Fiduciary Behavior

Governing board members bear major and ultimate responsibilities as fiduciaries of the college or university they serve. Calls for increased accountability and developments such as financial volatility, transformational technology, internationalization, and increased regulation of governance have led to mounting attention to the quality of fiduciary stewardship. What do some of the most distinguished trustees consider to be basic good practice for boards and board members with respect to fiduciary behavior? Traditionally, state law has addressed, often in case-specific state court rulings, what is expected of fiduciaries. More recently, federal law, too, has infiltrated some fiduciary duties, such as IRS requirements applicable to the conflict-of-interest practices of tax-exempt organizations.

The concept of fiduciary traces to the Latin term fiduciarius, meaning to hold in trust or in faith. Basic fiduciary duties include caring for and being loyal to the institution. While the law explicates fiduciary duties in some circumstances, for their application it typically looks to board members’ sound judgment guided by integrity, observation, experience, insight, and institutional policy. Although institutions’ needs and cultures vary, board members want to know what are generally regarded as best fiduciary practices.

Trusteeship asked Martin Michaelson, a partner in the law firm Hogan Lovells and an expert on higher education fiduciary matters, to explore in a roundtable discussion with other top higher education leaders some of the ways board members should engage in fiduciary behavior. Gerhard Casper, president emeritus of Stanford University and a former trustee of Yale University; Richard Chait, a Harvard Graduate School of Education emeritus professor whose field is higher education governance; Yvonne R. Jackson, trustee of Simmons College, vice chair of AGB’s board of directors, and present or former director of several corporate boards; David W. Miles, past president and current member of the Iowa Board of Regents; member of AGB’s board of directors, and CEO of Miles Capital, Inc.; Martin D. Payson, a board member at Carl Marks who has also served on boards of several leading universities, Tulane University and Howard University among them; and Henry Rosovsky, a former member of the Harvard Corporation and dean of Harvard’s faculty of arts and sciences, shared their views.

Michaelson: The word “fiduciary” covers a lot of ground, such as fidelity, trust, care, loyalty, and perhaps obedience. You are among the most highly regarded fiduciaries in higher education. What do you consider hallmarks of fiduciary behavior by college and university trustees?

Casper: Trustees’ most important fiduciary obligation is to worry about the future, not merely the present. These are not either/or propositions, of course. Board members are accountable for ensuring that the institution will have the resources it needs 30 or 40 years from now. The present generation at colleges and universities has so many legitimate and urgent demands. We need to remind faculty members and students that the trustees, as fiduciaries, must protect the institution’s future health. Trustees also have to worry about the institution’s reputation and can be very useful in that. Another basic fiduciary obligation—one trustees often don’t meet—is to be extremely well informed about the institution. The president, provost, and other administrators often don’t place enough emphasis on that need.

Chait: Fiduciary responsibility is the platform of effective trusteeship, not the summit. The two shouldn’t be confused. Three propositions come to mind: fidelity to mission, integrity of operations, and conservation of core values.

Rosovsky: Reputation is certainly important, but I also think of trusteeship in terms of safeguarding the institution’s moral compass. Colleges and universities today face all sorts of pressures, assaults, and opportunities. Somewhere in the system there have to be individuals who have a sense of the proper boundaries.

Let me give an example. Years ago I was asked, “If somebody offered you $2 billion to put a sign on the John Harvard statue that said, ‘Things go better with Coke,’ would you accept it?” What role should trustees have in a decision of that kind? Donors and commercialism figure in what I call the moral compass.

Justice Felix Frankfurter spoke of the university’s four freedoms: To determine for itself on academic grounds who may teach, what may to be taught, how it should be taught, and who may be admitted to study. In a sense, protecting that is the ultimate responsibility of trustees.

Casper: I’m in agreement with Henry, with this qualification: The core values—putting issues of morality to the side for the moment—are teaching, learning, and research. In one sense, trustees are least qualified to protect those values because they are often outside their area of expertise.

