Report illuminates trustee COI

A report filed on May 1 by the Tellus Institute, a Boston-based think-tank, lists the College among the top four least transparent institutions of higher education in Massachusetts in reporting related-party transactions involving members of the Board of Trustees. The report, titled “Errors of Omission,” states that the College engaged in “substantially problematic” reporting practices in its 2009 and 2010 disclosures of transactions between the College and trustee-affiliated firms to state and federal tax authorities. Harvard, Boston University and Tufts were also cited by the report for their opaque disclosure practices.

In its tax disclosure forms for the 2010 fiscal year, the College lists 10 conflicts of interest involving trustees or spouses of trustees. Conflicts of interest involving members of the Board arise when individual trustees or their close relatives are affiliated with firms that provide services to the College for which they collect a fee. The Tellus report states that a disproportionate number of these conflicts of interest at Massachusetts colleges arise from such related-party transactions involving trustee-affiliated firms providing financial services to the trustee’s own college.

As a state and federally tax-exempt organization, the College is legally required to disclose potential conflicts of interest involving trustees to the Massachusetts Attorney General’s Office as well as the IRS. However, conflicts of interest and related-party transactions between the College and trustee-affiliated firms are not illegal under Massachusetts or federal law.

Management of the College’s $1.78 billion endowment is primarily the responsibility of the Investment Office, staffed by professional financial analysists, and the Investment Committee, which is composed of trustees and alumni. “The responsibility of the Investment Committee is to maximize the endowment for the benefit of the students,” said Fred Puddester, vice president for finance and administration.

“In terms of maximizing strong returns in the long run, there are investment funds you want to be in and that institutional investors are dying to get into,” said Jim Kolesar, assistant to the president for Public Affairs. “So you don’t want to not go into those because you happen to have people on your Board – that would be harmful to students in the long run.”

Kolesar added that both the trustees and the Investment Committee observe a stringent conflict of interest reporting policy in which members list their potential conflicts each year. “[We are] conscientious about having those people recuse themselves – literally leave the room – whenever the Investment Committee is talking about a fund they have an interest in,” Kolesar said. Puddester added that the Investment Committee and the Board “monitor all investments closely and get out of investments that don’t meet benchmarks.”

Of the 10 conflicts cited by the College’s disclosure forms, five involve financial services provided to the College by firms at which trustees are partners or senior officers. Among the conflicts listed were Greg Avis ’80, a partner at Summit Partners, the chairman of the Board and a member of the Investment Committee; Michael Eisensen ’77, a partner at Charlesbank Capital Partners and the chair of the Investment Committee; and Sarah Williamson ’84, a partner at Wellington Management Co. and a member of the Investment Committee. Trustees E. David Coolidge ’65, vice chairman of William Blair & Co. and an emeritus member of the Investment Committee, and William Oberndorf ’75, a partner at SPO Partners, were also listed as having conflicts of interest.

Collette Chilton, chief investment officer, said the College does not preference trustee-affiliated funds in sourcing investment managers for the College’s portfolio. “Our process for sourcing the best managers is the same regardless of the role of a trustee,” she said. Additionally, “the College does not receive a reduced rate or fee due to a relationship with a trustee,” Chilton said.

Joshua Humphreys, a fellow at the Tellus Institute and the report’s lead author, said that the concerns raised by the study have little to do with issues of legality or compliance related to trustee conflicts. “This kind of cozy relationship undermines Board stewardship,” Humphreys said in a phone interview on Monday. “It creates conflicts and division of loyalty. That’s a difficult culture – how do you fire Charlesbank when you have [Eisensen] on the Board?”

The Tellus report raised two specific concerns regarding the College’s practices: that the conflicts disclosed on the College’s Federal IRS 990 form were not consistent with those disclosed in the MA form PC filed with the commonwealth and that the more expansive list of conflicts disclosed to the commonwealth did not include the amounts of the related-party transactions in question.

According to Kolesar, the College’s trustee conflict of interest disclosures to the IRS and the commonwealth are consistent with the specific regulations and with industry-wide practice. “Both legal counsel and Pricewaterhouse Coopers [the College’s tax accountant] believe we are complying utterly with both of those regulations,” he said.

Referencing the discrepancy between the College’s disclosure to the IRS and the commonwealth, both Kolesar and Puddester indicated that while both forms require disclosure of related-party transactions, the two agencies have different standards for such transactions. According to Kolesar, the IRS 990 form only requires institutions to disclose related-party transactions in which the related party owns a 5-percent or greater interest in the firm involved in the transaction. In 2010, the College disclosed two conflicts to the IRS involving the spouses of College officers who received compensation from the College. One spouse is an employee of the College and another is a partner in Williamstown Medical, which provides medical services to the College. None of the trustees’ financial sector conflicts were listed on the IRS form.

The MA form PC filed with the commonwealth, according to Puddester, includes “vague language,” leading College officials to disclose a more comprehensive list of trustee conflicts but not the amount paid to trustee-affiliated firms for their services. “To the College’s credit, they identify trustees by name and firm,” Humphreys said, “but they don’t provide anything about the nature or size of transactions or the amount in fees paid.”

Kolesar, however, stated that the lack of disclosure was primarily the result of the form’s ambiguous language. “These are not clear-cut regulations, and it looks like there is not an industry-wide understanding of that state form because it looks like different schools are filing it in different ways.” The Record’s research, as well as that of the Tellus report, indicates that several other Massachusetts institutions, including Boston University and Boston College, do in fact disclose the amounts of their related-party transactions, including financial services, to both the commonwealth and the IRS.

According to Chilton, the College as a matter of general policy does not “disclose our investment managers or how much we invest with each investment manager because the information is proprietary.” Puddester stated, however, that this was not the primary reason for the College’s decision not to disclose the amount of the transactions. “It was our interpretation of the instructions that led us to that conclusion,” he said.

In an interview on Friday, Kolesar stated that the College’s investment and reporting policies were unlikely to change as a result of the Tellus report. On Tuesday, however, Puddester said that the College would seek legal counsel from a firm that specializes in non-profit tax compliance. “What we believe now is that we may have to change our reporting and we may publish some numbers depending on the legal interpretation we get,” he said.

The Tellus report was funded by Service Employees International Union Local 615, a union that represents workers at Harvard but not Williams, said Kolesar. The Union is also supporting a bill in the Massachusetts state legislature, sponsored by State Senator Patricia D. Jehlen (Dem.), titled “An Act to Increase Transparency of Public Charities,” which seeks to introduce more stringent standards for non-profit financial disclosure.