Philanthropy Unbound

By November 20, 2018 March 7th, 2019 Trusteeship Article

On a summer night at a large public university in the West, a group of students project a repeating loop of two images onto the side of a large, new business-school building. Both images include photographs of the main donors for the building, and one reads: “Sold: Respected research institution. $25 million.” The students’ protest follows the release of documents revealing that the donors for the gifts to the institution and several other colleges and universities across the country were granted a role in the hiring and evaluation of some faculty members.

Scenarios like this one last year have prompted many higher education governing boards to increase scrutiny of their protocols for upholding academic freedom and ensuring that philanthropic gifts align with their institutions’ missions. At the same time, colleges and universities increasingly are relying on private donations as government funding continues to diminish and parents and lawmakers call for greater cost efficiency from higher education institutions. Over the past couple of decades, many private donors—including corporations, foundations, and individuals—also have been demanding a greater say in both the purposes and uses of their gifts.

Nowhere has that been more evident in recent years than in the gifts made to higher education by the Charles Koch Foundation, which advocates conservative, libertarian policies and unconstrained free markets. In recent years, the foundation has been steadily increasing its donations to colleges and universities and gave nearly $49 million to more than 250 higher education institutions across the United States in 2016, according to a recent Associated Press review of the foundation’s most recent tax records. That was a 47 percent increase over 2015.

Those gifts often came with strings attached. George Mason University has received the largest share of Koch’s higher education donations, according to an analysis of federal tax data by the Center for Public Integrity. Last spring, the university released documents that showed its gift agreements with the foundation, in support of faculty positions in economics, had granted donors a role in faculty selection and evaluation. The university’s announcement came amid a lawsuit about donation transparency that had been brought by student activists, although a Virginia judge later in the summer rejected the students’ attempt to make public the donor agreements between the Koch Foundation and the George Mason University Foundation. Amid the heightened media scrutiny, the Koch Foundation said in July that it plans to disclose its future donation agreements with colleges and universities.

At George Mason, news of the donor agreements spurred the university to begin a formal inquiry and take steps to void the faculty hiring agreement with the foundation and to rebuild trust in the university’s academic integrity and reputation. Similar donor agreements that granted the Koch Foundation a role in faculty hiring and evaluation have surfaced in past years at several institutions, including Florida State University and Utah State University.

Other private donors also have attached conditions to their higher education gifts, prompting campus and public outcry. A 2005 gift agreement between the BB&T Charitable Foundation and a dean at the University of North Carolina at Charlotte required objectivist philosopher and author Ayn Rand’s market ideas and books to be included in the curriculum and certain courses. Although the original terms of the agreement were never implemented, the university’s chancellor renegotiated them to preserve faculty control over the curriculum and uphold senior administrative oversight of gift agreements.

Gifts to higher education for policy research over the years have come from donors with agendas on both the political right and the left. The Olin Foundation, which closed in 2005, was previously the top conservative donor to higher education. Progressive campus donors have included the Russell Sage Foundation, the Ford Foundation, and the Institute for New Economic Thinking. While those foundations have not sought a role in academic curricula and faculty hiring, conservative faculty members including Frank Buckley, a law professor at George Mason, have argued that grants by those foundations to fund women’s studies programs and civic engagement courses have laid the groundwork for advancing progressive priorities.

BOARD ROLES

The heightened scrutiny means higher education governing boards must ensure their institutions’ gift agreement policies meet the highest standards. As Patricia P. Jackson noted in The Board’s Role in Fundraising, published by AGB in 2013, board members are part of an institution’s fundraising team. They are asked to make financial gifts to their institution and work with the president, advancement staff, and other volunteers to help obtain additional donations.

“To do this well requires an interest in and understanding of the institution’s mission and strategic priorities and the resulting plans to secure the funding to make it all possible,” Jackson wrote. “It also frequently entails working in close partnership with the institutional CEO and the advancement staff on specific assignments related to the identification, cultivation, solicitation, and stewardship of donors.”

