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Tinker to Evers to Chance: Harvard Makes Investment Decisions

By Eric B. Fried

On March 20, three uniformed University policemen stood on the steps of 17 Quincy Street, headquarters of the Harvard Corporation, while about 400 students marched around the building chanting and carrying signs urging Harvard to help end the investment of U.S. corporations in South Africa. After calmly watching the students cut across his field of vision for the 20th time, one of the policemen turned to his fellow officers and began the follow officers and began the following conversation:

"Hey, what are these kids protesting anyway?"

"Apartheid, you know, in South Africa."

"Oh yeah, the racial stuff. But what's Harvard got to do with it?"

"Harvard owns stock in a lot of U.S. companies that work in South Africa, pay taxes to the government and like that."

"So what do these kids want Harvard to do?"

"Sell its stock, I think."

"Why? Can't Harvard buy whatever stock it wants to? It's a free country."

"Yeah, but not if the company they buy stock in is doing really bad things, like apartheid."

"Dunno. Well, in any case it's good to see a lot of students protesting again."

"Yeah, especially peacful ones."

Much of the upsurge in campus activism this spring--campus activism, it is true, always increases when the weather turns warm, but usually not as much as it has this year--is tied to the increasing importance of the issue of southern African apartheid in the minds of students, corporate shareholders and the press. At Harvard, the entire complex machinery for making investment decisions has been deeply involved in the controversy over U.S. firms operating in South Africa, and in the related but more immediate issue of Harvard's investments in those firms. When the Harvard Corporation meets today to discuss, and possibly decide, the issue, it will cap a six-month process used to arrive at this year's policy stance. Harvard's overall policy on South African investments, and the present system for formulating such policies, have evolved over the past several years, years that have often witnessed turmoil and turbulence over University investment decisions.

The present process for deciding investment policy at Harvard works like this: Four students, four alumni and four faculty members are selected through various means to serve on the Advisory Committee on Shareholder Responsibility (ACSR), which studies relevant information on upcoming shareholder resolutions for firms in which Harvard owns stock. The ACSR advised the Harvard Corporation on how to vote on the resolutions at the annual meetings of the companies in Harvard's investment portfolio. A subcommittee of the Corporation--the Corporation Subcommittee on Shareholder Responsibility (CSSR)--makes the final decision. The Harvard treasurer, George Putnam '49, tells one of his two assistant treasurers of the decisions, and the assistant treasurer casts the actual proxy vote on Harvard's shares.

Sounds like Tinker-to-Evers-to Chance? It gets even more complicated. The ACSR-CSSR-Treasurer's Office route is only needed for shareholder resolutions, for those investment issues which involve social and ethical questions. On purely financial issues, Harvard turns to the professional money managers to keep the profit margin steady. Once the treasurer managed the Harvard portfolio in his spare time. But as the size of Harvard's holdings grew, and as the University turned towards the more unpredictable forms of investment, like common stocks--instead of bonds, government securities and real estate--a full-time treasurer was necessary. In the '50s and '60s treasurers used their own private investment firms to help manage the portfolio, but when George F. Bennett '33 resigned as treasurer in 1973, citing an impossible workload as the cause, Harvard decided to change the system. Bennett had in effect two full-time jobs, one at Harvard and one as president of his own firm, so Harvard decided its next treasurer would devote himself almost completely to University business. As part of the far-reaching financial reorganization that marked the early years of President Bok's administration, the corporation formed the Harvard Management Company, a 40-person operation located in downtown Boston that exclusively handles Harvard's portfolio. The deputy treasurer of Harvard, Walter M. Cabot '55, heads the company, which handles 90 per cent of the portfolio. The other 10 per cent of the portfolio is farmed out, as it were, to five smaller firms which have almost complete independence to buy and sell their little pieces of stock.