Payson: I agree with those thoughts. Several key considerations are, first, does the trustee have any unmanageable conflict of interest? Second, does the trustee have a narrow agenda—such as one school or program—or is the trustee open-minded to the whole enterprise? Third, does the trustee work hard in support of the institution? Certainly the board should be a moral compass. The exact markings on the compass may be different at an institution that has billions in endowment, which of course most of the institutions don’t, but there should be markings.

Jackson: Fiduciary behavior includes, prominently, holding to the institution’s mission and ensuring that the institution is financially and operationally sound and stable. For instance, mission-compliance addresses whether students receive a quality education.

Miles: A trustee must have an actual commitment—a commitment that is a lot more than lip service—to governance and to the institution’s long-term success. Among the key hallmarks of fiduciary behavior are that a trustee is expected to work effectively with fellow trustees and institutional executives. Trustees tend to find, I think, that compliance with one’s own sound ethical principles correlates with meeting the fiduciary standard, while failure to be true to one’s own ethical principles correlates highly with failure to meet the fiduciary standard.

Michaelson: Is a high standard of fiduciary behavior necessary for effective trusteeship, or is it sufficient?

Miles: It’s necessary, not sufficient. Effective trusteeship requires more than not flunking the legal standard. The legal standard might be met by a trustee whose failure of insight into the institution’s real interests makes him too risk-averse, for instance. Yet we know that excessive risk-aversion can really endanger institutions. We know that perceived risk-aversion sometimes actually adds risk. An effective trustee must be able to recognize and navigate the tension between risk-aversion and fiduciary responsibility.

Chait: A lawfully mediocre board might discharge every nominal responsibility yet not address the future, not exemplify the institution’s values, and not have a coherent strategy that aligns with the espoused purposes. That board regularly meets, committees convene, resolutions are passed, budgets are balanced, and no one is guilty of gross misconduct. Fiduciary responsibility is a threshold condition not to be mistaken for superb trusteeship.

Michaelson: Gerhard, do you agree that failure to maintain a sound conception of the institution’s future can be consistent with fiduciary behavior?

Casper: Many trustees focus too much on the endowment. That is insufficient for fiduciaries. They must maintain not only the endowment, but also the physical plant, for instance. We’ve seen spectacular cases at prominent universities where the board never really considered the physical plant and instead kept the payout low and addressed the endowment only. Those were wrong calls.

It Starts with Education

Rosovsky: Isn’t there a dilemma? You said earlier trustees are unequipped to judge teaching and research. Then you say they should worry about the future. I don’t think the future is mainly endowment size or deferred maintenance. It involves intellectual judgments.

We fail to train trustees for that. We don’t make a systematic effort to get board members to understand the institution’s intellectual activities. How does the president come to understand future needs? Decisions must be made about physics, economics, medicine, and so forth. Trustees can’t be experts, but they can be educated to participate in the discussion intelligently.

Michaelson: It’s commonly said that corporate directors know more about the company than college trustees know about the college. Does the shared-governance concept suggest that faculty and deans don’t want the board to know more, especially about academic matters?

Rosovsky: Generalizations on that are difficult because governance differs by the type of institution. We talk about “the American system of higher education,” but large research universities and community colleges, for example, don’t have much in common.

Chait: The differences are trumped by commonalities to which Marty alluded. It’s not so much that trustees lack “industry knowledge.” No one expects trustees to differentiate credible research from questionable research. Difficulties arise mainly because trustees are unfamiliar with the institution’s processes and precepts.

The image I have of a typical trustee is an American who lands in London, rents a car, and then confronts a rotary. It’s vaguely familiar, but backward. All of your instincts are incorrect. You look in the wrong direction. Your expectations are constantly upended. The best trustees say, “I’m going to learn to drive like a native.” The worst trustees shout, “Why do they insist on driving on the wrong side of the road?” Even allowing for that, board members can make superb contributions, yet we do tend to keep trustees at bay.

