At What Cost?

In an Indonesian shoe factory, workers labor 10 to 12 hours a day, seven days a week, crowded in hot rooms, ingesting poisonous chemicals.

Across the globe, a Canadian oil company makes plans to drill on a South American Indian tribe's ancient burial ground, changing its plans only when thousands of U'wa Indians threaten to throw themselves off a cliff in a mass suicide.

At home in the U.S., a healthcare company defrauds the federal government and lies to industry regulators.

These are allegations against Nike, Occidental Petroleum and Columbia/HCA, respectively, as published by The New York Times and the Los Angeles Times.

And as of last June, Harvard owned 91,000 shares of Nike, 320,000 shares of Occidental Petroleum and 500,000 shares of Columbia/HCA.

But Harvard administrators say they are concerned about the ethics of investment. In fact, in 1972 the University created two committees on shareholder responsibility to review Harvard's holdings.

But instead of aggressively scrutinizing whether to buy or sell certain stocks, these committees confine themselves to narrow and formal questions of company policy, called proxies--questions whose answers rarely change anything.

Meanwhile, fund managers at the Harvard Management Company (HMC), which manages Harvard's $11.2 billion endowment, continue to pursue the highest yield, officially relieved of the burden of making ethical choices.

Division of Labor

Each year the Multinational Monitor, a Washington-based organization, names 10 companies that it alleges maintain the worst working conditions, create environmental hazards or engage corruption.

And according to a report filed by Harvard with the Securities and Exchange Commission, the University owned stock in seven of the top 10 companies during the 1997 fiscal year.

In addition to Nike, Columbia/HCA and Occidental Petroleum, Harvard invests in Elf Aquitaine, TRW, Tyson Foods and American Electric Power, companies which the Multinational Monitor alleges are involved in improprieties including bribery, international coups or maintaining substandard working conditions.

HMC's freedom to focus solely on profitability has led it to record-breaking success. In two years it has added nearly $4 billion to Harvard's coffers with annual returns of 26 and 25.8 percent.

HMC President Jack Meyer refused to comment on the issue of shareholder responsibility, but Provost Harvey V. Fineberg '67 says HMC should continue to focus solely on questions of financial success, not ethics.

"I wouldn't want a system that combined the two," Fineberg says. "Money managers get the best return."

Harvard's 1972 solution to the need for ethical stances on investment questions was to create a system of two committees on shareholder responsibility. The Advisory Committee on Shareholder Responsibility (ACSR), made up of faculty, students and alums, researches cases and then reports to the Corporation Committee on Shareholder Responsibility (CCSR).

The two members of the CCSR make a final decision, subject to approval by the Corporation as a whole. The Corporation is Harvard's seven-member chief governing board, responsible for overseeing and approving the University's investments, academic appointments and budgets.

Exercising Authority

In recent years, the two committees did agree to force HMC to divest selectively from businesses operating in South Africa during apartheid and firms that manufacture tobacco products.

But these are exceptions to Harvard's standard operating procedure.

The ACSR and CCSR devote their time almost exclusively to proxy decisions, questions on which all of a firm's shareholders may vote. They are usually raised by outside interest groups that own shares, such as human rights or environmentalist activist organizations.

For example, in 1985, the two committees considered whether General Motors should sell to South Africa's police or military.

Both agreed it should not, and the CCSR voted for the proxy.

But in the same year, a proxy asking that Raytheon make no new contracts with the South African government or state-controlled governments was favored by the ACSR but rejected by the Corporation's committee.

"The routine business is proxy business," Fineberg says.

The result is that any ethical examination of a Harvard investment requires that an outsider bring the question to the table.

"If nobody put forward a proxy about Nike, Harvard will not take a stand, at least within the normal operation of these committees," says Joseph L. Badaracco, chair of the ACSR and Shad professor of business ethics at Harvard Business School (HBS).

Proxies aside, the question of whether to purchase a stock in the first place is almost never asked by the CCSR. It rests, instead, with fund managers.

The bottom line: no one asks about Nike.

Badaracco says this results in a review process that is "fundamentally reactive."

"It's not in our jurisdiction as to whether Harvard should hold certain stocks," he says. "Unless somebody is asked, we just stand on the side of the dance floor....We tend to be wallflowers."

Ali Ahsan '99, the ACSR's student representative, says Harvard should be more active as a shareholder, analyzing whether or not the University should hold investments in companies like Playboy Enterprises.

