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Why University Endowment Policies Are Broken

Are the endowment policies of many of the nation's wealthiest universities broken?Dartmouth College
The answer seems rather obvious to me. Over the years, a growing number of colleges decided to move more of their portfolios into illiquid assets such as private equity and venture capital, hedge funds, commodities and even timberland. These schools had greedily eyed the magical investment returns that Yale and Harvard routinely bagged with these illiquid investments and they assumed it was safe following in the footsteps of Ivy League investment gurus.

We all know what a disaster that's been. Now a new report provides a close-up look at the carnage that these college endowment policies created.

The Center for Social Philanthropy and the Tellus Institute produced a thick report titled, Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System. The researchers examined the endowment investing practices at Boston College, Boston University, Dartmouth, Harvard, Brandeis and MIT.

The study was partially funded by the Service Employees International Union (SEIU), which represents workers at several of the campuses. You can't use this connection as an excuse, however, to dismiss what are clearly damning accusations that point to endowment policy models that beg for a saner and more ethical approach to investing.

Here's just one of the many findings in this thick report that I find appalling:

Over the past five years, Dartmouth's board has included more than a half dozen trustees whose firms have managed well over $100 million in investments for the institution. While Dartmouth insists that trustees recuse themselves from conflict of interests, I think it's clear that this kind of self-dealing among trustees is dangerous and should not be allowed.

Unfortunately, Dartmouth is hardly alone in tolerating trustee conflicts of interest. In March, The Chronicle of Higher Education released the results of its investigation of 618 private colleges that revealed that one in four of the schools maintain financial ties with trustee-linked companies. The contracts generated by these connections ranged from a few thousands dollars to millions of dollars. According to a study by the National Association of College and University Business Officers, 58% of private universities permit business relationships with trustees!

Some sanity needs to be injected back into the policies of university endowments. I just wish I could feel optimistic that changes are in the offing.

Lynn O'Shaughnessy is the author of The College Solution, an Amazon bestseller, and you'll also find her over at TheCollegeSolutionBlog. Follow her on Twitter.

More on CBSMoneyWatch:

Ivy League Endowment Report Card: "F"
Harvard's Stunning Mistakes
Endowment fund image by redjar. CC 2.0.