I’ll step deliberately on a landmine: intercollegiate athletics. Fiduciary duties are not satisfied when boards say, “We have a perfect compliance program and no sanctions.” Trustees should ask—and can reasonably discuss unless they’re rabid boosters—whether the system is actually salvageable or incorrigibly toxic. College athletics are a kind of business trustees can adeptly understand. The problem is they’re in a strange foreign land; the rules of the road are unfamiliar and uncomfortable to learn.

Jackson: My experience is that faculty and deans want the board to understand what they’re trying to achieve. Frustrations develop on both sides when trustees don’t know how to talk about—and don’t take the effort needed to learn about—the work of faculty and deans. Real and sometimes challenging efforts should be made to address this.

Michaelson: Is there an optimal board size for fiduciary performance?

Casper: Engaging trustees becomes difficult when you have a 35-, 40- or 50-member board. Board size itself may be a fiduciary issue. Can the administration really engage the board? I served on the Yale board, which has an ideal size: 15. They sit around a smallish table and are really involved in discussions. With many boards that’s not remotely possible, which makes it hard for trustees to be fiduciaries.

Payson: A university board is typically larger than a corporate board because they serve different purposes, such as fundraising. Were the university board reduced to 10 to 15 people, some of those purposes would be defeated. Although some board members are much more active than others, all are fiduciaries. In theory, a smaller board would be better, but theory is different than economic reality at most higher education institutions. Also, the institution needs enough trustees to populate board committees.

Michaelson: Some institutions flourish with large boards. I’m thinking of two strong universities that have a board larger than 50. One is among the most distinguished in the world. The other has had remarkable growth and a very philanthropic board. Much can be said, however, for a board of 25 or fewer.

Casper: Philanthropic trustees are performing one of their obligations to the institution, but a large board is driven to a governance structure in which the executive committee makes the real decisions. We need to worry about the relationship between the executive committee and the rest of the board, and ensure that both are subject to the same expectations and obligations.

Jackson: Although familiar with a competent board of more than 50 at a higher education institution, I’m somewhat skeptical of very large boards and think they should be rare.

Miles: I have served on a private college’s board of about 35 and on a nine-member public higher education board. Both performed well. But my impression is that larger boards tend to impede effective engagement by trustees. I’ve seen trustees drift away from larger boards.

Caution: Board Members as Big Donors

Michaelson: Is it problematic, in terms of fiduciary behavior, to expect trustees to be major donors?

Rosovsky: Is that an expectation at public institutions?

Michaelson: Not so much, in general. Are there risks to that model, whether as a condition of board membership or a serious expectation?

Casper: Yes. Risks are that substantial donors will be paid undue attention and have undue influence. On a high-quality board those risks are manageable. I’ve dealt with mega-donor trustees who weren’t treated differently than others. What should a trustee’s qualifications be? Remember the famous three W’s: wealth, wisdom, wit. Any two will do. It’s important that some board members not be big donors. Non-donor trustees frequently bring a needed perspective.

Chait: The expectation that board members be substantial donors, although probably immutable, carries some dangers for governance. Donors’ passions may not square with institutional priorities. The larger the trustee’s gift, the louder the trustee’s voice; trustees don’t speak equally.

A useful thought experiment would be for all trustees to register views anonymously on an issue and then have everyone’s identity unmasked. I’m quite sure that a different dynamic would result if trustees offered their opinions unmasked in the first place.

At some institutions, large donors can play by different rules. They’re not held accountable to the same standards for attendance, preparation, or participation. I think mega-donors can have more influence as independent voices than as members of a collective committed to a process of corporate governance. They can do many things that would be untoward for a trustee but perfectly acceptable for a donor.

Miles: The hazard posed by the major-donor trustee is a potentially dangerous misalignment of interests. For instance, a tension increases between the big-donor trustee’s actual skill set and the influence other trustees cede to that trustee. Such ceding of influence—influence unwarranted on the merits—can tend to disempower other trustees and isn’t good.

Jackson: The trustee-as-donor issue calls for careful management. No givers should be allowed to have undue weight. “One person, one vote” should be the rule.

