Finding the Path to Growth

As endowment chief steps down, Harvard weighs benefits of keeping internal management structure

When Jack R. Meyer departs Harvard to start his own investment firm in the coming months, he will enter the market with a track record that’s sure to have investors lining up to hire him.

After fifteen years at the helm of the Harvard Management Company (HMC), Meyer is bequeathing his successor an endowment that makes Harvard the second wealthiest nonprofit in the world, with a net worth larger than some countries.

But as the endowment has multiplied many times over, so too have the challenges of managing the behemoth.

For the University, the selection of Meyer’s successor is inextricably linked to the question of whether Harvard should continue its unique in-house management structure, one in which HMC invests a substantial portion of Harvard’s money itself.

While HMC’s internal structure affords it better control over the risks it takes at a lower price, at times the in-house approach exposes Harvard to searing public scrutiny, and HMC has had difficulty retaining top managers at below-market wages.

The alternative is external management, in which most investment responsibility is outsourced to other firms, but this structure skirts these issues, perhaps at the cost of lower performance and higher management fees.

“It’s difficult to say which [structure] is more successful,” says John Griswold, executive director of the Commonfund Institute, the research arm of a group that manages money for over 1,400 nonprofit organizations.

When seven members of the Class of 1969 sent a letter in December 2003 attacking the compensation of managers—at the end of a year in which two Harvard bond traders earned over $34 million—they set off a public relations war about Harvard’s endowment management that played out in the country’s biggest newspapers.

Meyer defends the compensation system but notes that it is less generous than most private sector firms, thus making it harder to attract managers. And HMC’s troubles may only increase with the cap on maximum compensation set by its board in March 2004.

After a year under an unusually harsh public spotlight, Meyer announced he would step down in January, taking four other HMC investors—including the two well-paid traders—with him.

“It would be nice to drop out of the public spotlight a little bit,” Meyer told The Crimson in January. “Everything Harvard does is closely scrutinized.”

Without a doubt, Meyer’s departure is the end of an era for HMC.

Treasurer James F. Rothenberg indicated at the time that no option—including a move toward external fund management, which most universities use—is off the table for Harvard.

Even as it has defended its in-house system, over the last few years Harvard has quietly moved to a system that is half externally-managed as fund managers have spun off.

With the rapid departure of top personnel over the past few years, Harvard might continue to move toward a more externally managed system without eliminating the management company entirely.

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