Sunday, August 8, 2010

The Corporate Scandal of Higher Education

I have been meaning for some time to offer a series of posts about the plague that is devastating education, even though education is supposed to fuel economic growth. I was stirred to stop procrastinating by a note in yesterday's Wall Street Journal, which reported that the Washington Post's Kaplan "education division, which accounts for more than 60% of total revenue, increased 15% to $747.3 million. The bulk of Kaplan's revenue comes from the higher-education unit, consisting of a group of for-profit colleges that primarily offer certificate, associate's and bachelor's degrees."

I am going to start out with a shocking piece from the New York Times, which describes the enormous salaries given to presidents of elite universities to serve on corporate boards. Administrative salaries alone should be enough to create an outrage now that money for teaching is drying up. These presidents might be expected to offer a patina of respectability for the corporations. Even more, presidents, who want to keep their lucrative board positions, will be careful not to offend corporate America. Others who want to have comparable money thrown at them will be equally careful. Here is the article:

Bowley, Graham. 2010. "The Academic-Industrial Complex." New York Times (1 August): p. BU 1.

"What does Shirley Ann Jackson know about shipping parcels? For that matter, what does Steven B. Sample understand about mutual funds? Dr. Jackson, who is a theoretical physicist and the president of Rensselaer Polytechnic Institute in Troy, N.Y., has served as an outside director on the board of FedEx since 1999."

"Dr. Sample, an electrical engineer and the retiring president of the University of Southern California, sits on the boards of directors of the American Mutual and Amcap mutual funds. He is also a director of another company, and stepped down two years ago from the board of the Wm. Wrigley Jr. Company, the candy maker."

"Dr. Jackson and Dr. Sample are part of a cozy and lucrative club: presidents and other senior university officials who cross from academia into the business world to serve on corporate boards. While academics can often bring fresh perspectives, managerial experience and the imprimatur of a respected institution to a board, they are also serving in an era when corporations wrestling with fallout from the financial crisis (think Bank of America, Citigroup and Goldman Sachs) or very public mishaps (think BP, Johnson & Johnson and Toyota) have raised the stakes for board members expected to guide corporations."

"Some analysts worry that academics are possibly imperiling or compromising the independence of their universities when they venture onto boards. Others question whether scholars have the time -- and financial sophistication -- needed to police the country’s biggest corporations while simultaneously juggling the demands of running a large university. "It is prestigious for a company to have a major university president on their board,"says Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute. "But few college and university C.E.O.’s are even qualified to understand the workings of a major public company"."

"According to a 2008 survey by The Chronicle of Higher Education, presidents from 19 of the top 40 research universities with the largest operating budgets sat on at least one company board. The trend is more widespread among public universities, but the private ones are catching up: the American Council on Education says that from 2001 to 2006, the proportion of presidents from all doctorate-granting institutions sitting on corporate boards rose to 52.1 percent from 47.8 percent at public institutions, and to 50.9 percent from 40.6 percent at private ones."

"Some of the more high-profile and ubiquitous academics include the president of Stanford, John L. Hennessy, who sits on three boards, including that of Google. (Google also has the president of Princeton, Shirley M. Tilghman, on its board.) The chancellor of the University of California, San Diego, Marye Anne Fox, is on three boards. And then there is Dr. Jackson of Rensselaer, the highest-paid private college president and one of the most prominent black university leaders. In addition to FedEx, she sits on the boards of four other companies, including I.B.M. and Marathon Oil, and she recently stepped down from the board of NYSE Euronext."

"The attractions are clear for the president: lucrative extra pay and useful networking, among other reasons. For a dozen hours or so each month for each board served, in addition to preparation time, and their wise advice, they can receive hundreds of thousands of dollars a year. Ruth J. Simmons, the president of Brown University and the first African-American woman to lead an Ivy League university, sat on the Goldman Sachs board until she stepped down this year. In 2009, she earned $323,539 from her Goldman directorship, including stock grants and options, as calculated by Goldman, and left the board with stock worth at the time around $4.3 million. This is in addition to her salary from Brown, $576,000 this year."

"Dr. Jackson earned $1.38 million from her directorships, comprising both cash and stock. That’s in addition to $1.6 million from her day job, including bonuses and other benefits. Beyond personal financial benefits, the interchange of ideas between campus and corporation can allow for a fruitful cross-fertilization. For example, Dr. Hennessy sits on the boards of Cisco Systems and Atheros Communications as well as Google. As an electrical engineer and a pioneer in computer architecture, he is well placed to bring industry expertise to the boards he serves."

"William G. Bowen was president of Princeton University for 16 years and served on two boards, including Merck’s. It was an experience, he says, that was invaluable in helping him build up Princeton’s then-fledgling life sciences activities. "It influenced my understanding of how the field was evolving, where new ideas were most likely to appear, where to look for talent,"he recalls. "It was one long seminar in the sciences and molecular biology"."

"Indeed, the path from academia to corporate boards began broadening in the late 1990s when companies sought to break up the traditionally white, male composition of their boards. Academia, and in particular university presidents, were a good source of prominent minority leaders and women who were established in their fields and had experience running big organizations."

"Phyllis M. Wise, the provost of the University of Washington, is on Nike’s board. Nike said it hired Dr. Wise, an Asian-American, "because of her impressive accomplishments and her record of independent thought, and we believe that through the exchange of ideas, both Nike and the University of Washington will benefit"."

