An Alumni Evaluates Endowment Performance

Because of other pressing matters I have only found sufficient time to respond to your excellent and path braking report on Harvard's endowment returns ("Harvard's Endowment Returns Outpaced by Over 71 Percent of Universities," November 9). It will be to the eternal credit and glory of your reporter, Stephen E. Frank, the editorial board and the president of a mere student newspaper to be the very first to publicly call attention to the fact that indeed the king is naked. You may have rendered a greater service to Harvard, our mutual alma mater, and countless generations of future students than you can foresee or dare to imagine today.

The following is merely to elaborate and to offer the perspective of a political economist and management observer who happens to be a concerned alumnus.

I prefer to believe that our interest in the long-range welfare of Harvard more than justifies constructive criticism whose ultimate purpose is nothing less than to express in a truly practical way our loyalty to Harvard as a glorious institution rather than to any of its administrators. Those who criticize constructively also serve, perhaps even in a more effective way than those on the University's payroll.

To be forthright let me define Harvard's problem in my admittedly subjective personal opinion--but not necessarily without supporting facts--our new president, Neil L. Rudenstine, as well as his predecessor Derek C. Bok, may have allowed themselves unwittingly to be captives of and nearly totally dependent on their own full-time administrators of more than 20 years (few die and none resign from their lucrative positions and fiefdoms.)

The two Harvard governance bodies--The President and Fellows and Board of Overseers--are reduced to the position of a mere rubber stamp of the administration, the only source of their information. Yet each member of these two governing bodies is liable for dereliction of fiduciary duty and gross negligence. Legal precedence abound.

As long as the President and Fellows, as well as the Overseers, are condemned to rely on management, evaluation, reports and advice of the Harvard Management Company (HMC) and that of the vice president for finance (who sit in judgment of their own miserable performance), they risk losing at least $1 million a day for Harvard.

This staggering figure with its pernicious cumulative effect represents twice the amount that Harvard alumni generously contribute in the best of years. According to the most conservative analysis the University has already realized a loss of at least $1 billion in outright losses and unrealized income in the last half dozen years.

The lame excuses for shockingly poor performance by these same individuals and their loose talk about the long-range merely serves to obfuscate real issues. It attempts to hide inexcusable blunders of the last five to six years by "averaging" them with previous more acceptable performances. This is nothing less than a cheap statistical game played against the unsuspecting president and the governing bodies. No refuge from reality should be sought in easy dismissive remarks about the long-range. This is unworthy of any analytical mind and contrary to common sense. In the long-run, as Lord John Maynard Keynes said, we all will be dead and so may be Harvard as we know it today if its administration is permitted to continue on its present course.

The one-sided attention paid by the previous administration to income from customary alumni and corporate contributions inevitably resulted in skewed priorities. The actual and potential returns on Harvard's endowment in their several composite aspects are of an order of magnitude several times that of new annual charitable contributions.

Furthermore, except for new additions from outside, they are a direct result of internal management by HMC and not dependent on anything else. Even an average performance by HMC managers could not help but make it grow at almost geometric rates thanks to the miracle of compound interest. It is precisely here that all the powers that be failed abysmally. Scant attention over the last ten years resulted in its level being perhaps $2.2 billion below where it should be now. Reasonable people may differ as to the exact figures but not as to their magnitude.

Ultimately, it is not the exact figures that concern me, but rather the awesome range of the yet unrecognized problem, and to the extent that it is vaguely perceived by some alumni it had not been clearly defined to be faced head-on by all who have an obligation to deal with it. With all due respect I submit that this duty can no longer be postponed.

Successful results of immediate attention with corrective measures taken forthwith would at least equal the results from the proposed $2 to 2.5 billion capital campaign. In addition, these actions would be self-perpetuating. This should be undertaken as a necessary precondition to launching such a campaign.

