The Volokh Conspiracy - A Wave of Donor Intent Lawsuits Coming?

Yesterday's WSJ had a major story on the dust-up going on at Trinity College as the administration there tries to plunder a gift made by Shelby Cullom Davis to establish a chair in the study of free enterprise:

In 1981, Trinity President Theodore D. Lockwood wrote to Mr. Davis that the fund, by then $1.6 million, was big enough to be tapped to create a Shelby Cullom Davis Professorship of American Business and Economic Enterprise. The letter listed several related activities, such as campus visits from business leaders. Mr. Lockwood also sought flexibility to use the money as the school saw fit "as conditions evolved and opportunities arose."

In a return letter, Mr. Davis approved the professorship and activities Mr. Lockwood specified. But he rejected any other leeway. "It is my wish that the funds and income from the Endowment be used for the various purposes you have described...and for no other purposes."

Over the years, the value of the chair grew substantially. The current holder of the chair, economist Gerald Gunderson, requested that the Trinity administration add new professorships consistent with the intent of the gift, but Trinity refused:

The Davis fund grew beyond the needs of meeting Mr. Gunderson's $155,000-a-year salary. By 2007, it reached $13.5 million, or 3% of Trinity's total endowment, and generated more than $500,000 a year in income. After recent market declines, the fund is now estimated at $9 million.

Mr. Gunderson, 68 years old, says he complained for years that the school was starving the program and had rejected his frequent requests to add another full-time professor and a business-executive-in-residence program. The letter from Mr. Lockwood provides for the creation of a single professorship, but it doesn't explicitly rule out adding another.

Trinity instead wants to use the money to fund scholarships for international students. Prof. Gunderson complained to the Connecticut AG's office to investigate. More on Gunderson and his efforts here.

Based on the fact here, it seems to me that Professor Gunderson is on the right side of the story and really deserves credit for doing the right thing, even though it looks like he's not the most popular guy on campus these days. It isn't hard to imagine how much pressure he probably was under to keep his mouth shut rather than blowing the whistle. The story reports, "In a February letter, the attorney general's office told Trinity it could find no evidence that Mr. Davis intended the college or his family to have discretion to direct income from the endowment to purposes "other than the study and promotion of the economic theories of the free enterprise system." Amazingly, Trinity tried to do the same thing with restricted endowments in 2004 and backed-down when faculty revolted. And where were the trustees during all of this?

As the WSJ article notes, this is a problem that might be set to explode. The downturns in university endowments is creating intense pressures to invade restricted endowments and to convert them to general uses (like scholarships for international students). Moreover, the impact of the economic downturn on universities may be even greater than society in general.

Today's WSJ has a withering attack on the incompetence of university boards in managing their investments over the past several years (a point I have raised previously):

Idiots, liars and thieves have torched billions of dollars in this financial crisis. But it is a safe bet that at least as many billions were lost by smart people trying to do good, honest work on behalf of others — usually as part of a committee.

Examples are so abundant it isn't hard to trip over them:

Compensation committees on Wall Street awarded multimillion-dollar bonuses to the very people who ended up nearly eviscerating the global financial system. The investment committees at leading universities embraced hedge funds, private equity and real estate so unquestioningly that many ended up with 75% or more of their endowment in these illiquid assets.

Investment committees at charities fell as badly under Bernard Madoff's spell as lone investors did, often losing millions of dollars at a pop.

Boards of directors at mutual funds looked the other way as managers loaded up on toxic mortgage securities.

State boards of trustees approved risky investment menus for the "529" plans designed to help families save for their children's college costs. Not just dollars but dreams were destroyed.

So much for the wisdom of crowds. "The best groups will be better than their best individual members," says Robert Sutton, an organizational psychologist at Stanford University, "and the worst groups will be worse than the worst individual." That is because committees and other groups tend either to follow the leader in a rush of conformity or to polarize into warring camps. For committees and other boards to work well, they must be made up of people with differing perspectives and experience who are unafraid to speak their minds, says Richard Larrick, a psychologist at Duke University's Fuqua School of Business. They must also select and process information effectively and seek to learn systematically from their mistakes.