Rosovsky: Trusteeship is an art, not a science. I’ve known mega-donors who are among the most modest people I’ve ever encountered; the size of their gifts never becomes an issue. Others throw their weight around. I wouldn’t want to exclude anyone. You have to select case by case.

Payson: You have worker bees and donor bees on many of the boards. The board sometimes must be prepared to say “No, thank you” to donors, such as if they try to dictate how the institution should conduct itself.

Michaelson: Is there consensus that from a fiduciary behavior viewpoint there should not be an expectation that trustees will donate a certain amount?

Rosovsky: I like the concept, commensurate with capacity. But we all have different views of capacity.

Chait: A workable standard some institutions apply is to seek assurance that the institution will be one of your top two or three philanthropic commitments.

Jackson: A general expectation of philanthropy is good, provided the institution doesn’t fail to recruit some trustees who can’t give much money. The trusteeship committee has to manage the expectation in that context. And we need to keep in mind other very urgent considerations in composing the board, such as diversity of membership.

The President’s Place at the Board Table

Michaelson: What are implications for board fiduciary performance when the president is a trustee?

Rosovsky: I don’t have a strong view on the president being a board member, but being board chair is not a good idea. Board agenda setting should not be mainly in the president’s hands.

Casper: I feel strongly about the president’s role as a trustee, because it enables the president to say to those who want something that shouldn’t be done, “Look, I’m also a fiduciary of this institution. This is a terrible idea.” Other board members’ oversight roles aren’t affected by the president being a trustee.

Chait: I’m probably the most bearish among us about the president as trustee, for three reasons. First, if a president needs to have a board seat to be effective, the president has a different and more fundamental problem. Second, I can’t imagine a president voting with the minority of the board on a course of action.

Third, if the president can be on the board, it’s harder to make the case that employed faculty members or other administrators should not be. I would prefer that anyone who draws a paycheck from the institution not serve as a trustee.

Jackson: I see it differently. The president should have a stake in the game. Board membership is part of that. I believe the concerns Dick Chait identifies in this respect are manageable.

Michaelson: Many public universities and some private universities have faculty representation on their boards. Is that wise?

Chait: In Canada it’s the norm. Some American institutions also have a trustee from the professional staff and another from the clerical and unionized staff.

Michaelson: And some have a student trustee.

Chait: Institutions are well advised to avoid all of those. Employees’ capacity to eschew parochialism is limited. Confidential conversations become more porous. Trusteeship requires objectivity and disinterestedness. This approach fails on every count.

Payson: The verdict on faculty trustees is mixed. I’ve seen some who have been terrific and as trustworthy as any other board member. And I’ve seen instances where the faculty trustee was nothing more than a shop steward. My observation of student trustees is similar. On balance I don’t favor the practice.

Rosovsky: As we’ve discussed, trusteeship addresses the future, about which faculty, staff, and student trustees are less likely to worry.

Chait: They, especially students, have a vested interest in the present.

Michaelson: It’s no accident that at public institutions constituency representation by faculty members and students is more common than at private ones; political imperatives call for faculty and staff representation on the board.

Careful Trusteeship

Michaelson: What is the “duty of care”? What are basic elements of careful trusteeship?

Casper: Institutional decisions that require board approval include decisions involving major expense, such as establishment of a branch campus. Part of the duty of care is insistence on thorough cost-benefit analysis of such proposals—really doing the homework and sitting down and considering the problematic issues.

Miles: As I see it, the duty of care connotes a thoughtfulness of purpose. It connotes a trustee who isn’t the proverbial potted plant, and who takes real effort to understand the issues. That trustee asks herself or himself, “Have I actually captured sufficient information to exercise solid judgment and make an informed decision?”

Michaelson: Do you have a rule of thumb for how many hours of preparation a trustee should normally spend before a board meeting or important committee meeting?

Casper: If the meeting mostly involves routine matters, preparation may be not more than half a day. But if there is a major matter of the kind that I described, a board member may have to spend days preparing—not only reviewing information the institution provides, but also making calls and inquiries, asking how things are done elsewhere, and so on. That is anything but routine.

