In April 2016, 19 students were arrested at the University of Massachusetts in Amherst, while protesting the fossil fuel investments held in the university’s endowment. The previous year, students and faculty members at New Jersey’s Princeton University petitioned university trustees to divest its endowment of any investments in multinational companies that sustain the military occupation of Palestine.
Across the country, students at colleges and universities have increasingly taken interest in the investments held in their institutions’ endowments. Consequently, in addition to responding to student activism, the role of banks and investment managers in the recent financial crisis includes making many of the elements of ethical management of endowments a top priority. After the financial crisis of 2008 and the Great Recession, public distrust of the financial industry has risen—and colleges and universities want to make sure their financial management meets high standards.
The recent NACUBO webcast, Ethics and Financial Markets: What Every Endowment Professional Should Know, addresses the difficult and sometimes nuanced challenges of exercising ethical choices over endowment management.
“Many of the behaviors of investment managers that led to the financial crisis were actually legal,” says Michael McMillan, director of society ethics training at the CFA Institute (which administers the Chartered Financial Analyst designation), and participant in the webcast. “But ethical behavior is doing the right thing when no one else is watching, even if the wrong thing is legal.”
Most ethical dilemmas don’t have clear black or white answers, but instead fall in “gray areas,” McMillan notes in the webcast. For that reason, endowment managers must work to establish an ethical culture that promotes open conversation about matters of right and wrong.
Build a Culture of Integrity
Ethical decisions are more often made in institutions that already have an ethical culture, McMillan says. That’s an environment “where people are encouraged to do the right thing and where temptations and pressures to do the wrong thing are reduced.”
Rather than focusing simply on getting the job done, an ethical workplace focuses on getting the job done in the right manner. In organizations with a culture of integrity, leaders regularly communicate about organizational values and traditions, and those values are incorporated into decisions.
In the webcast, McMillan offers six ideas to help institutional endowment leaders build environments that foster integrity. They include:
- Encourage individual responsibility. Work toward helping employees become more conscious of their own thoughts and behaviors so that they are more likely to notice and act upon ethical issues before they become a problem.
- Expect ethical questions. Make employees aware that ethical dilemmas are a normal and predictable part of their jobs.
- Talk openly about ethical problems that arise. Provide forums for discussing approaches and different ways to deal with ethical issues.
- Connect ethics to reputation. Help employees to recognize that ethical behavior is a reflection of the organization’s values and traditions.
- Make integrity a way of life for the organization. Incorporate ethics into all aspects of decision making, as well as the fabric of the organization.
- Promote and encourage ethical behavior from the top and from within. Employees come in contact with middle managers much more regularly than they do with C-suite leaders, so make sure that those managers are just as committed to ethical behavior as their superiors.
Institutions are traditionally viewed as leaders in diversity, innovation and collaboration. They are committed to hiring a diverse workforce and admitting a student body that reflects various cultures; ethnicities; and political, social, and ideological viewpoints. However, “many times, the endowment is not managed [or represented] in the same manner,” says Orim Graves, executive director of the National Association of Securities Professionals; board member of Dillard University, New Orleans; and webcast participant.
Instead, the endowments of most colleges and universities are overseen by the same managers who take care of other institutional assets—the managers who work at a few, very large firms. In fact, 13 percent of the financial management industry controls almost 85 percent of the industry’s $29 trillion in assets, Graves says. In contrast, minority- or women-owned investment management firms manage only 3.2 percent (about $1 trillion) of the financial industry’s total assets.
For colleges and universities that view diversity as an important ethical commitment elsewhere on their campuses, the dearth of diversity in endowment fund management could represent an ethical breach. But including a diverse team of fund managers isn’t just about ethics; it’s also important for fund performance. “Excluding minority and women fund managers limits diversity of thought in managing your portfolio,” Graves notes.
“Research shows that having different viewpoints improves the process and the performance,” adds McMillan. “We learned in the recent U.S. election and from Brexit that just because everybody seems to think something won’t happen doesn’t mean that position or opinion is correct. Diversity of thinking is important; people who all think the same way are often incorrect.”
Without explicit direction from endowment professionals, most investment consultants will choose large investment management firms such as Goldman Sachs or Merrill Lynch. To encourage diversity, Graves recommends asking investment consultants to include more small, minority- or women-owned, or emerging asset managers in the mix.
“It starts with a staff committed to diversity that is willing to ask about what managers are being used,” Graves says. “Commit to a continual review of asset manager diversity and a determination to regularly increase diversity.”
To build diversity into your portfolio management and improve performance, Graves recommends ensuring that consultants’ processes include identifying and tracking small, minority- and women-owned asset management firms. You can also explore platforms that offer exposure to such managers, and encourage collaborative business models and partnerships between and among traditional consulting firms and managers.
“The absence of diversity creates a glaring lack of diverse ideas, resulting in the concentration of risk in alarming proportions,” Graves says. “‘Large’ can sometimes be falsely equated with ‘best’ and as a result, opportunities to work with many of the best and brightest entrepreneurs are missed.”
Tackle Dilemmas Head-On
When endowment management professionals have established a culture that values ethics, integrity and diversity, taking time to discuss questionable actions is a common practice for them and their staff members. And with written guidelines for ethical behavior, they are able to weigh various actions against institutional standards to make informed decisions.
For instance, McMillan suggests, imagine that BGE Company is one of your university’s largest endowment holdings, and the university just signed a contract with BGE to provide janitorial services. While university administrators want endowment managers to purchase more shares of BGE to show support for the contract, students, faculty, and staff want the endowment to divest of all BGE shares because the company will use outside contractors rather than current employees to perform the work. And many analysts currently think BGE stock is undervalued.
In that case, endowment management professionals must determine whether to purchase more BGE shares, divest current shares, or maintain current holdings—and making the right decision likely would require in-depth discussion regarding which audiences the endowment must serve first. “Ultimately, your duty as an endowment professional is to do what is best for the endowment,” McMillan says. “If you purchase more shares, are you trying to only please the administration, or do more shares of the company really fit into your portfolio needs? And if you divest your shares and the stock is undervalued, the endowment will bear unnecessary losses. For those reasons, simply maintaining your current holdings may be the most ethical option.”
In the world of financial management, such nuanced situations come up regularly. Those institutional endowment managers who handle questionable situations effectively are usually the ones who have established organizational cultures that value open discussion, integrity and diversity. They are also likely to make the most ethical decisions and, in many cases, enjoy improved performance over the long term.
NANCY MANN JACKSON, Huntsville, Ala., covers higher education business issues for Business Officer.