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 In May 2005, the college repealed its speech code, and it immediately moved from FIRE's "red-light" rating and became a 'green-light' institution.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?