Maximum Return vs. Social Concern
President Kemeny last month made public the report of a special faculty-administration-student-alumni committee named last year, at the request of the Board of Trustees, "to examine and clarify the role of the College's investment policies in today's society."
The study group, known as the Committee on Investment Objectives, was headed by Wayne G. Broehl Jr., Professor of Business Administration at the Tuck School. The committee report was presented to the Trustees at their January 15 meeting and its recommendations were accepted by them.
In his charge to the committee when he appointed it, President Kemeny said:
"The Board of Trustees of Dartmouth College has directed me to,appoint an adhoc 'Committee on Investment Objectives' to examine and clarify the role of the College's investment policies in today's society. I ask that in this study the Committee analyze to what extent, if any, the College should consider any goals other than maximization of return (in yield and growth) in both the selection of new investments and in the continuing management of existing holdings. For the latter cases, it would be helpful if the Committee could recommend some general principles in regard to the posture of the College in voting proxies and other corporate issues where the College may have some direct or indirect involvement.
"Beyond this, I ask that the Committee address itself to the overall question of what role the College should play in its relations with corporate enterprise in the furtherance of constructive societal goals."
In carrying out this charge, the committee made three specific recommendations to the Trustees.
Under the question "To what extent should the College consider any goals other than maximization of return?" the committee recommended:
(1) Maximization of return—the primary investment goal—should not be the sole criterion for the management of Dartmouth's capital resources. Investment policies should also reflect the broad societal goals for which the institution as a whole stands.
(2) The responsibility for decisions in which the expected rate of investment return is significantly reduced in order to pursue societal goals should lie with the Board of Trustees as a whole. The Investment Committee of the Board should continue its policy of seeking maximum long-range return on the capital resources it administers.
Under the question "What role should the College play in its relation to corporate enterprise in the furtherance of constructive societal goals?" the committee made a third recommendation:
(3) A permanent "Advisory Committee on Investment Objectives" constituted broadly from the Dartmouth community, should be established by the Board of Trustees. The Committee should advise the Board on allocation of College resources that seem to have an adverse impact on desirable social goals, and should make recommendations concerning Dartmouth's general .relationship to corporations, whether these arise through investment or otherwise.
Such an advisory committee is in the process of being selected, and its membership will be announced in the near future.
The Committee on Investment Objectives fleshed out its report with comment on each of the three recommendations. Introductory to all three, it pointed out that non-profit organizations are typically involved in the social issues of the country, that investment policies have always had societal consequences, and that the Dartmouth Trustees in responding to these societal implications in a number of specific ways "have reaffirmed what always has been a fundamental responsibility of the Board of Trustees—to administer College financial policy in a moral manner as well as an economic and legal manner."
Concerning recommendation No. 1, the committee recognized that "the basic criterion guiding the Board is to maintain or better the College's procedures and programs so that the historic purpose of the College—full freedom of expression and inquiry in the pursuit of knowledge and excellence in Dartmouth's teaching and research programs—is realized." While the principle of maximization of return is a major means of serving this criterion, it is not the sole means, the report stated.
As examples of ways in which the College has forgone maximum return in favor of facilitating programs, the committee cited (1) the purchase or construction of faculty and staff housing and subsequent rentals at less than market levels; (2) holding mortgages on faculty and staff housing at less than market interest rates; and (3) capital allocations to provide utilities and services for College facilities in the Hanover area.
"The costs of these three have risen substantially in past years," the report states. "Recently, in the face of increasingly scarce resources, the College has begun to cut back such investments, reasoning that so tying up large amounts of capital over a long term might be less effective for the programs they support than maximizing return and thus increasing budgetary expenditures for items related to these programs. The Committee endorses this move as a responsible fiscal decision, but calls attention to the fact that the thrust of this decision remains that of implementing the procedures and programs, not maximizing the return as anend itself.
"A fourth, related category where capital allocations have been made, sometimes at maximum return and sometimes at less than maximum return, involves instances where the College protects its long-term future by purchasing properties in Hanover and the Upper Valley area. There is heightened interest at the College in regional programs, with the boundaries of this region extending beyond Hanover into other areas of New Hampshire and Vermont. Furthermore, there is an increased realization that one of the priceless intangible assets of the College is its location in the North Country. In the light of current environmental pressures, it may be strongly argued that for the foreseeable future Dartmouth's self-interest would be well served by a wider definition of environs than in the past, and that capital allocations should be increased for land purchases which might in some cases yield less than market return but protect the environment. This is a complicated issue which the Committee has not had time to explore fully, but it should be further investigated in the near future by the Board of Trustees.
