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An Exchange

Dartmouth’s Financial Piñata

by CHRISTOPHER C. SCHONS

‘To the Editor:

Since I arrived in Hanover late last year, I have been moved by the intimacy and kindness of the Dartmouth community, bowled over by the capacity for meaningful scholarly output and impressed by the intense passion Dartmouth inspires.

Christopher C. Schons’ column “Dartmouth’s Investment Practices Raises Troubling Questions” reflects some of that passion, although unfortunately channeled to rehash allegations long ago dismissed by the authorities. He goes over familiar terrain referring to “questions” that have been answered multiple times in multiple venues for multiple audiences. Schons conveniently fails to acknowledge that the college responded to his latest inquiry just two weeks ago. What is worse, in the absence of any facts he uses innuendo to question Dartmouth’s integrity. There is in fact nothing to his assertions.

In October 2012, the New Hampshire Attorney General reviewed the anonymous claims repeated in the Schons column and found “no basis to conclude Dartmouth’s Trustees have violated state law by engaging in related party transactions involving the investment of a portion of Dartmouth’s endowment.”

Moreover, College policy imposes procedures that actually exceed the requirements under the law, including one directing that before being submitted for full Board of Trustees approval, each such transaction must be reviewed and approved by the Board’s Audit Committee, in addition to the Investment Committee.

In addition to this rigorous process, the performance of these related party investments testifies to their soundness. These investments have significantly out-performed the endowment portfolio as a whole over the past 15 years. Dartmouth is fortunate to have such talented and committed alumni on its Board.

As former Chair Ed Haldeman observed several years ago, Dartmouth could have a blanket prohibition on these investments, and if we did, we would never be second-guessed. But returns on the College’s endowment would have been substantially lower and the institution would not be as strong as it is today.

Vigilance, constructive criticism, and innovation help us herald the fine institution that Dartmouth is. Recycling long-ago dismissed allegations does not.

Sincerely,

Thomas W. Bruce
Senior Vice President for Public Affairs
Dartmouth College

First of all, I have not made any allegations. I merely work from the fact, acknowledged by the college, that as of last year 13.5% of Dartmouth’s $3.5 billion endowment (or $472.5 million) is invested with firms controlled by current or past trustees or members of the college’s investment committee. If we assume as financial experts say we should that a 2% annual fee is charged on these funds, that means that nearly $10 million per year is going into the pockets of a handful of individuals associated with Dartmouth’s board of trustees. And that does not include any commissions on profits, which in the hedge fund industry amount to 20% of any gains. If this has been going on at this magnitude for the 15 years cited by Mr. Bruce in his letter, trustee-related firms have netted revenues from Dartmouth totaling well into nine figures. Yet, we are the ones who are “fortunate”?!! As the broadway song goes, being a Dartmouth trustee is “nice work if you can get it.”

Beyond these direct profits, the firms involved also gain the advantage of Dartmouth’s Ivy League imprimatur, which must be invaluable when promoting themselves among prospective clients. Yet the college receives nothing in return for having its name associated with the businesses in question.

As for Dartmouth’s protestation (and the state of New Hampshire’s concurrence) that no illegal acts have been committed, every observant person knows that there is often a breach between what is strictly legal and what is ethical. The college says that “Dartmouth could have a blanket prohibition on these investments, and if we did, we would never be second-guessed.”  That would be the proper route to take.

Dartmouth has decided to endure the appearance of trustee self-dealing because, it says, the financial gains to the endowment were too good to pass up. So, the message sent to the Dartmouth community, current undergraduates included, is: “Don’t worry too much about appearances if you can make an extra buck.” I would argue that a better message would be, “Financial strength matters, but not as much as ethical and reputational standing. And, in fact, you can relatively easily have both.” But the Trustees chose to compromise on one part of that equation.

Ethics aside, the specifics of the performance of the related-party investments remain murky. If it has been so stellar, why didn’t the trustees put 100% of the endowment in these funds? What is the riskiness of these investments? What if they had lost money? Would that change the ethical calculus at all? (It shouldn’t!) Moreover, the total US stock market in Dartmouth’s most recent fiscal year gained over 20%, while the college’s endowment grew by 12.1%. Remind me again who is “fortunate”?

Finally, Dartmouth’s answers (via an alumni liaison) to the specific questions raised in my original piece have been either vague or (mostly) non-existent. Dartmouth alumni still don’t know exactly how nearly half a billion dollars apparently has flowed to firms connected to the board of trustees or its investment committee, what the profits for these firms have been, nor whether any alum with financial acumen would be allowed to pitch investment ideas to the board.

In any case, as a putatively non-profit institution of higher learning, Dartmouth College should not serve as anybody’s financial piñata.

Christopher C. Schons, a graduate of Dartmouth College, lives in Arlington, Va.

This column originally ran in the Valley News