The board’s ultimate responsibility for the institutional reputation also means board members must be aware of the ways that donors’ conditions in gift agreements can undermine an institution’s academic mission. “Boards have ultimate responsibility to sustain higher education’s inherent values—academic freedom, institutional autonomy, and self regulation—and protect them from those who attempt to leverage influence to affect institutional policy,” AGB’s Board of Directors noted in its 2012 Statement on External Influences on Universities and Colleges. “Boards can help facilitate meaningful and appropriate relationships with donors by calling for up-todate gift-acceptance policies and processes, as well as naming policies for buildings, research institutes and centers, and the like. These policies and processes will preclude donors from exercising inappropriate influence on the institution’s independence and autonomy or its academic programs and mission.”

In cases where a public university has a private fundraising foundation, AGB has recommended that communication among foundation and institutional administrators and board members should be frequent and candid. “Institutional governing boards and foundation boards should jointly endorse gift acceptance policies, recognizing that the institution has ultimate authority to accept or reject gifts that impose unusual restrictions on the institution or would significantly impact the mission, strategic direction, or finances of the institution and its affiliates,” the AGB Board of Directors noted in its 2016 Statement on Institution-Foundation Partnerships.

At the same time, a higher education institution’s board members must exercise care to be active fundraisers but not micromanagers as they work in partnership with their college or university’s president and development staff to coordinate philanthropic efforts, recognizing that the president is the chief fundraiser. Governing boards have a role in identifying and cultivating potential supporters, as well as soliciting gifts. They also should request appropriate planning and regular reports measuring success. “In their oversight role, boards have a responsibility to both understand and help shape the institution’s overall fundraising direction and activities,” Jackson wrote.

Careful fundraising policies and protocols are particularly important when considering gifts to an institution’s endowment. Since these types of gifts are longterm in nature and established to ensure intergenerational equity, they must be evaluated with a broad view for the college or university’s future best interests. While donors may often demand restrictions on the use of their endowment gifts, governing boards and other institutional fundraisers must negotiate their requests with a look beyond present-moment considerations.

OPPORTUNITIES

The acceptance and management of endowment gifts is a complicated undertaking that comes with heightened fiduciary obligations for board members. Governing boards should be mindful of specific best practices for managing endowment gift agreements:

  • Gift agreements should be prepared centrally and should be written by the college or university’s lawyer, or by the counsel for a public university’s private fundraising foundation. Development officers should not prepare gift agreements because they are representing the donors in the process. The foundation or university lawyer is usually independent of the gift negotiation and aware of the larger institutional picture. As a result, he or she can best represent the college or university.
  • Consider the state’s Uniform Management of Institutional Funds Act and incorporate its concepts into an escape clause to be included in all endowment gift agreements. All states except Pennsylvania have adopted a version of the act, which outlines fundamental rules for the investment of funds held by charitable institutions and the expenditure of funds donated as endowments to those institutions. The laws in general require that assets be invested prudently and appreciation of assets be wisely spent for the purposes of any endowment fund held by a charitable institution. Some donors may balk at the escape clause, but this is essential for future, unknown conditions the college or university may face. This clause would only apply if the donor’s stated use becomes illegal, impossible, or impractical. At public universities with private fundraising foundations, the foundation’s board of directors should have the right to alter the agreement.
  • Always have the donor sign the gift agreement last. While awkward, this avoids the embarrassing situation of a president saying, “We don’t want this” after a donor has signed.

College and university board members also should be aware of considerations that their institution or foundation’s gift-acceptance policy should include:

  • All endowment gifts must be documented in a written gift agreement.
  • Donors cannot serve on any selection committee associated with their gift. This includes scholarships, lectureships, fellowships, and faculty positions. Such selection committees are a key part of academic freedom, and only university faculty, staff, or students can serve on them.
  • A donor cannot stipulate the subject matter or a specific text to be taught by a faculty member, or the specific topic to be addressed by a speaker. Donors also cannot dictate classes that a scholarship or fellowship student must take. These are cherished parts of academic freedom.
  • A donor cannot stipulate the investment of a specific gift. Non-cash gifts should be liquidated immediately, and proceeds should be invested in accordance with the investment policies of the endowment fund.
  • A donor cannot change the terms of a higher education institution’s policy over endowment investment spending, including the percentage of the endowment that may be paid out annually. ment that the gift will be managed and invested in accordance with the management and investment policies of the university or foundation “from time to time.” This language provides a legal specification that such policies may change over time.
  • The donor’s proposed gift must be something that an academic unit wants and can use and is consistent with its long-term plans.
  • Policies must provide that an endowed faculty position cannot be filled until the pledged gift is fully paid.

