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Best Practices for the Endowment

I had an interesting discussion with a Williams administrator yesterday with regard to
my concerns about the endowment. No one expects Chief Investment Officer Collette Chilton and the Investment Committee to work miracles. But they should be able to adhere to a set of best practices as exemplified by peer institutions. To be specific, consider The Boston Foundation (tBf), led by former Williams trustee Paul Grogan ’72, and Wellesley College. Both organizations do a fine job with resources similar to those of Williams. Which best practices should Williams emulate?

1) Quarterly reporting. Consider this webpage and pdf from tBf. Given that Chilton and her staff compile quarterly reports for the Investment Committee, there is no excuse for not sharing that information with the rest of us.

2) Manager transparency. Consider the explicit listing of Boston Foundation managers.

Note that there is not complete transparency here. In particular, we do not know which private equity and venture firms tBf invests in, much less which specific funds sponsored by those firms. That’s a complex issue which we can save for another day. But there is no excuse for Williams not to tell us which firms it uses to manage the standard equity and fixed income portions of the portfolio.

3) Clear asset allocation, benchmarks and category performance.
The Boston Foundation provides its asset allocation here. As discussed previously, Williams makes public its asset allocation policy, but we have little idea which benchmarks it uses to measure manager performance nor how well those managers have done, at least in aggregate. Consider the 2003 Report (pdf) from Wellesley.

There are two components to endowment returns. First, what categories were the funds allocated to? An endowment that is 75% in equities will perform very differently than one which allocates only 25% to equities. Second, which managers are selected within a given category? Two endowments can both allocate 50% to equities (as Williams does) but their performances can differ dramatically depending on which managers each selects. There is a case to be made that the performance data for a specific manager should be kept secret. But there is no excuse for not doing as Wellesley does above and reporting the aggregate performance of the managers within each specific category of the overall asset allocation.

Again, it would be one thing if reporting this information to the Williams community were a major burden to Chilton and her staff. Transparency is valuable, but not at any cost. However, every single piece of information (manager identity, asset allocation, benchmarks and relative performance, all on a quarterly basis) is already collected and reported to Morty, the Trustees and the Investment Committee.

Best practices require that Williams share that information with the rest of us.

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#1 Comment By PTC On November 20, 2008 @ 11:13 am

David-

How much money has Williams spent on Construction in the last decade? How much more do these new buildings cost to maintain?

Irresponsible growth always has consequences that effect wealth and relationships. Has this building spree hurt or helped Williams?

#2 Comment By lgeorge On November 20, 2008 @ 11:44 am

Query to Dave: What do you envision recipients would do with the information if they had it? I’m all for transparency but it so often leads to nothing. (E.g., our local government makes available campaign contribution information. It’s very clear that the real estate/developer/construction types and the restaurants are very cozy with our governing body and now anyone who wants to take the time can weed through the information and see just how cozy. Having that information available — and even publicized — seems to make absolutely no difference in who gets elected and the continued coziness of their decisions.)

Sign me “Cynical” but Williams would do well to go much more transparent with the sorts of information you mention as it wouldn’t end up making much of a difference (unless they started investing heavily in tobacco, sweatshops, or the like).

#3 Comment By David Kane On November 20, 2008 @ 12:03 pm

How much money has Williams spent on Construction in the last decade? How much more do these new buildings cost to maintain?

I don’t have this data. Somewhere around $200 million? These buildings cost a lot to maintain. Indeed, one of the complaints from the faculty about Hank Payne’s too quick acceptance of Herb Allen’s ’62 gift was that Payne failed to take seriously the on-going operating costs of a new theater.

It would be nice if Williams gave much more detail about its budget. But, on that topic, I have trouble making a best-practices argument since I don’t know other schools/institutions who do.

What do you envision recipients would do with the information if they had it?

Most people who do nothing with it. That’s what always happens when you make public the formerly secret, as with your campaign donation example. But, the most involved 1% of the community would make use of that information.

First, transparency builds a culture of trust and accountability throughout the entire institution.

Second, transparency builds faith and involvement among the big givers. I talked with a major giver last week about Chilton and the endowment and he expressed some real concerns. (Post on that conversation to come.) Why should he write a big check if the endowment was being managed stupidly?

But, you say, we can be sure that everyone at Williams is wonderful and smart, that everything we do is done as well as it could be, that all is for the best in this, the purplest of all possible worlds. Perhaps.

But this generous Eph wanted more reasons for his faith. Transparency is one way of supporting that faith.

Third, transparency guards against the big mistake. Do I really think that anything untoward is happening with the endowment? No. But do I know that? No. And neither to you. The more transparent that institution X is, the less likely that something really bad is happening.

Fourth, transparency provides the means for education and discussion. Williams is an educational institution, both for its students and its faculty. Endowment management is something that some Ephs want to know more about. Transparency would allow those who want to teach (like me) better explain things to those who want to learn (our readers).

Again, this is not in my top 10 list of changes to make at Williams. It is more my standard rule: Successful non-profit organizations err on the side of transparency. There is no excuse for Williams not to follow the best practices of its peer group.

#4 Comment By Dick Swart On November 20, 2008 @ 1:36 pm

Dave –

Larry has a great point that shouldn’t be buried: Sin Stocks do well in recessions!

Phillip Morris Intl., Imperial Tobacco Group, British American Tobacco, and China National Tobacco could be great buys!

Only noted in the interest of transparency.

(cough) (cough) Would you please check the ticker for me while I light up?

#5 Comment By lgeorge On November 20, 2008 @ 2:27 pm

DK’s Comment 3 carries a great teaser: “(Post on that conversation to come.)”

#6 Comment By David R, ’06 On November 20, 2008 @ 4:21 pm

Second, transparency builds faith and involvement among the big givers. I talked with a major giver last week about Chilton and the endowment and he expressed some real concerns. (Post on that conversation to come.) Why should he write a big check if the endowment was being managed stupidly?

I obviously don’t know general policies on sharing this information, but I can only assume that especially big donors are granted access to the same reports as the Investment Committee. That would seem pretty reasonable, at least.

#7 Comment By Ronit On November 20, 2008 @ 4:53 pm

David R. – if any corporate followed such a policy, it would be a violation of numerous fair disclosure laws. I’m not sure why something that is a crime if committed by a corporate should be acceptable or expected from a nonprofit.

I for one can’t see any reason why small and medium-sized donors should donate to a charity that treats them as second-class citizens – if you want someone to give you money, you had better be prepared to show them you are acting as a good steward of that money.