civic moral values governing its endowment,” the authors state.
The integrated fiduciary, the authors continue, “views the entire portfolio as an
extension of institutional values, something fitting and proper within current interpretations of
Is it possible that the highly esteemed Harvard Business School
offloads its graduates to Wall Street and other positions of influence without instilling in them
the tenets of sustainable business practice? It seems unlikely; but, as the authors point out, the
Harvard Management Company oversees the university's endowment as if sustainability were but a
passing fad and not the necessary corrective to destructive short-termism that in fact it is. Thus
the authors conclude this brief but important publication with an appeal for the integration of
academic curriculum with investment practice.
“Harvard is in a position to profoundly
influence current and future generations of leaders, in addition to professionals, policymakers,
and the public,” the authors write. They call for “a carefully considered curriculum of fiduciary
obligation...geared specifically to institutional investor responsibilities for active equity
ownership, and broader public participation.”
When Monks spoke at the Frankel Fiduciary Prize
Symposium in December, he said, “The only class of owners who don’t have crippling conflicts of
interests are universities and foundations.” Referring to the message of Trusting Harvard, he
continued, “They’re not the biggest shareholders, but they own a lot of money. Because universities
have a fiduciary culture of teaching, of instruction, of trying to train ethical behavior, they
should take this seriously.”
On several occasions throughout Trusting Harvard, the authors
refer to A
Manifesto for Sustainable Capitalism, published in 2012 by David Blood and Al Gore of
Generation Investment Management. The paper calls for five actions to be taken immediately by
companies and investors:
Identify and incorporate risk from stranded assets;
End the default practice of issuing quarterly earnings guidance;
Align compensation structures with long-term sustainable performance; and
long-term investing with loyalty-driven securities.
Such an action plan seems enough to
launch a curriculum. Given that Monks has been engaging with Harvard on these very issues for
decades now, it remains to be seen if the Harvard Management Company is prepared to transcend its