"But according to James H. Finkelstein, a professor in the George Mason School of Public Policy, probably the biggest reason companies have sought out academics is the prestige they bring. Universities are among the few institutions trusted by the public, he says, and companies believe they can associate themselves with this quality by installing an academic on the board."

"Corporations think this is a way of enhancing their prestige and legitimacy, especially in the case of Ivy League presidents,"he says. "I suspect that’s the principal motivation. It’s probably not for their business sense."

"John Gillespie, who has written a book on corporate boards, "Money for Nothing,"says academics are often selected for another reason -- because they are less likely to rock the boat than directors from the business world. Academics may be trained to ask tough questions in their own fields, but when confronted with tricky business issues far above their level of expertise they "often become as meek as church mice,"he says."

"Most corporate governance experts think that a president serving on one board brings benefits to both the company and the university, but the situation becomes problematic as these academics serve on more boards. There may be diminishing returns to the university and less time to be an effective board member."

"Nell Minow, editor of the Corporate Library, an independent research firm focusing on corporate governance, says Goldman Sachs was hurt having Dr. Simmons as a director because she lacks financial expertise and was focused more than she should have been on other things like the firm’s philanthropy. She was chairwoman of the advisory board for a Goldman initiative, 10,000 Women, that provides women outside the firm with business and management education."

"That seat could have been held by someone who understood derivatives,"says Ms. Minow. "What we have learned from the financial crisis is that boards of directors have failed miserably in their No. 1 task of risk management. You don’t go on a board for networking, seeking contributions or working for minorities. You go on a board for one purpose -- to manage risk for the long-term benefit of the shareholder."

"Dr. Simmons declined to comment for this article. In an interview early this year after she announced she was retiring from the Goldman board, she said filling boards with specialists was "exactly the wrong direction." "You need people close to the industry to provide depth of experience, but you also need people with perspective,"she says."

"In the case of Dr. Jackson and her five board appointments, Ms. Minow says, "it is just physically impossible to do the work necessary to be a good director"on so many boards. The Corporate Library estimates that board members must invest 240 hours a year, including meetings and preparation, to do the work properly. But it can become a full-time job if the company runs into trouble."

"At the time, Goldman was being battered by questions about its involvement in the financial crisis and the lucrative pay it doled out to executives and employees even after the firm had received a huge taxpayer bailout. As a director, Dr. Simmons was partly responsible for approving Goldman’s bonuses during the boom years — including the $68 million pay package awarded to its chairman, Lloyd C. Blankfein, in 2007, the largest ever on Wall Street. Early this year Dr. Simmons said the criticism directed at Goldman was not the reason she gave up her position. She would not comment on whether the salaries the board had approved over the past decade were appropriate, except to say, "The environment for salaries on Wall Street has evolved over a period of time, and the environment today is different"."

"As a further sign of how complicated the issue can become, some academics at the University of Washington protested that Dr. Wise’s presence on the board meant they would not be able to criticize Nike over its labor policy, in particular the treatment of workers at factories in the developing world. "She is the chief academic officer of the university, to whom all faculty report, and her affiliation with Nike creates incentives for faculty to be less vocal about Nike’s human rights record," said Angelina S. Godoy, director of the university’s Center for Human Rights. However, Ms. Godoy said a recent landmark agreement between Nike and unions in Honduras made her less concerned about the university’s relationship with Nike."


Anonymous said...

shocking . sho nuff. education supposed to fuel economic growth. your youtubes.

Shag from Brookline said...

Many moons ago, my letter to Barron's editor was published, addressing a Barron's story of the CEO of a prominent publicly traded corporation who served as a director of five (5) other publicly traded corporations. Based upon my personal experience as outside General Counsel and a director of a more modest publicly traded corporation, I analyzed the time this CEO should devote to his outside directorships, first focusing upon just the quarterly board meetings, the preparations therefor, the travel, attendance, return to his employer, plus serving on board committees that might meet more frequently than quarterly, to demonstrate how much of this CEO's time would not be available for his own corporation. While such a CEO may have demonstrated business acumen in arriving at his position, he is still subject to the same limitations of time, etc, as we mere mortals. So I challenged the effectiveness of this CEO with respect to his day job.

Academia directors may not share the same business acumen as my CEO target, but they also have the same limitations of time, etc. If these academia directors have so much time available because their day jobs do not require such, then perhaps their colleges and universities' boards might ask "Why?"

Sadly, many directors of publicly traded corporations are selected by CEOs to protect the latter. And directors' pay is much greater than when Barron's published my letter.

My stock portfolio is not that extensive as I am about to enter my ninth decade, but when I receive proxies for voting for directors, I check with care the number of other boards a director nominee serves on. If it's more than two, I generally vote "no."

michael perelman said...

I am less concerned about the diversion of time -- maybe the university would be better off with their complete absence. I am worried about what such people will do to the campus in an further their corporate careers.

run75441 said...


Universities and colleges are "supposed" to be independent places of learning free of no outside influence. The membership of college presidents gives the appearance of being bought. The same as schools were forced to divulge gifts from student loans, these schools whose officials are a part of corporations "may" suffer from the same influence.

michael perelman said...

That was my point. Thanks.