The temptation of an easy option of launching periodic capital campaign is ultimately as self-defeating as it is illusory. Even on the order of $2 billion or $2.5 billion, it will merely serve to make up for what had been irresponsibly lost between them through sheer mismanagement.

For example, the equivalent of the $359 million campaign for Harvard just a few years ago had already totally wasted and wiped out through mismanagement in the last few years and the equivalent of two other such campaigns added to this waste of Harvard's endowment. Unless the root causes is removed from HMC they may surely again waste the equivalent of this proposed campaign by the time it reaches its end, which would in effect do no more than replace losses up to that point.

This is a vicious circle par excellence and it must be broken by the new President and the two governing boards and with such outside help, whether loyal and knowledgeable alumni or others as they may decide to enlist. Furthermore, the fallacy of the self-serving argument that outside management is too expensive must be exposed for what it is--a red herring.

To view this problem from yet another perspective: If one were to accept (as I do not) the most conservative and charitable estimate of Harvard's losses due to mismanagement of $1 billion during the last six years or so, this figure omits the consequential and cumulative subsequent losses. This $1 billion would have formed a new capital base, earning its own annual returns in perpetuity and subject to its own market value growth.

In fact, the losses already suffered by Harvard's endowment through gross mismanagement and incompetence are so monumental that they stagger the imagination. Try to imagine what a small fraction of assets so lost could have done for annual University budgets in terms of scholarships, salaries, new professorships, research projects.

There is one particular part of HMC which would require the special attention of the President and Fellows as well as of the Overseers--the handling of the $1.25 billion risk capital or private placement portfolio. Other factors beside sheer professional losses may be responsible for monumental losses.

This is a part that should bring the highest returns of all. The managers operate behind a veil of secrecy under the fallacious pretext of losing competitive financial advantage. This argument is nothing less than an insult to all Harvard's alumni intelligence inasmuch that they never had any such advantage in the first place and if they had, they had lost it many point ago by their own hand to the point that they already became the laughing stock of Wall Street.

It may well be that full disclosures of their investments will reveal the real reasons for their original secrecy, especially when the lists of their owners, stockholders and partners are scrutinized for other connections. Uncannily such secrecy of operations cannot help but invite comparisons with recent national scandals of S&Ls, for which results even our grandchildren will still have to pay the price of their wrongdoings. If HMC is to be considered as an integral part of the University, standing on its own bottom, then one cannot escape the conclusion that it is a very leaky bottom indeed--sinking into a quagmire of administrative inefficiency and professional imcompetance and dragging all of Harvard down with it.

There are other connected issues and problems facing our unsuspecting president, but at least some of them can be relegated to his newly appointed General Counsel, who I hope will introduce a breath of fresh air into the stale and musty Massachusetts Hall. Before the President can even focus his attention on other matters, he must first stop the bleeding on the financial side.

Immediately thereafter, if not simultaneously, he must perform a radical operation to remove the already advanced cancer on the body of Harvard--not with a scalpel, but with an ax. Only then will the entire Harvard family, loyal as it has been, will be able to help him clean the Harvard house instead of having it done by an outsider.

Surrounded as he is by already compromised advisors, Rudenstine will need all the help he can get to exercise his own healthy instincts. Being ethically clean and preserving his impeccable personal integrity may be necessary, but no longer a sufficient condition, for the Harvard presidency, otherwise Mother Theresa would be an ideal candidate for this position. Rudenstine needs the guts to ask penetrating questions of his top administrators and demand their full disclosure of their personal financial status and possible conflict of interest with respect to their positions.

Our president has a Herculean problem of cleaning his inherited Augean stables across the University. The only tools he will require are an ax, a broom and a shovel, and perhaps the prayers of all who truly care for Harvard.

This letter is not meant to be either negative or destructive to any person within the Harvard administration; on the contrary, it is meant to be positive and constructive by trying to identify and to remove once and for all the growing cancer on the body of Harvard. Henryk S. Ryniewicz