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Getting Off Without a Conviction: Harvard's Killings in the Market

By Steven E. Levy, Wesley E. Profit, and Charles F. Sabel

The pretence that society is regulated by eternal, iron laws applying to particular areas is finally revealed for what it is: a pretence. The true structure of society appears rather in the independent, rationalized and formal partial laws whose links with each other are of necessity purely formal (i.e., their formal interdependence can be formally systematised), while as far as concrete realities are concerned they can only establish fortuitous connections. --George Lukacs

What can be said for the budgetary principle of Every Tub on Its Own Bottom is that it works and that it would be very hard to change. Choice between incommensurable enterprises (accounting and ethics) remain implicit and hence are resolved with a minimum of conflict and pain to the community.   --Harvard and Money: A Memorandum on Issues and Choices


BY DEMANDING that Harvard divest itself of its Gulf Oil stock, the Pan African Liberation Committee (PALC) is asking the bourgeois moralist to look the bourgeois property holder straight in the eye. Harvard's hesitating, half-hearted response attests that even men of presumed good will are discomforted by the question of how much the university will pay for a good conscience. Yet to call attention to the dilemma mirrored in the slogan "shareholder-democracy" is not to foreclose debate about Harvard's investment policy. Between here and the land of final contradictions there is a great measure of human misery to be eased--some of it at bargain basement prices. It is true that were the providential to come to pass and all the universities in the country joined together to vote their stock for the Good, our industrial order would be untransformed. But here and there a company, rendered especially vulnerable by the concentration of its stock (as was Kodak, when it was forced to introduce a minority hiring program) or by some accident of geography (like the one which places Polaroid within easy reach of Harvard) can be pressed to reform itself. As Campaign GM demonstrated last year, even a breath of dissent produces a gesture of reform. Every so often a Black could be elected to a board of directors or an alum might ask himself if the old school doesn't have a point when it urges a new conception of civic responsibility. Not much for not much--but better than nothing. Besides, the alternative to a politics of the better is a politics of the worst; and who has the right to tell the victims of the world that they should endure a clearly evil existence until we present them with a most perfect one? To proceed in this way, to urge with sincerity a series of reforms which advertise so clearly their merits and ultimate limitations, we shall need a sense of irony.


THE FIRST irony is that Gulf Oil stock, vexed by virtue of the company's participation in the economy of the Portuguese colony of Angola, is a mediocre investment. You wouldn't turn up your nose if you heard that your great uncle had just left you 1000 shares. As of yesterday's quotation you would be $25,250 richer. But if you told your financially cagey friends that you had quietly held onto your Gulf shares when they were selling theirs last year, all you would get is a Bronx cheer. For the last four years the stock has steadily declined from a high of about $49 per share to the current price, while paying about $1.50 in dividends. That means that even if Harvard's 671,187 shares of Gulf stock have appreciated dramatically since the undisclosed date when they entered the portfolio since at least 1969 (which is doubtful, considering that Gulf has sold no lower than 19 since 1963), retaining the stock has cost the University some substantial amount of money in missed investment opportunities.

Assessing this opportunity cost is difficult, since it turns on a comparison of the average return on the University's $1,244 billion portfolio investment, treckoned in the April edition of Upstart at an annual average of 6.5 per cent for the last ten years, and some "standard," "fair" return on market speculation. (Disheartening as it may be for investment analysts, a recent study at the University of Chicago conclues that a portfolio of stocks purchased randomly returned slightly more than 9 per cent. A regular savings account at the Harvard Trust will earn you about 5 per cent.)

More to the point, it is easy to find stocks in heavy industry in general or oil in particular which offer better combinations of risk and return than does Gulf. For example, Gulf's competitor Mobil Oil has shown a far greater earnings growth than Gulf (since 1968, Gulf's earnings have actually declined), better price performance and a comparable dividend yield (Mobil's dividends have increased). Whatever the precise balance of merits between Gulf and similar, but "good" capitalists, it is safe to say that in this case a solid argument can be made for divestment on economic grounds. Yale, financially much harder pressed than Harvard and so presumably quite hesitant to walk away from a promising stock, let alone a true gold mine, apparently took the low road to valour a few weeks ago by selling its shares of Gulf as part of routine portfolio management.

BY VIRTUE of a second irony, namely the large assortment of investment opportunities offered by the (capitalist) capital market in response to the variety of investor tastes, it is possible to make an important generalization: the financial equivalent of any morally objectionable stock can be found. Given a statistical description of the aims of the Harvard investment program--target distribution by industry, risk characteristics, aggregate rate of growth and return would be examples of the necessary parameters--it should be possible to keep the University out of moral potholes for nothing. Indeed, there is some justice in the argument that investing in companies like manufacturers of pollution control devices will increase returns, simply because the public's demand for a cleaner world translates itself into a growing demand for the goods and services such companies produce. The same argument in reverse holds that corporate malefactors will do some this-worldly penance thanks to expropriations, consumer boycotts and the like. Investors who held on to Kennecott Copper probably wish they had called the marines or their broker some time back.

