Forced to Justify Board Membership

U of California system will require top leaders to prove outside work benefits their institution -- a test not applied at most colleges. Is the policy too weak or too strong?

August 2, 2016

A stricter conflict-of-interest policy the University of California Board of Regents approved for high-ranking leaders last month is drawing mixed reactions, with some saying the new standards could be stronger and others wondering whether portions go too far.

Most labeled the policy a step in the right direction. It is intended in part to ensure that outside positions administrators take on -- like paid positions on for-profit companies’ boards of directors -- do not damage the UC system’s reputation. The changes establish new procedures administrators must follow when signing up for outside positions while limiting the number of outside paid positions an administrator can hold to two, down from three.

One controversial and unusual portion of the policy is generating discussion in particular. It requires top administrators who want to hold outside positions to describe how their service will benefit their institutions. That’s a very different proposition than a more traditional policy, which would require administrators to pledge that their roles outside the university do not create a conflict of interest.

To some, the requirement of proving benefits seems easy for administrators to circumvent. Critics on one side point out that the new policy did not lay out clear ways that benefits to the university and state system will be measured.

University presidents have said outside board membership can help them make important connections, raise money, understand governance issues and shore up their financial knowledge. Against that backdrop, the new policy can also be viewed as an unnecessary hoop to jump through, one that could tacitly discourage outside board membership among administrators who might find it useful.

Regents approved the new policy amid outcry over several UC system administrators’ paid positions on corporate boards of directors. UC Davis Chancellor Linda P. B. Katehi was placed on administrative leave in April following a series of controversies, including over her taking a seat on the board of the for-profit university operator DeVry Education Group. The Sacramento Bee had reported that the seat, which Katehi quickly resigned, came with $170,000 per year in compensation. The Sacramento Bee also reported that Katehi made $420,000 in stock and fees for serving on the board of John Wiley & Sons, a textbook publisher.

The San Francisco Chronicle also reported that UC San Francisco Medical Center’s CEO, Mark Laret, was on the board of companies that were vendors for the medical center's hospital. Varian Medical Systems recorded $6.8 million in sales to the hospital since 2007, when Laret joined that company’s board, the newspaper reported. Software company Nuance Communications recorded almost $1 million in sales to the hospital since 2010, when Laret joined its board, the newspaper reported. Laret earns $1.6 million from the medical center and averages $556,000 annually in compensation from the companies, it said.

State legislators held hearings on the issue of the UC system’s outside compensation policies earlier this year. They passed a budget directing UC leaders to review the policies.

The newly passed rules, which UC President Janet Napolitano proposed, apply to a 165-member senior management group. That group includes chancellors at campuses as well as other high-level administrators. But they grandfather in administrators’ existing outside positions -- about 50 of 165 administrators hold positions that are grandfathered, with a dozen of them having spots at for-profit companies, according to the San Francisco Chronicle. Grandfathered positions will need to be annually reviewed and reapproved, though.

Experts called the UC system’s change an important move at a time when conflicts of interest, outside pay and university leaders’ paid spots on corporate boards are coming under increasing scrutiny. Charles Elson is a professor of finance and the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He supports the idea of limiting university presidents’ outside board memberships to one or two.

It can also be a good idea to have leaders seek approval before taking outside board spots, he said. Both university and corporate sides should be concerned about any relationships that could have money changing hands between institutions connected by someone who is a higher ed president and also a corporate director, Elson said. That individual’s independence would be compromised.

Elson was less certain about the policy requiring leaders to prove that their outside board memberships benefit their campus or university system.

“I don’t know what they’re doing with it,” Elson said. “I think limiting the number of boards each president or top executive can serve on, that makes sense. Other than that, I think the benefits statement might go a little far.”

The new policy will force administrators to make a case about their outside board work, according to John V. Lombardi, a former president of several universities, including Louisiana State University. Lombardi has served on boards at several types of organizations, including a stint at Nabors Industries Ltd. overlapping with his presidency at LSU. In practice, he thinks that could turn out to be a low bar to clear -- the UC system gave no rubric for rating whether benefits legitimize new outside paid positions. But presidents who can’t pen a persuasive argument are probably in the wrong line of work, Lombardi said in an email.

