University Treasurer Defends Compensation at HMC

University Treasurer Paul J. Finnegan described efforts to improve the performance of Harvard Management Company in a letter responding to alumni concerned that the University's investment arm overcompensates its executives.

Finnegan’s letter, dated Dec. 23, comes a month after a group of alumni from the class of 1969 wrote a letter to the Harvard Corporation arguing that HMC pays its executives too much money considering the $35.7 billion endowment's recent poor performance. The signatories called on the University to stop the “unjustifiable” compensation and to increase transparency around how HMC manages the endowment.

While not directly addressing the group’s concerns over the total level of compensation, Finnegan, a member of the Harvard Corporation, listed six “work streams” HMC has already started to improve the firm’s performance. He also detailed former HMC CEO Stephen Blyth’s decision to hire the consulting firm McKinsey and Company for a candid and sometimes harsh review of the organization.

The McKinsey report, Finnegan wrote, was in response to Harvard's recent endowment performance; it has grown more slowly than the endowments at its peer schools. Most recently, in fiscal year 2016, the value of Harvard's endowment dropped almost $2 billion as HMC posted a negative 2 percent return—the second lowest return among Ivy League endowments.

Federal Reserve Bank of Boston - HMC Office
Harvard Management Company is housed in the Boston Federal Reserve building.

“The report took as a premise that HMC, after many years of superior performance, had for several years not performed as well as some of its leading peers, and it offered recommendations on a forward course,” Finnegan wrote.

Finnegan wrote that the new initiatives intended to improve HMC include developing “more clearly defined investment objectives.” While HMC has lagged behind peer institutions for years, it has frequently surpassed its own internal benchmarks: fiscal year 2016 was the first since fiscal year 2009 that HMC did not beat its overall internal goal. In the McKinsey report, excerpts of which were published in Bloomberg, employees blamed the easily attainable benchmarks for fostering a complacent culture at HMC.

In addition, Finnegan's letter delineates that the fund has altered compensation to tie individual compensation more closely to HMC’s overall performance starting in fiscal year 2017, and that it is moving away from focusing on individual asset classes and “towards a more flexible and collaborative approach.”

Finnegan also wrote that HMC has “embraced a set of recommendations on how to enhance aspects of the firm’s organizational culture.” HMC spokesperson Emily Guadagnoli declined to comment on what these recommendations were.

In response to Finnegan’s letter, the group of alumni penned a press release blasting the University’s “clearly inadequate” response, arguing that it “provides platitudes rather than the specifics about whatever changes are being made.”

“Finnegan ignored the Committee’s demand for greater transparency, as well as its assertion that a non-profit education institution such as Harvard should not provide multi-million-dollar bonus compensation to its money managers,” the alumni wrote.

N.P. Narvekar—formerly the head of Columbia’s endowment—took over as CEO of HMC in December from interim CEO Robert A. Ettl, who filled in after Blyth resigned in July. Bloomberg reported last month that Narvekar postponed HMC’s annual Winter Gala as he conducted a review of the fund.

—Staff writer Leah S. Yared can be reached at leah.yared@thecrimson.com. Follow her on Twitter @Leah_Yared.

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