July 2, 2007

Harvard’s Sort-of Divestment

Two years ago, Harvard University became the first major university to announce a policy of selling off stocks in companies that operate in Sudan in ways that support the genocide taking place in Darfur. The announcement was huge for the nascent movement to push universities to take a stand on Darfur. No university has a larger endowment. And Harvard has a well known dislike for using its endowment for any political or social cause — so when it decided Darfur was important enough to make an exception, the divestment movement gained instant credibility.

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Dozens of colleges followed Harvard’s lead — with many of them not just selling off a few companies’ stock, but setting general guidelines that would restrict holding stock in companies complicit in the genocide. Harvard was widely praised for being a leader.

But then things got complicated. In January, The Harvard Crimson reported that the university continued to hold stock in the companies from which it divested — stock worth more than that the university had sold — when the shares were part of a broad investment fund (like a mutual fund). At the same time, the divestment movement shifted to a slightly broader goal. Because identifying companies on a case-by-case basis, as Harvard did in 2005, is time consuming, it results in few stock sales. Darfur activists started urging colleges to adopt a short list of criteria by which companies would be judged, so that there could be a uniform response.

Given Harvard’s leadership role in 2005 and the reality that Harvard’s endowment managers have the kind of clout with investment groups that no one can duplicate, the question has been: Would Harvard go with a set of criteria and try to apply those criteria to funds that include stocks from many companies?

On Friday, the university gave its answer: No.

The Harvard Corporation Committee on Shareholder Responsibility issued a report stating that it did not believe either shift would be in Harvard’s interest, although it did add a company to the two previously identified for divestment and said that in the future it would “inform” outside fund managers of Harvard’s views of Sudan investments for consideration, although with no order to sell such holdings. When reports surfaced in January about Harvard’s indirect holdings in Sudan, officials said that their practice was not to talk publicly about investment decisions, so the report is the first full explanation of the university’s logic for the approach, and why it is sticking to it.

On the question of “indirect” investments — those in broad funds as opposed to the “direct” investments purchased by Harvard — the report said that these were vital to the university’s investment strategy. For example, some of the companies that do business with the government of Sudan are Chinese entities. China has strict limits on the ability of entities outside China to purchase shares of Chinese companies, but these limits do not apply to funds that combine shares of many Chinese companies. If Harvard wants to own parts of those companies, in some cases the only way it can do so is through the purchase of funds that also include companies supporting genocide in Sudan.

Citing an advisory report it received, the committee of the Harvard Corporation said it could not give up the flexibility of investing in such funds. “Today, large institutional investors tend to buy ‘baskets’ of securities (such as exchange traded funds and mutual funds, which include index funds) that have specific characteristics with respect to liquidity, price volatility, and expected return. [The Harvard Management Company] makes very substantial investments in such funds as a way of exposing the portfolio to, for example, anticipated movements in specific industries or in economies relative to the entire market. Some of these funds held by HMC are representative of broad market indices and allow HMC to quickly increase and decrease exposure to markets that are subject to potential liquidity fluctuations and/or to gain access to markets HMC would not otherwise be able to access,” the report said.

Limits on the use of such funds could “profoundly affect the liquidity of the portfolio, the ability of HMC to manage risk, and the portfolio’s overall return.”

On the question of moving away from case-by-case evaluations of businesses, Harvard rejected that idea, citing “the strong presumption against divestment and the particular salience of oil production activities in providing revenues to the Sudanese government.” Criteria “would potentially call for divestment of a range of companies operating in various industries and not themselves equity partners in those active oil production ventures,” the report said.

The Harvard report added, however, that it “recognizes that this is an area in which line-drawing is inevitably a complex matter, and in which different institutions and thoughtful individuals of goodwill are apt to prefer somewhat differing approaches and reach somewhat differing outcomes in view of similar concerns.”

Another reason to move with caution, the report said, is the good that is achieved with university funds. The report quoted Derek Bok, the former Harvard president, as having said of endowment funds decades ago: “The funds [universities] administer are not private funds but represent the indispensable means of carrying out important public functions. These functions themselves have ethical content whether they involve the search for useful knowledge or the ability to offer all deserving students the opportunity to enjoy a Harvard education regardless of their financial means.”

Harvard’s approach on indirect investments is not unusual. Most colleges have taken a similar stance, although Harvard’s wealth ($28.9 billion in the endowment last year) is so much greater than anyone else’s that many hoped its actions might prompt investment companies to create “Sudan-free” funds that might appeal to other colleges. And some universities have in fact applied their Darfur policies to indirect investments. When the Board of Regents of the University of California — with an endowment of less than one-fourth of Harvard’s — voted to divest last year, it specifically included index funds as an example of indirect investments covered by the policy.

Daniel Millenson, national advocacy director for the Sudan Divestment Task Force and a rising junior at Brandeis University, said he was disappointed with Harvard’s report. He said that the criteria his group uses are fairly narrow, and end up applying to only about 20-30 companies. To get on the group’s list, a company must have a business that “increases Sudan’s capacity for genocide,” provide “little or no substantial benefit” to civilians in the country, have no corporate policy of opposing genocide in Darfur, and have no responded to shareholder requests to play a constructive role in the region.

Because companies must meet all of those criteria, only a minority of the several hundred companies from outside the Sudan that do business there are affected, Millenson said. But those companies should feel a united front from academe, he added, rather than knowing that they might or might not lose investors from academe.

“Harvard’s hodgepodge approach is essentially to insist on watering down the effect of divestment,” he said.

Millenson said his group has not focused on indirect investments by most colleges because it is true that removing such holdings is more complicated, and could be difficult for a college with a small endowment. “I can somewhat understand why a university would be unwilling to address its indirect its indirect holdings, but it’s not undoable — it certainly is,” he said, especially for institutions with “mega-endowments.”

The report issued Friday represents an unfortunate shift, Millenson said. “Harvard was a leader. They were the first to divest, and they influenced other institutions to follow suit, but now Harvard is a laggard.”

— Scott Jaschik

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