Rosovsky: A board member with whom I worked called material submitted to the board “untreated sewage.” Much has to do with the way information is presented and what is presented. Private corporations are better at that than academic institutions I’ve seen.

Chait: Two benchmarks for trustees should be disinterestedness and open-mindedness. Some trustees are not disinterested. They become enrapt with their fraternity, a particular program, or athletics. A relentless disposition to ask inconvenient questions and engage in robust discourse and disagreement is vital.

Michaelson: Dick, you’ve long studied college and university boards. What grade do you give them for careful trusteeship?

Chait: Well more than half would earn a respectable grade—a lot of B’s and B+’s. Some even merit an A. Others, regrettably, are quite deficient.

Rosovsky: Eternal vigilance is the best motto for boards. Dick has talked in the past about generative governance. Should a board mainly be an informed sounding board that reacts to issues or should it be more activist?

Chait: I would describe a generative board not as activist or intrusive, but as reflective. The generative board asks, “Do we have the right question, framed the right way, before we move to the right solution?” Many boards in recent years have hopped on the bandwagon of globalization and commercialization. Few do the generative work of asking, “What are the implications for the programs that can’t produce cash flow? Under what circumstances would we invest in programs that don’t make money?”

The same is true for the amenities arms race. Instead of making ad hoc choices, boards should ask, “What’s really going on here? Why do we need the largest climbing wall?” not “What’s the square footage of the climbing wall, can we fund it, and what’s the debt structure?” That’s what I mean by generative work: Trustees do “sense making” before “decision making.”

Michaelson: Is that what Henry referred to as boundaries?

Chait: Yes, you can consider it in those terms. I think of it as framing issues.

Rosovsky: Shouldn’t the administration frame the issues and then subject them to questions by the board?

Chait: I’d prefer that truly consequential issues be framed through interplay by the administration and the board. Too often boards confront issues so prepackaged and predetermined as to describe the problem definitively. Then the answer comes from narrow choices. No one suggests, for example, “Instead of this amenity, what if we competed on academic quality or on student services?” If management asked, “How do we respond to competitive pressures that are manifested by amenities? Should we compete on a different axis?” That’s a different conversation.

Payson: I once joined a university board that was a very polite board. They came in, met for an hour and a half, and had lunch. I was probably the first New Yorker on it, and I started asking questions, such as—when the financial report showed only one line for the medical center—“Where’s the back-up? Don’t you have separate financials for it?” There’s a duty to be an inquirer—not a prosecutor, however. You have to inquire with the right attitude. Trustees need much more than to attend a passive dog-and-pony show.

Michaelson: What are your views on fiduciary oversight of the president and administration? Most of you seem comfortable, in slightly varying ways, with the president being a board member. In the context Dick described, how should the board oversee the president and administration?

Jackson: The board’s role is to recruit, hire, and develop the president; annually appraise the president in a constructive way; and hold the president accountable. Accountability of the president includes, for example, accountability for maintaining a healthy institutional culture, such as with shared governance. Where the president doesn’t measure up, the board’s role is to find a new president.

Casper: I agree with Dick’s characterization of how proposals are usually put before boards. These proposals are polished, have been worried through by the administration, and then it is hard for the board to get hold of the big issues. One of the president’s duties is to bring to the board major issues in an informal discussion. Consider how most board meetings take place, with many university officials in the board room. That makes trustees shy to ask questions. The executive session in which the president alone, or the president and provost, sit with the board, is valuable for airing issues.

As to oversight of the president, a college or university board should act like a corporate board, except even more rigorously. At least once a year the president should detail his or her goals for the coming year. At the end of the year, the president should talk about accomplishments and failures. Then the board should meet again in executive session, without the president, for uninhibited, robust discussion of performance and policy issues.

Michaelson: Should that discussion be with the full board or the executive committee?

Casper: The full board, unless the board is unmanageably large. If fiduciary duty means anything, the board must engage in oversight of the administration.