Harvard has owned as many as 23,000 shares of the company, which led to student outcry last November.

"We really can't go up there and say we want to take up this issue when we haven't been asked to," Ahsan says. "There should be a forum to discuss whether or not we should have Playboy."

Badaracco says the ACSR's mandate "has been defined more narrowly than it needs to be."

"It needs some consideration," he says.

Fineberg says that there is nothing stopping the committee system from making larger ethical decisions and questioning holdings, but Badaracco says that when he became chair of the ACSR, he was told the ACSR only deals with proxy questions.

"As a practical matter, the CCSR, and probably the entire corporation, would have to decide they wanted to consider things more broadly," he says. "I don't think the ACSR could do it on its own."

Money Talks

Indeed, divestment from tobacco and South Africa show that the CCSR is empowered to dictate HMC policy.

But Charles P. Slichter '45, former Corporation member and former chair of the CCSR, says that such moves are "unusual."

Slichter says the committees were established to free HMC of handling proxies, allowing it to focus on one thing: making money. But the CCSR is not so single-minded, choosing to consider the monetary as well as the ethical consequences of investment.

D. Ronald Daniel, University treasurer and member of the CCSR, says the Corporation's committee is more conservative than the advisory committee.

"We take them very seriously," he says, but the advisory committee is "more concerned with what's right or wrong, period."

The Corporation, however, chooses to look beyond "what's right and wrong" to include what's fiscally prudent.

"We want to allow time for [the ACSR's]thinking to evolve," Daniel says.

He says the ACSR, whose members serve twoyears, is less concerned with how its decisionswill fit into the bigger question of Harvard'sinvestment practices, while the CCSR attempts tobuild a more consistent, long-term policy to guidethe University.

The result: In the 1997 proxy season, the CCSRdecided not to follow its advisory committee'srecommendation to support a given proxy in six of21 instances--nearly one in three cases.

The Corporation's differing priorities seem toassure that it will not extend the ACSR's advisorypower beyond the proxy questions brought to theUniversity.

In fact, Slichter says the real reason Harvardcreated the committees was simply because theUniversity was obligated to come up with decisionsfor proxy votes, a responsibility which took toomuch of HMC's time.

"The practical matter is that there are acertain set of issues, [and] Harvard is requiredto vote our shares," Slichter says. "This is animportant responsibility and the Corporationdecided Harvard needed a committee that wouldexamine the issue."

But Slichter, who chaired the CCSR for morethan a decade, says Harvard should not move beyondproxy decisions to include moral questions inselecting stocks.

"It's a slippery slope when you try to decidewhether a business is appropriate," he says. "Withany stock, you can find somebody who objects to itand somebody who doesn't."

Says Daniel, "We are not an advocacy group."

Who Listens to Proxies?

From his vantage point on the ACSR, Badaraccosays, "It may matter a bit more that Harvard takesa position because other universities andfoundations look to Harvard for leadership."

But since the committees on shareholderresponsibility generally stay out of largerquestions of investment, the full weight ofHarvard's moral significance falls on the proxyprocess, a weight which may be more than the proxyprocess can sustain.

Though Daniel says Harvard relies on proxies topress management, he also says the University isonly one among many shareholders.

"Unless there is widespread unanimity, Harvardhas a small voice," Daniel says.

Elizabeth A. Gray, secretary to the CCSR, sayslarge questions can make the University heard whenconsensus builds.

"People assure us that when a proxy begins togather enough votes to stay in the game," Graysays, "they affect management."

Badaracco agrees that if proxy support grows"from two to four to six to seven percent, it maydo something," but that such a scenario is ananomaly.

"I don't think it makes any differencetypically," Badaracco says.

Malcolm S. Salter, professor of businessadministration at HBS and an expert in the fieldof corporate strategy, agrees.

"Proxy battles are rare, and winning proxybattles is very rare," Salter says.

"The easiest way is to vote with your feet andget out," Salter says.

No Change in Sight

Members of the more populist ACSR say theircommittee is restricted to a reactive role,devoting all of its time to ineffective and highlyspecific proxy questions. They say the Universityshould at least create an arena in whichinvestments can be discussed.

But content with HMC's success, the Corporationdoes not appear ready to expand the ACSR's mandateany time soon, either.

Daniel points out that Harvard owns millions ofshares in more than 1,600 firms, shares whichrapidly change hands, and he says a review of allfirms Harvard invests in would be impossible.

