Broadening the Divestment Debate Beyond ROI

Bruce A. Kimball and Sarah M. Iler’s Inside Higher Ed essay “The Case Against Any Divestment Ever” appeared amid a spate of (mostly critical) articles and editorials addressing student demands from across the country that their colleges disclose financial ties to the ongoing massacre of civilians in Gaza and divest. Even in an already crowded field, Kimball and Iler’s piece stands out for its absolutism, since they argue that any divestment for any reason is a bad thing.

While their argument might be welcomed by some chief investment officers, trustees and university administrators for making their jobs simpler, we think that it obscures and distorts both the complexity of the financial issues at stake and the challenges that colleges and universities face when divestment demands of any kind are made.

First, their argument rests on the false premise that fiduciary responsibilities can be discharged merely by maximizing return on investment. According to the 2006 Uniform Prudent Management of Institutional Funds Act (UPMIFA, now adopted separately by most states), the long-term interests of a nonprofit are not exclusively financial.

This means that whatever individual nonprofits and their stakeholders consider to be in their organization’s long-term interests is not at all a settled issue but rather a matter of evolving discussion, debate and context. The current divestment movement around Gaza, as well as the one focused on fossil fuel divestments and climate change, should be seen in this context.

Though Kimball and Iler briefly mention UPMIFA, noting that its passage “somewhat attenuated” the legal duty to maximize returns, they argue that colleges still have a “moral obligation” to donors and future students to grow the endowment above all else. But this is a mere assertion. UPMIFA implicitly leans toward a democratic and participatory model of governance.

In contrast to Kimball and Iler’s one-size-fits-all model, UPMIFA reflects the diverse national landscape of nonprofit institutions of higher education, allowing for considerable institutional independence and discretion. The authors’ concerns about a slippery slope of morally charged divestment decisions can be quickly laid to rest if only one recalls that finance professionals do not possess a monopoly on competence.

Second, Kimball and Iler seem to treat the so-called Yale model of investing pioneered by David Swensen as a fact of nature, a static and unchanging method for maximizing ROI via heavy investments in alternative/private funds such as private equity, venture capital, hedge funds, real estate investment trusts and the like. They suggest that criticisms of this model are essentially arbitrary because they come from outside the sophisticated world of expensive fund managers and threaten to disrupt the intricate collage of asset types now typically found in endowment portfolios.

Recalling that even Swensen himself cautioned others “not to try this at home,” their view effectively erases all problems of herding, inflated or inaccurate valuations, illiquidity and heightened risk, intense competition for top-decile funds, and steadily diminishing returns even in comparison to more plain vanilla investments like stocks, bonds and index funds.  

Third, they argue that transparency is simply bad. Why? Because opacity is linked to risk, which is linked to heightened returns. Considered in tandem with their attachment to the Yale model and its reliance on high priests of finance, their logic here is circular. Their views on transparency frankly could have been written by a representative of the private fund industry, which has aggressively opposed even the most modest efforts by the Securities and Exchange Commission and its current chair, Gary Gensler, to increase investor-facing disclosures. So determined is the private fund industry to protect its current opacity that a coalition of industry groups pursued legal action against the SEC’s new disclosure rule and won.

After these various flawed attempts to dispense with their potential critics, Kimball and Iler then lean on principles emerging out of our last Gilded Age by the Rockefeller-funded General Education Board, which held that “a college has no right, moral or legal, to ‘borrow’ from its endowment … or, in fact, to do anything with endowment except to invest it so that it will produce a certain and steady income.” Ironically, the General Education Board eventually spent up its funds and closed in the early 1960s, but echoes of perpetuity remain in the jargon of the “100-year horizon” now so often bandied about in academic administration and trustee circles.

If the authors are truly concerned about borrowing against future generations, then how can they countenance loading up endowment portfolios with all sorts of very expensive high-risk investments having minimal to no observable market inputs and therefore far less than stable or certain valuations? As we experienced in 2008, such things can look pretty good until, suddenly, they don’t.