Were the list of unacceptable companies to grow past a certain point, of course, this painless model would break down and the University would have to contemplate real cuts in its income. But then again, the list is likely to become prohibitively comprehensive only at a point when public opinion is so aroused that the issue of university investment will have become relatively small beans. In the foreseeable, placid, meantime, no one but the dinasaurs is likely to disagree with a cautions study of investment policy conducted by MIT this year which concluded that: "It is unlikely that limited exclusions (of morally unacceptable stocks) could cause a perceptible difference in the Institute's portfolio returns with the wide selections of alternatives currently available."

BY A THIRD irony--the last one we shall pause to count--the major objections to a reform of financial policy are likely to be more political than economic. Even if they concede that some forms of moral control over investments would be costless, university administrators are prone to argue that the political procedures by which decisions could be reached on individual stocks would in themselves corrode the "freedom" of the academy. Harvard's administrators are probably representative of corporate bureaucrats in fearing the disclosures of now confidential information and the presumption of legitimization of institutional expressions of will which would necessarily be associated with any investment policy--whether it limited itself to a goal of "social responsibility" or defined itself as "socially active."

Arguing from what they take to be common sense notions of the role of academic communities, the Harvard Administration has openly deprecated the desirability of communitarian decision-making several times in the last year. The Austin report, commissioned last year to investigate the disastrous malcoordination of the University's various decision-making bodies during Campaign GM, adopts the conclusion of an earlier report that is well to remember that non hierarchic, explicit, participatory processes impose large costs. They disperse responsibility. They are vulnerable to empire protection, logrolling and the like. And they exact a high price measured in divisiveness, and in the time and energy of people whose competence may not reach the particular question at hand.

"The fact is," the Austin report concludes, "that the universities are simply not very good at reaching collective decisions on questions with social or political overtones." So, to forfend this fragile galaxy of genial political incompetents from overtaxing their powers of decision, the Austin report would entrust the power to formulate University moral investment policy to a "single officer of substantial standing, with a small staff, who would invite and sift suggestions from all members of the University community with respect to what might be termed the nonfinancial aspects of the University's role as investor."

The inclination to such a patently anti-democratic solution--and the resistance to any popular control of the University's endowment--clearly rests on a conception of the university as an assembly of self-sufficient thinkers whose thoughts in collision form the best practical approximation of truth. Plainly, corporate political activity or even the procedure by which corporate political policy could be determined would force "members of the University community" to acknowledge a commonality which according to the theory should not exist. The Austin report reminds us:

...a university, like any corporation, is a persona ficta, an abstraction, nothing more than a convenient administrative mechanism for facilitating the work of a group of scholars and students. In the words of the Wilson report on 'The University and the City,' the university does not exist.

There are both long and short retorts to this conception of the university. A short answer is that only the belligerently naive can still conceive of the university as a locus of disinterested truth. As Clark Kerr (cited in Stephan Leibfried's excellent book, Die angepasste Universitat) has it:

What the railroads did for the second half of the last century and the automobile for the first half of this century may be done for the second half of the century by the knowledge industry: that is to serve as the focal point of national growth. And the university is at the center of the knowledge process.

If it is accepted that the university is producing a product unmistakeably destined for social use, instead of an eternal essence, it becomes difficult to see why members of the productive community should not have some say in the disposal of community resources.

A start at a longer answer would begin by pointing to the deeply ambiguous character of public charters of power in this county. Historically, the United States has ceded wide, Juasi-public powers to private corporations (rights of eminent domain to the railraods, rights of social engineering to foundations), and withdrawn these rights when "public policy" saw the necessity for doing so. Two examples of the imperative use of considerations of public policy are the abolition of monopoly rights of turnpikes in the early 19th century to make way for the railroads and a leading case in which a trust was declared illegal because it carried "a serious threat against the proper growth and development of the parts of the city" in which the lands in question were located. The rule of thumb has been to favor private remedies in the sense of freely-arrived at contracts or grants of public power as long as these have been economically progressive and not too perturbing to the body politic. Only in dire cases is there recourse to quasi-public regulatory bodies like the administrative agencies.

As charitable trusts and educational institutions (and most universities are both), universities have traditionally benefited from charters of broad scope granted by a public appreciative and often solictous of their socially productive role. From the point of view of the American reliance on ostnesibly private institutions to resolve social issues, the universities' retreat to a prissy functionalism is simply irresponsibility. Self-limitation of the university's social activity by appeal to the arch-humanist conception of the function of education may reinforce the middle class academics claim to be an "autonomous intellect,." But it flys in the face of the crudest political and budgetary realities, and gives up the battle just at the point at which it whould be joined.