The rationale for letting small firms control some of the portfolio is that no organization, not even Harvard, knows everything, so the portfolio benefits from having several different firms, with presumably different investment strategies, making decions. The independence of the smaller firms can cause problems, however, as when Mackay Shields, a New York investment company, bought $800,000 worth of stock in Citibank and Manufacturers Hanover Trust in 1976. The two banks are among the handful of major U.S. banks that loan money to the South African government and help South African get loans from other countries. Shields sold the bank stock this year in the wake of campus protests over Harvard's holdings in banks giving money to the South African government. Although the official explanation was that the decision was "purely financial", the timing of the transaction caused some to doubt the explanation.

The general outlines of Harvard's portfolio are set by the treasurer, who receives the advice of the Overseers Financial Policy Committee. That committee looks over all areas of University funding, like budgets, tuition and endowments. It performs the basic functions of all overseers--overseeing the running of the University, advising and discussing, but it has little real power own.

Since Bok took office the Corporation, and the Office of the Treasurer, have had fewer day-to-day financial affairs to handle. When Bok became president, the University had one vice-president, no significant presidential staff, and a treasurer working part-time on running Harvard's investments. In addition to setting up the Harvard Management Company, Bok brought in four new vice presidents, including Hale Champion, to handle financial affairs. Bok also brought in Daniel Steiner '54 to be general counsel to the University. Last year the University showed a small but welcome budget surplus, and according to Putnam the Harvard portfolio is one of the most well-managed and carefully-watched of al university portfolios. The current annual rate of return on the market value of Harvard's endowment is 5.2 per cent, which may not outrun inflation, but is still considered respectable in institutional circles.

Harvard's investment policies are profitable, but are they ethical? Therein lies the rub, or at least therein lies much of the agitation over the portfolio in recent years. While Bennett was treasurer he personally made the shareholder decisions until Bok decided in October 1972 that a Corporation subcommittee should make the decisions. Bennett seemed to think there were no ethical issues involved in stock decisions, because he never supported an anti-management statements in the trash as soon as he got them. When non-financial shareholder resolutions became more prevalent in the early '70s, Bennett's conservatism began to become a problem.

In 1972 Harvard owned about $20 million of stock in Gulf Oil, a company that was helping the Portuguese colonial regime in Angola beat back the growing threat of the black guerilla movement. After eight months of ineffectual protests and calls for Harvard's divestiture of stock in the company, a small group of black students occupied Mass Hall, supporters demonstrated for several days in the Yard and students called a general University strike. The Corporation refused to give in to the pressure, and the Mass Hall occupiers left peacefully after six days. After the sit-in, Bok sent one of his assistants, Stephen B. Farber '63, to Angola to investigate the situation first-hand. Today Harvard still owns stock in Gulf Oil, but market forces and minor sales of some shares put the present value at $8.5 million.

In the wake of the 1972 uprising, President Bok decided to establish the ACSR as a five student, five faculty member, five alumni body to consider the ethical questions inherent in investment decisions, and advise the Corporation on how to vote its shareholder proxies. The Associated Alumni were to choose the alumni members, the deans of the various schools were to suggest professors to serve on the ACSR, and the dean of the College was to choose the undergraduate students from a list drawn up by a group of undergraduates from all the Houses. South House refused to send delegates to the inter-House group unless the University students granted the right to decide on their own representatives, but the group met anyway and selected two undergraduate nominees. The three other students came from other parts of the University.

Other the years the ACSR has evolved, becoming a four faculty member, four alumni and four student body, with the one undergraduate member elected by the body of student representatives from the Houses and the freshman class. The body of student representatives has at times refused to disband upon choosing its nominee to the ACSR, as it did in 1972, when it demanded that the undergraduate representative's votes on issues be bound by its decisions. This year the group again did the same thing, institutionalizing itself by getting the approval of CHUL to become the Undergraduate Committee on Harvard Shareholder Responsibility.

The ACSR has met since October to formulate a South African investment policy. Along the way, the ACSR has relied greatly on the Investor Responsibility Research Center (IRRC)--a Washington-based service set up in 1972 by Harvard and other large institutions and first chaired by Farber.

