Editorial: Dartmouth Disclosure

It’s hard to decide whether Dartmouth College’s response to regulators seeking an accounting of certain endowment investments merits outrage or jealousy. Asked by the Attorney General’s Office to provide information required by state law, the college said it couldn’t comply because the transactions were too complex. If only we all could deflect probing questions so easily.

The information sought pertained to investments in funds affiliated with college trustees. Under state law, nonprofit organizations that invest in companies or funds owned or managed by their trustees are supposed to disclose fees and all pecuniary benefits received by those entities. The college has parked millions of dollars of its $3.5 billion endowment in funds owned or managed by trustees. In the most recent annual report filed with the Charitable Trusts Unit of the New Hampshire Attorney General’s Office, for example, it was disclosed that in the fiscal year ending June 30, 2011, $30 million had been invested in a fund managed by Stephen Mandel Jr., Dartmouth’s trustee chairman.

How much compensation did Dartmouth pay to Mandel’s Lone Dragon Pine Fund or to the Greylock Fund XIII, a fund managed by trustee William Helman in which the college invested $10 million?

We don’t know and, according to Dartmouth, it doesn’t either. The college acknowledged that the firms may be entitled to management fees and a share of the profits over the life of each fund, but asserted that those amounts “cannot be quantified for any fiscal year.”

Regulators apparently are willing to leave it at that.

“Dartmouth represented in its disclosure that, for this reporting year, such an amount was not quantifiable given the nature of the transaction,” Anthony Blenkinsop, director of the Charitable Trusts Unit, wrote to Valley News correspondent Rick Jurgens, whose reporting pointed out the absence of the information in the college’s routine annual filings.

Too complex? Well, we certainly can understand how a particular investment in a private equity or hedge fund can change over time and how a value assigned to that investment at a given point might vary greatly from whatever value it will have when the investor cashes out. But can’t all assets be valued at any point during their existence, even if their value is zero?

And, as was pointed out by Martin Gross, a lawyer and former chairman of the New Hampshire Charitable Foundation who helped write the law that requires disclosure, the college should at least report the yearly fee Dartmouth pays the funds for managing those investments. As Jurgens reported, that’s routinely done by other investors when reporting elsewhere.

There was a time when Dartmouth and other nonprofits were prohibited from investing any of their money in a way that might benefit their trustees. Lawmakers decided that such a prohibition was too restrictive, so they decided to allow such investments in return for what former state Sen. Jim Rubens describes as “very high-grade disclosure” or, more figuratively, “freedom in return for sunlight.”

Dartmouth got its freedom. And now, with the blessing of the attorney general’s office, it is being allowed to exercise that freedom in what can only be described as the shadows.

Let’s not forget that the Dartmouth endowment enjoys the considerable benefit of a tax exemption. The government, on behalf of taxpayers, has agreed to forgo revenue it would otherwise earn by taxing endowment income because the endowment supports an enterprise deemed to serve the public good — in this case, education. Under those circumstances, taxpayers have a right to insist that endowment activity isn’t serving other, nonpublic purposes, such as the undue enrichment of connected parties.

It’s certainly easy to grasp why Dartmouth wishes to pursue these investments. The college happens to have on its board some of the nation’s most successful investors. Or perhaps it’s not happenstance. In any case, the aim of the committee that makes investment decisions is to maximize returns. Accordingly, the committee does not want to deprive itself of the opportunity to invest in promising funds simply because they are under the control of trustees. So the college has put in place several procedural safeguards — including the requirement that trustees recuse themselves from investment decisions involving their own funds — and has invested freely and, judging by recent results, wisely.

So, just to ensure the continuation of this favorable climate, wouldn’t it make sense for the college and regulators to go out of their way to provide the basic information needed to assure everyone that these transactions aren’t self-serving? Seems as though they’re doing the opposite.