So the policy’s effectiveness will hinge at least in part on how it is enforced, leaving open a question of whether the change is substantial. Leaders at many universities already fill out conflict of interest forms, Lombardi said.

“Often they have to fill out conflict of interest forms that are quite extensive and specific, that are designed to force them to externalize relationships that may be problematic,” Lombardi said. “It’s not clear whether there is any audit follow-up on such conflict of interest statements.”

UC staff members will develop procedures and documents now that the revised policy has been approved, according to Dianne Klein, a spokeswoman. That includes a form justifying the benefits institutions will realize when administrators want to take paid outside work like corporate directorships.

The UC system does not plan public hearings on leaders’ requests to do outside work. Supervisors are slated to review requests, make their decisions and issue a report to regents that will be public. Two supervisors are now tasked with reviewing requests, up from one previously.

Some cautioned against setting overly restrictive standards for what outside work is and is not considered beneficial to the institution, however. Merrill Schwartz, vice president for AGB Consulting, said overly bureaucratic standards should be avoided.

“These are professional, grown people with good judgment, and they will come up with a standard for whether this is in the interest of the institution or not,” Schwartz said.

In 2011, Schwartz wrote about an AGB survey of college and university leaders that found more than half -- 53.4 percent -- served at institutions without a policy in place addressing service on corporate boards. A quarter of respondents said their contracts established guidelines for board service at outside organizations, with roughly the same portion saying their own governing board must approve outside directorships. AGB recommended institutions put in place employment agreements and board policies addressing the terms of any outside service. It also recommended that university leaders seek board approval before committing to outside board positions and that they disclose potential conflicts of interest and compensation in the process.

Policies for outside board membership should also take into account additional issues, Schwartz said. Colleges and universities should consider risks to their reputation, she said. They should also look at the timing of a board membership -- a president in his or her first year at a university is more likely to be pressed for time and less able to juggle additional commitments than one who has been in the role for several years.

“It’s really considered a 24-7 job in the fishbowl,” Schwartz said. “It’s a very tough, demanding role to lead a higher ed institution. I think that the broader examination of why this would be a good idea or not is a great step forward, and then I would suggest that they also look at risk and at the overall time commitments of the key executives when they’re balancing these concerns.”

The UC system’s new policy does seek to address conflict of interest violations “actual or perceived.” The requirements also include the disclosure of material changes in compensation and time commitment.

The policy is not perfect, said Judith A. Wilde, chief operating officer at the School of Policy, Government and International Affairs at George Mason University. The benefits provision could end up being rubber-stamped. Administrators might be able to fill out a boilerplate statement of benefits and have their forms approved.

Still, Wilde believes the new policy puts California ahead of the pack.

“Having anything that people have to respond to is a huge, huge step forward,” Wilde said. “It may not go as far as need be, but it’s a giant step.”

Wilde and George Mason Public Policy Professor James Finkelstein appeared at California’s hearings on outside compensation earlier this year. They presented research from 2010 showing that about a third of university presidents served on at least one board for publicly traded companies. The average dollar value of their compensation was almost $148,000 per board.

Presidents listed many different benefits to serving on boards, according to their research. They included networking, gaining understanding of governance and more opportunities for research. But presidents also receive their own individual benefits for acting as corporate directors, like stock awards and director fees.

That could raise questions about compensation and how a president’s loyalties could be split. Can a president who is paid by both university and corporation fulfill their duties to make decisions in both institutions’ best interests?

More than half of presidents on corporate boards sampled led public institutions, according to Wilde and Finkelstein’s presentation to legislators. It is an important public issue, Finkelstein said.

“The public policy issue is these are public executives,” Finkelstein said. “Why should this class of public executive and no other have the opportunity to serve on corporate boards and make considerable money doing so? Because the only reason that they’re on this board is because they’re the president of that particular institution.”


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