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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.

“The funds 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.

In 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 fiduciary obligation.”

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;
Mandate integrated reporting;
End the default practice of issuing quarterly earnings guidance;
Align compensation structures with long-term sustainable performance; and
Incentivize 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 myopia.


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