	[Todd Zywicki, April 25, 2009 at 12:07pm] Trackbacks A Wave of Donor Intent Lawsuits Coming? Yesterday's WSJ had a major story on the dust-up going on at Trinity College as the administration there tries to plunder a gift made by Shelby Cullom Davis to establish a chair in the study of free enterprise: In 1981, Trinity President Theodore D. Lockwood wrote to Mr. Davis that the fund, by then $1.6 million, was big enough to be tapped to create a Shelby Cullom Davis Professorship of American Business and Economic Enterprise. The letter listed several related activities, such as campus visits from business leaders. Mr. Lockwood also sought flexibility to use the money as the school saw fit "as conditions evolved and opportunities arose." In a return letter, Mr. Davis approved the professorship and activities Mr. Lockwood specified. But he rejected any other leeway. "It is my wish that the funds and income from the Endowment be used for the various purposes you have described...and for no other purposes." Over the years, the value of the chair grew substantially. The current holder of the chair, economist Gerald Gunderson, requested that the Trinity administration add new professorships consistent with the intent of the gift, but Trinity refused: The Davis fund grew beyond the needs of meeting Mr. Gunderson's $155,000-a-year salary. By 2007, it reached $13.5 million, or 3% of Trinity's total endowment, and generated more than $500,000 a year in income. After recent market declines, the fund is now estimated at $9 million. Mr. Gunderson, 68 years old, says he complained for years that the school was starving the program and had rejected his frequent requests to add another full-time professor and a business-executive-in-residence program. The letter from Mr. Lockwood provides for the creation of a single professorship, but it doesn't explicitly rule out adding another. Trinity instead wants to use the money to fund scholarships for international students. Prof. Gunderson complained to the Connecticut AG's office to investigate. More on Gunderson and his efforts here. Based on the fact here, it seems to me that Professor Gunderson is on the right side of the story and really deserves credit for doing the right thing, even though it looks like he's not the most popular guy on campus these days. It isn't hard to imagine how much pressure he probably was under to keep his mouth shut rather than blowing the whistle. The story reports, "In a February letter, the attorney general's office told Trinity it could find no evidence that Mr. Davis intended the college or his family to have discretion to direct income from the endowment to purposes "other than the study and promotion of the economic theories of the free enterprise system." Amazingly, Trinity tried to do the same thing with restricted endowments in 2004 and backed-down when faculty revolted. And where were the trustees during all of this? As the WSJ article notes, this is a problem that might be set to explode. The downturns in university endowments is creating intense pressures to invade restricted endowments and to convert them to general uses (like scholarships for international students). Moreover, the impact of the economic downturn on universities may be even greater than society in general. Today's WSJ has a withering attack on the incompetence of university boards in managing their investments over the past several years (a point I have raised previously): Idiots, liars and thieves have torched billions of dollars in this financial crisis. But it is a safe bet that at least as many billions were lost by smart people trying to do good, honest work on behalf of others — usually as part of a committee. Examples are so abundant it isn't hard to trip over them: Compensation committees on Wall Street awarded multimillion-dollar bonuses to the very people who ended up nearly eviscerating the global financial system. The investment committees at leading universities embraced hedge funds, private equity and real estate so unquestioningly that many ended up with 75% or more of their endowment in these illiquid assets. Investment committees at charities fell as badly under Bernard Madoff's spell as lone investors did, often losing millions of dollars at a pop. Boards of directors at mutual funds looked the other way as managers loaded up on toxic mortgage securities. State boards of trustees approved risky investment menus for the "529" plans designed to help families save for their children's college costs. Not just dollars but dreams were destroyed. So much for the wisdom of crowds. "The best groups will be better than their best individual members," says Robert Sutton, an organizational psychologist at Stanford University, "and the worst groups will be worse than the worst individual." That is because committees and other groups tend either to follow the leader in a rush of conformity or to polarize into warring camps. For committees and other boards to work well, they must be made up of people with differing perspectives and experience who are unafraid to speak their minds, says Richard Larrick, a psychologist at Duke University's Fuqua School of Business. They must also select and process information effectively and seek to learn systematically from their mistakes.