The self-serving timidity of the universities' position can be illustrated by their treatment of the supposed legal objections to even a "socially responsible" exercise of their investor's rights. It is often alleged, for example, that were the university to intervene economically in outside political causes, it would abuse its prerogatives as an educational institution, and risk forfeiting its tax exemptions Or, it is urged that the university is legally liable to its financial supporters if it does not invest with exclusive return for maximizing economic return and capital safety. (These are but two objections drawn from a crowded field. The two problems presented here and the legal counters to them are drawn from a painfully fair book. The Ethical Investor, just published by three Yale professors. Their conclusion is that there are "no legal impediments" to their elaborate "moral minimum" investment policy.)

The tax-exemption objection can, according to our authors, be overcome with a bit of legerdemain no more complicated than reading the two sections of the Internal Revenue Code that impose political prohibitions on universities and other charitable organizations. Section 501(c)(3) provides that:

a. Such an organization may not "participate in, or intervene in...any political campaign on behalf of any candidate for public office" and

b. "(N)o substantial part of the activities" of such an organization may consist of "carrying on propaganda, or otherwise attempting to influence legislation...

Arranging academic calendars to permit campaigning for peace candidates would presumably run afoul of the code; few investment decisions are likely to. Even an expansive interpretation of "propaganda" or efforts to "influence legislation" would be circumscribed by the current Treasury regulations interpreting the exemption statute, which declare that:

The fact that an organization, carrying out its primary purpose, advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying under section 501(c)(3) so long as it is not (an organization engaged in legislative or electoral activities.)

The Treasury further defines "educational," as used in the code, to mean "the instruction of the public on subjects useful to the individual and beneficial to the community." An institution is eligible for an educational exemption "even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as th permit an individual or the public to form an independent opinion or conclusion."

The obligation to profit objection is similarly far from insummountable. A comprehensive argument against the claim that this "obligation" restrains the university in any way might be made in two steps.

First, it is asserted that the university enjoys as much discretion in the disposition of its funds an any business corporation. The Attorney General of New York has stated:

Unless modified by statue, charter, or by laws, the powers of the trustees of an educational, religious or charitable corporation in respect to the administration and investment of the corporation's funds are fundamentaaly no different than that of the directors of a business corporation in respect to the administration of the property held by the corporation...

Next, it can be argued that the manager's obligation to keep his company profitable is, from the point of view of the common law, like the shipowner's obligation to keep his vessel seaworthy. Each is obliged to meet a set of evolving standards defined by trade practice and consideration of economic and legal rationality. In an important sense, seaworthiness "is" the practice of captains and outfitters of shipt; and maximizing profits "is" the business conduct of men of affair. If current trade practice emphatically recommends the use of ship to shore radios, a ship owner can be held liable for neglecting to equip his tugs with them. If businessmen decide that socially responsible investments are indespensible to preserve long-term profits, the courst are likely to agree with them. A recent article in the B.U. Law Review maintains:

Business efforts dealing with this community crisis may not only be reasonably related to the long-term profit-making potential of the corporation and its long-term ability to survive and prosper. They may also reflect the businessman's appraisal of the public acceptance-expectation-demand process and his decision as a business matter that it is 'good business' to assume some responsibility for the community in which the corporation functions.

A number of court decisions in the last years have supported this overarching conception of profits as the social good. (Not that it matters all that much one way or the other. Assuming that morality in this case is something that can be had for nothing, the question of the obligation to profit need never arise--which makes the foregoing something of an exercise in prudence.)

Substantive issues aside, there are broad methodological questions which arise in connection with the political and legal debates about investment policy. The arguments introduced are not tested against some eternal objective standard. Rather, political and legal positions do or do not prevail against the best argument that can be brought against them. The idea that there is an eternal political and legal order in which universities can be nothing but congeries of scholars and investors nothing but sharp-eyed speculators, is but a malicious puff of bourgeois ideology. Can it seriously be supposed that the same kind of men who invented the multinational corporation, the stock option and a thousand such precision instruments could be powerless to put their "own" property to some social use? Or, imagine a world in which all the capital was mediated, that is, owned by pension funds, universities and corporate investors. Would anyone claim that no one had the right to ask industrial enterprises to do other than maximize profits quarter after quarter, on the grounds that all property is held in perpetual trust for the now-defunct, profit-maximizing, private investor?

In fostering these illusions, the University does semi-consciously what it does with deliberation in its policy of budgetary non-disclosure: tactically rationing information. Decisions about budget allocations or investment policy are reached, we are told, by a mysterious but preeminently rational process. Criticism, groping in the dark, is offered a helping hand just after it has fallen off the cliff. A tactical reply to this procedure, of course, is to produce ever more detailed alternatives to those proposed by the University, thereby forcing it to reveal the contraband information in the course of its rebuttal--or else demonstrate its lack of the proverbial good faith in bargaining.


BEYOND THE underlying ideological factors, there is an oft-remarked peculiarity of the Harvard

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