Thursday, July 13, 2006

Widespread Conflicts of Interest at Stanford: Affecting the Board of Trustees

We recently posted about reports of widespread conflicts of interest at Stanford University School of Medicine found in an investigative series in the San Jose Mercury News (see links here and here).

Just before that series was published, the San Francisco Chronicle was looking into conflicts of interest affecting the Stanford University Board of Trustees.

The most glaring example was of Trustee Mary Cranston, who runs a law firm entitled Pillsbury Winthrop Shaw Pittman. But, "according to its 990 tax form, Stanford paid $2.18 million in legal fees during fiscal 2003-04 to Pillsbury Winthrop Shaw Pittman." Also, "Pillsbury Winthrop has consistently ranked among the five highest paid independent contractors the university used between 2001 and 2004. The firm earned between $937,000 and $2.7 million annually during that period."

Although "Stanford has done business with Pillsbury Winthrop since 1993, and Cranston began serving as trustee in 2000. Only in the most recent tax form filed with the IRS that has been made public -- for the year ending Aug. 31, 2004 -- did Stanford make clear it did significant business with one of its trustees' companies and give details."

The Chronicle interviewed governance experts who found the relationship between Stanford University, Ms Cranston, and her law firm "troubling." "Such relationships, they said, while not illegal, can be inherently problematic because they can make it difficult to avoid conflicts of interest or, at least, the appearance of conflicts of interest. As a trustee, she is a watchdog for the university at the same time her law firm is paid millions of dollars for legal advice and litigation services. 'It affects the perception of her ability to be independent,' said Charles Elson, chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware. 'If she voices opposition to the administration, the fear is the law firm loses legal fees -- that's the public perception.'

The Chronicle found that "Cranston declined to discuss the matter. In January, she announced plans to step down as chairwoman of Pillsbury Winthrop at year's end to become a senior partner. A spokesman for Stanford, which as a private institution does not open its business records to the public, said the university stands by the relationship. Jeff Wachtel, senior assistant to [University President John] Hennessy, said Cranston would recuse herself from any legal decisions. 'We're confident this is an appropriate relationship,' he added. Burton McMurtry, chairman of the Stanford board, agreed, saying people like Cranston are too valuable to exclude simply because there's a potential conflict of interest -- a conflict that can be managed. 'You would cut off your nose to spite your face if you eliminate all people who could have a potential conflict,' he said.

In my humble opinion, it is hard to believe that among the immense pool of talented Stanford alumni and donors one could not find capable potential board members whose firms do not do major business with the University.

The Chronicle also noted other potential conflicts of interest involving Stanford University's board:

-- University President John Hennessy, an ex officio member of Stanford's Board of Trustees, serves on the board of Google Inc. Stanford had $282 million invested in Google as of as of Aug. 31, 2004. According to the federal Security and Exchange Commission, Hennessy owns $2.5 million in Google stock and an additional 44,300 shares in stock options.

-- Former Stanford trustee William Landreth served as an advisory director for Goldman Sachs, an investment banking firm that underwrote $50 million in bonds for the university at the time Landreth was a board member.

-- Stanford trustee Jon Blum served as managing director for Morgan Stanley, an investment banking firm that underwrote $80 million in bonds.
I believe that the corporate culture of contemporary universities, which hardly operate as representative democracies, for better or worse is set at the top. Thus it should not be surprising that a university whose top leaders have conflicts of interest would also be susceptible to conflicts of interest affecting medical school leaders and faculty.

When leaders and faculty up and down the university and medical school hierarchy have financial arrangements with outside organizations whose interests may not always coincide with those of the university or the medical school, one wonders whom these leaders and faculty really speak for, what mission they really put first, and how well an academic institution with such leaders can fulfill its academic and clinical mission.

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