But the practical questions of how to changeare not even being raised, as no constituency inthe University is pressing hard for reform.

In 1972, students protested Harvard'sinvestments by occupying Mass. Hall, and theUniversity eventually responded with a plan to"divest selectively" from South Africa.

But Daniel says he receives very few complaintsabout Harvard's investments and feels "nopressure" to take a more proactive role.

And so the financial strength of companies likeNike will remain the sole determinant of Harvard'sdecision to invest in them, and the sweat ofshoemakers will keep Harvard the wealthiestuniversity.Crimson File PhotoFRUSTRATED: ACSR member ALI AHSAN '99says a forum is needed to discuss the University'scontroversial holdings like Playboy and Nike.

"We want to allow time for [the ACSR's]thinking to evolve," Daniel says.

He says the ACSR, whose members serve twoyears, is less concerned with how its decisionswill fit into the bigger question of Harvard'sinvestment practices, while the CCSR attempts tobuild a more consistent, long-term policy to guidethe University.

The result: In the 1997 proxy season, the CCSRdecided not to follow its advisory committee'srecommendation to support a given proxy in six of21 instances--nearly one in three cases.

The Corporation's differing priorities seem toassure that it will not extend the ACSR's advisorypower beyond the proxy questions brought to theUniversity.

In fact, Slichter says the real reason Harvardcreated the committees was simply because theUniversity was obligated to come up with decisionsfor proxy votes, a responsibility which took toomuch of HMC's time.

"The practical matter is that there are acertain set of issues, [and] Harvard is requiredto vote our shares," Slichter says. "This is animportant responsibility and the Corporationdecided Harvard needed a committee that wouldexamine the issue."

But Slichter, who chaired the CCSR for morethan a decade, says Harvard should not move beyondproxy decisions to include moral questions inselecting stocks.

"It's a slippery slope when you try to decidewhether a business is appropriate," he says. "Withany stock, you can find somebody who objects to itand somebody who doesn't."

Says Daniel, "We are not an advocacy group."

Who Listens to Proxies?

From his vantage point on the ACSR, Badaraccosays, "It may matter a bit more that Harvard takesa position because other universities andfoundations look to Harvard for leadership."

But since the committees on shareholderresponsibility generally stay out of largerquestions of investment, the full weight ofHarvard's moral significance falls on the proxyprocess, a weight which may be more than the proxyprocess can sustain.

Though Daniel says Harvard relies on proxies topress management, he also says the University isonly one among many shareholders.

"Unless there is widespread unanimity, Harvardhas a small voice," Daniel says.

Elizabeth A. Gray, secretary to the CCSR, sayslarge questions can make the University heard whenconsensus builds.

"People assure us that when a proxy begins togather enough votes to stay in the game," Graysays, "they affect management."

Badaracco agrees that if proxy support grows"from two to four to six to seven percent, it maydo something," but that such a scenario is ananomaly.

"I don't think it makes any differencetypically," Badaracco says.

Malcolm S. Salter, professor of businessadministration at HBS and an expert in the fieldof corporate strategy, agrees.

"Proxy battles are rare, and winning proxybattles is very rare," Salter says.

"The easiest way is to vote with your feet andget out," Salter says.

No Change in Sight

Members of the more populist ACSR say theircommittee is restricted to a reactive role,devoting all of its time to ineffective and highlyspecific proxy questions. They say the Universityshould at least create an arena in whichinvestments can be discussed.

But content with HMC's success, the Corporationdoes not appear ready to expand the ACSR's mandateany time soon, either.

Daniel points out that Harvard owns millions ofshares in more than 1,600 firms, shares whichrapidly change hands, and he says a review of allfirms Harvard invests in would be impossible.

But the practical questions of how to changeare not even being raised, as no constituency inthe University is pressing hard for reform.

In 1972, students protested Harvard'sinvestments by occupying Mass. Hall, and theUniversity eventually responded with a plan to"divest selectively" from South Africa.

But Daniel says he receives very few complaintsabout Harvard's investments and feels "nopressure" to take a more proactive role.

And so the financial strength of companies likeNike will remain the sole determinant of Harvard'sdecision to invest in them, and the sweat ofshoemakers will keep Harvard the wealthiestuniversity.Crimson File PhotoFRUSTRATED: ACSR member ALI AHSAN '99says a forum is needed to discuss the University'scontroversial holdings like Playboy and Nike.