NEED FOR DILIGENCE

Governing boards also must be aware of pitfalls that can occur with endowment agreements and ensure that their institution has adopted appropriate strategies for managing them:

  • Avoid gift agreements with perpetuity. No matter how prescient a donor or a dean may be, things will change over time. What if the gift is to endow a scholarship in nursing? What if in 50 years the college or university no longer has a nursing program? An escape provision in a donation agreement solves this problem.
  • Try to deter donations for overly specific purposes. If a donor wishes to endow a fund for a specific purpose, find ways to broaden that. For example, a donor wishes to endow a fund to support research for the cure of glaucoma. What happens if, happily, glaucoma is cured? Consider suggesting alternate provisions that allow the gift to be used to support general research in eye diseases. Perhaps a donor wishes to endow a professorship in the study of a rare Native American language. Current faculty members are excited at the prospect. But what happens if a search committee cannot find anyone to fill the position?
  • Be sure to include flexibility whenever possible. Donors often seek endowment agreements with narrow provisions when funding scholarships that memorialize someone. They want the recipient to be just like the deceased, with similar attributes such as playing soccer and tuba. Seek to broaden the criteria.
  • Avoid gift-agreement provisions that are in violation of your state’s affirmativeaction provisions. Affirmative-action law is a difficult arena, and rules vary state by state.
  • Fend off provisions that would violate state or federal laws or the higher education institution’s mission and values. Instead, the staff member who drafts a donor agreement should seek to find ways to uphold those legal and institutional requirements while still accomplishing a well-meaning donor’s goals. For example, a public university should not accept or manage a scholarship restricted to Christian students. But a scholarship for a student majoring in Christian Studies could be useful and welcome if such a program exists.

FISCAL ACCOUNTABILITY

One of the most significant fiduciary responsibilities of a college and university trustee or a foundation board member is ensuring that donor-restricted gifts are only used for the purpose specified by the donor. When beginning an endowment program, this may be simple to oversee if there are only a handful of donor-restricted endowments. But the task becomes more complicated when there are thousands. Some specific recommendations for ensuring accountability should be considered:

  • At many public universities, spendable income from foundation endowments is transferred to university accounting for expenditure. This makes it impossible for foundation auditors, internal or external, to audit the spending. A way to solve this problem is to coordinate with university internal auditors. Ask them, or purchase a portion of a university auditor’s time, to audit a significant number of random spending items from the endowment funds each year.
  • If an audit uncovers misspending, such mistakes are often clerical ones and may be easily repaired. The entity within the institution that is responsible for the misspending must repay the endowment. The institution should then advise the donor and explain that the error has been corrected.
  • A comprehensive annual report on endowment stewardship should also uncover misspending. But what if it uncovers no spending? It is challenging to write an appreciation letter to a donor that states: “Well, we didn’t spend any of your gift this year, but it’s so important. Please send more.” Many times, nonspending occurs when a new faculty or staff fund administrator isn’t aware of a gift, or when a challenge exists with the underlying terms of the gift agreement. A relatively simple way to address this issue is to provide each dean and director with an annual fiscal year list of unspent balances in endowment accounts, with copies of the list sent to the provost. Problematic provisions in gift agreements can then be brought to the attention of the development team, who can work with the donors to revise the agreement.

STAYING THE COURSE

Fundraising plays a large role in a higher education institution’s financial stability, and governing boards have ultimate fiscal responsibility. At the same time, board members must ensure that development work aligns with the college or university’s mission and values. Close vigilance, in partnership with an institution’s president and development staff, will help preserve institutional integrity—and avoid scenarios suggesting the college or university, through its acceptance of private gifts with problematic conditions attached, has been sold to the highest bidder.