In what seems to be a strange parallel to the 1972 events, this year's demonstrations and interest in South Africa prompted Bok to send one of his current assistants to investigate South Africa firsthand. Lawrence F. Stevens '65, secretary of the ACSR, traveled for three weeks n South Africa and will report his findings to the Corporation's investment subcommittee, which was set up simultaneously with the ACSR and which makes final investment decisions with the advice of the ACSR. In 1972 students were calling for divestiture of stock in Gulf because it and other U.S. corporations were helping the white minority regime in Angola survive, and this year many student groups, including the Black Students Association, are calling for Harvard's divestiture of stock in U.S. firms that help uphold the white minority government in South Africa. In 1972, persuasion failed so students took over a building--that also failed to make Harvard divest. Today rumors abound of a possible sit-in if the also assistant to the Corporation's investment all U.S. firms from South Africa, although none of the groups in the United Front, a newly-formed coalition of seven campus anti-apartheid groups, of the Front itself, have announced plans for a sit-in, or even admit to forming contingency plans in case they are needed.

Each year the ACSR considers dozens of shareholder resolutions in most of the companies in the Harvard portfolio, but there are usually only a few major issues on the proxy agenda--this year the issues are South Africa, bottle feeding, and political contributions, last year they were the Arab boycott of Israel; and South Africa. On the purely financial resolutions the ACSR may defer to the Corporation subcommittee, but on almost all important shareholder issues the ACSR considers the matter and makes a recommendation to the Corporation. Unless the ACSR's vote is too close for the Corporation to draw "a clear mandate" from it, the subcommittee has tended not to disagree with the ACSR's recommendations. When the subcommittee does disagree with the ACSR, it is usually to change a vote for or against a resolution to an abstention, although occasionally the Corporation has changed a yes vote into a no vote. The most recent shareholder resolution of note was one to force Kodak to stop photographic equipment sales to South Africa, which both the ACSR and the Corporation passed. The resolution will probably fail at Kodak's annual meeting, however--no more than a small percentage of shareholder resolutions opposed by company management ever pass.

But much more than the shareholder resolutions, the ACSR report on South African investments has drawn the attention of the University community. In its report presented to the Corporation on March 20, the recommended a policy of non-investment in banks ending money to the South African government or its public corporations, the sale of the bonds Harvard now holds in those banks, and the establishment of a detailed procedure for monitoring U.S. firms' compliance with apartheid. After studying the firms the ACSR will reevaluate the entire situation next fall and will propose shareholder resolutions in those Companies that it believes offer more help to the apartheid government than o the black workers in South Africa, That is, if the Corporation approves the report. Neither the ACSR nor the Corporation has the personnel to conduct such an extensive study, but Corporation members extensive study, but Corporation members have suggested they may try to "beef up" the IRRC and ask it to do the analysis.

While most Corporation members decline to speculate on what position the Corporation will take on the issue, Putnam says he believes the Corporation will agree with the vast majority of the ACSR report and will "go farther on the banks." Although he is not a member of the four-man investment subcommittee, Bok has involved himself on the issue because the full Corporation makes all major policy decisions for the University. Bok, as president, is the most influential Corporation member, and because he has over the years acquired a reputation for being one of the more liberal members of the seven-man body, his involvement may spell a coming strong anti-apartheid stance by the Corporation. No one really knows, however.

Meanwhile, the United Front is sponsoring a march from Radcliffe to the Yard, and a general boycott of afternoon classes so all students can participate in a mass demonstration during today's Corporation meeting. What effect they will have remains to be seen--despite the chain of advising from the IRRC to the ACSR to the Corporate subcommittees, despite student protest and petitions, despite ACSR and Corporation open hearings, despite the southern Africa Solidarity Committee and the United Front, once again the actual decision comes down to the Harvard Corporation, as it always has, and probably always will. Legally, that is the Corporation's right. But the policeman will be back in front of 17 Quincy Street again, just in case someone wants to quarrel with the Corporation's decision.

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