"There is a fifth category of capital allocations at possibly less than market rates that promises to be critically important in the future—student loans. The current financial crisis of the universities is also a financial crisis of the university students. The demands for student loan funds are rising in tandem with tuition. The total impact of this cannot yet be clearly seen, and the Committee feels it would be unwise to take a premature stand. However, if the Board does decide to make such loans in the future, the Committee would support this action, provided the Board makes its case on the grounds of its basic criterion noted earlier."
Concerning recommendation No. 2, the committee pointed out that although the Trustees have delegated management of the College's portfolio to an Investment Committee, they have retained general policy supervision and have shown themselves to be "responsive to the Dartmouth community in those cases where there appeared to be substantial concern about the societal dimensions of a particular investment decision."
"Thus the Board has accepted the concept," says the report, "that the College may decide not to invest in a particular corporation because that corporation's goals are clearly inconsistent with those of the Dartmouth community. The Investment Committee already has implemented this policy by deliberately refraining from investments, for example, in the stocks of South African gold and copper mining companies.
"The Committee assumes that the Board will continue to be responsive to the Dartmouth community. Past policies of full disclosure should be reaffirmed and there should be a further strengthening of the process of two-way communication (see the Committee's recommendation #3). Given these as- sumptions, the Committee agrees with Board policy that, except for specific exceptions made by the Board of Trustees itself, all those investments administered by the Investment Committee should be made solely on the basis of long-run profit maximiza- tion."
Concerning recommendation No. 3, the report says: "Universities clearly have power to persuade corporations. The Committee does not subscribe to the notion that because Dartmouth College's various holdings are miniscule in a national sense, the College's decisions on investments have only minor meaning. Valid symbolic acts by institutions such as the College can have great persuasive power.
"The Committee believes that this power is most apparent in the continuing relationships with corporations. Although selling or not acquiring a stock because one does not agree with the corporation's policies might well be a prudent decision in terms of long-run profit maximization, or a moral decision in certain situations, it would appear to have little if any visible effect on the corporation. Continuing affirmative representation as a shareholder by the College on corporate policy matters, on the other hand, appears to the Committee to have great potential. Thoughtful letters to corporate presidents by the Chairman of the Board of Trustees, personal representation by the College at selected annual meetings, careful analysis and response to those proxy issues beyond the routine—these and other positive acts by the College community can have substantial ameliorative effects on corporation policy. ...
"It is anticipated that issues in proxy voting will increase in numbers and complexity. The volume of work in realistically analyzing these proxy contests therefore is likely to rise. Concern among the Dartmouth community about corporate investment relationships probably will mount. Even if this were otherwise, the College would wish always to be a responsible shareholder even if no one happened to be looking over its shoulder. The previously mentioned affirmative steps all require in creased attention. In sum, whatever the future evolution of the proxy and annual meeting issues, the Committee feels that the College will wish to increase its research and analysis of the corporation, and its communication to the Dartmouth community about this.
"To do this, existing mechanisms must be strengthened. The Committee feels that neither the Board nor the Investment Committee alone can do the extensive research needed for such an affirmative program. There is both substantive and psychological value in involving members of the Dartmouth community in this process. Therefore, the Committee recommends that a new Advisory Committee on InvestmentObjectives be established by the Board of Trustees, constituting a broad representation of the Dartmouth community. The Committee suggests that this new committee be reasonably small in size—perhaps seven people. It should count as members perhaps two representatives from the General Faculty, two students, two alumni, and one officer or other College employee. The specific functions of the committee would be to advise the Board of Trustees with regard to (1) investment policy decisions where issues other than profit maximization might apply and (2) continuing concerns for on-going relations with corporations. The Committee would act as a clearing house for Dartmouth College community concerns about investments and would stand ready to respond to individual concerns or interests as they arose. Beyond this, the Committee itself would act as a continuing research arm for the College in regard to the corporation visa-vis stockholder relations and investment concerns. The precise relationship of this committee to the proposed Dartmouth Community Council would need to be specified by the Board of Trustees in its initiating charge."
In addition to Professor Broehl as chairman, the Committee on Investment Objectives consisted of Lisle C. Carter Jr. '45, Prof. Jere R. Daniell II '55, Prof. Steven W. Dobson. Charles D. Ellis, Prof. Francis W. Gramlich, J. B. Hollomon Th-G, Richard D. Lombard '53, Carl E. McGowan '32, Vice President John F. Meek '33, William H. Schlesinger '72, Stuart O. Simms 72, Prof. Walter H. Stockmayer, and Prof. Bella Strauss.