Michaelson: Do you agree that the board’s most important function is to hire and fire the president?

Casper: Yes.

Michaelson: Many of us have seen situations in which some trustees are skeptical of the president’s performance, yet there has been little, if any, communication in which these concerns were discussed.

Rosovsky: Part of the reason for that is the trend of increased bureaucratization at institutions over the last decade or so. Administrators come to board meetings with a retinue—the chief of staff, the lawyer, and so on. Boards need to create places where it is possible to interact on a simpler, more direct basis. The multiplication of administrators at board meetings is a big problem.

Who Should Communicate with Whom (and When)?

Michaelson: Where does the board chair fit into this equation? For example, should the board chair be in daily or weekly contact with the president?

Payson: The board chair represents the board and has the most crucial relationship with the president. Ordinarily, trustees who have issues should raise them with the board chair. Direct contact between the president and individual trustees is to some extent good, but if every trustee raises with the president each issue, it becomes unmanageable. The board chair should be in regular, informal contact with the president.

Casper: There should be as much contact between the president and board chair—as well as with committee chairs, and other board members—as they can manage. It shouldn’t be regulated, but should be an expectation. Trustees should also feel free to talk to faculty members. I’ve been associated with some universities where relationships between the board and faculty were tightly controlled. That model is not good. The more contact among board members and faculty, the more information will be generated for the board, and in particular for board members to convey to the president. One of the most valuable functions board chairs performed when I was president was to call me and say, “I think you should know something that was said last night.” It has to be informal. There can’t be a rule, such as once-a-week meetings.

Chait: Committee chairs will also talk to staff liaisons, but I second the suggestion that committee chairs have open access to the president to ensure that the president and board chair do not become so tightly coupled as to govern without benefit of the board’s best thinking. Whatever the formula by which board chairs and presidents communicate with each other, were I to fault both it’s that too few of these conversations concern the board’s effectiveness. I would encourage much more discussion between board chairs and presidents on how to enhance board performance.

Michaelson: May I suggest a different slant? I’ve observed over the years presidents who believe they spend far too much time being pestered by trustees, especially at institutions where board committees have evolved into fiefdoms in such areas as buildings and grounds. The president finds it distracting, excessive, and intrusive. Have you seen that?

Chait: Yes, all the time. There should be a high threshold before a trustee calls the president where the issue has not first been vetted with the board committee or staff. The average independent college or university board has about 35 members. If every trustee called the president even every four months, that’s 105 phone calls. That’s not good.

Casper: If trustees raise fiduciary matters—general policy matters, not micromanagement—the invisible hand will see to it that the president isn’t overwhelmed by phone calls.

Rosovsky: The president needs to make certain things clear—for example, that the president doesn’t discuss admissions cases. If you establish that principle, a boundary is set and accepted.

Michaelson: Before we close, two questions that are related: Is it harder these days than it used to be to get the best people to serve on college and university boards? Also, is it harder than it used to be to be a college or university fiduciary?

Chait: “Where have all the great trustees gone?” is a nostalgic warp. I’d recast the question: Really talented prospective trustees are harder to attract because they want to be assured a meaningful role. I don’t think it’s about the time commitment or the complexity of the institution. People want to put their time to productive use. The refrain I hear more than any other from frustrated trustees is, “Too much of the work we do is inconsequential.”

Jackson: The trustee today has to work harder to keep up to date, to read and understand financial reports, to understand various maps of risk. Technology is transforming all of higher education. Change is happening much faster now than in years past. Management and oversight of these institutions are riskier and more complex than they were in even recent years.

Payson: Trustees are more in a fishbowl than they used to be, and that’s not necessarily bad. Also, people’s lives today, in general, seem busier and harder than before.

Rosovsky: I will refrain from commenting on these two questions, except to say it was always better in my day!

Casper: It was not only better but, of course, it was less complex. Ever since Adam and Eve were driven out of paradise, the world has been becoming more complex with every day, and therefore the trustee’s job has, too.