full statement of james h finkelstein, judith a wilde, and … · 2016-03-31 · in addition, in...

Full Statement of James H Finkelstein, Judith A Wilde,

and Tameka Porter

Joint Hearing of the Assembly Budget Subcommittee No. 2 on Education

Finance and the Assembly Committee on Higher Education

Sacramento, California April 4, 2016

James H Finkelstein, PhD, is a Professor of Public Policy within the School of Policy, Government, and International Affairs (SPGIA) at George Mason University in Arlington, VA. Contact: jfinkel@gmu.edu Judith A Wilde, PhD, is an Adjunct Professor with SPGIA. She also is the founder and principal of βeta Group Consulting. Contact: judithwilde@gmail.com Tameka Porter, PhD, is a senior researcher at the Wisconsin Center for Educational Research within the University of Wisconsin-Madison. Contact: Tameka.Porter@gmail.com

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April4,2016 JFinkelstein,JWilde,&TPorter 1

IntroductionThankyouChairmanMcCartyandChairmanMedinafortheopportunitytotestifyattoday’s

jointhearingregardingtheoutsidecompensationforexecutiveswhoserveoncorporateboardswithintheUniversityofCaliforniaandCaliforniaStateUniversitysystems.

IamJamesFinkelstein,ProfessorofPublicPolicyatGeorgeMasonUniversity,thelargestpublicuniver-sityintheCommonwealthofVirginia.Mycolleague,ProfessorJudithWilde,alsoofGeorgeMasonUni-versity,isherewithmetoday.TamekaPorter,oftheUniversityofWisconsinandNancyGoldschmidtoftheOregonHealthSciencesUniversity,myothercollaborators,areunabletojoinus.

Background

I,personally,firstbecameawareofuniversitypresidentsservingascorporatedirectorsover50yearsago.Shortlyaftermybarmitzvah,myfatherurgedmetobuystockinalocalcompany,CityNa-tionalBank—laterBancOneandnowJPMorganChaseBank.ThenextSpring,Ireceivedthecompany’sannualreportandsomethingcalleda“proxystatement.”Irecallseeingthethen-presidentofTheOhioStateUniversitylistedasamemberoftheboard.Notunderstandingwhysomeoneatauniversitywouldbeadirectorofabank,Iaskedmyfather.Heexplainedthatthiswasawayforthecommunitytosupplementtheuniversitypresident’ssalary.

AsI’velearnedsincethen,itwasnotthatuncommonforcorporationsheadquarteredincitiessuchasColumbustoofferthepresidentoftheirlocaluniversityaseatontheboard.Infact,formanyyearsthepresidentsofOhioStateroutinelyservedontheboardofBancOneaswellasothercompanieshead-quarteredthere,suchasTheLimited,AmericanElectricPower,andBorden.

Whatoncewasconsidereda“quaintpractice”hasnowbecomesomethingmuchmore.So,in1998,Ibeganstudyingthepracticeofpresidentsattoptierpublicandprivateuniversitiesservingasdirectorsofpublicly-tradedcorporations.Dr.GoldschmidtandIreplicatedthatstudyin2001.In2010,alongwithDr.Porter,wecompletedourthirdstudyonthetopic.Drs.Wilde,PorterandIhavejustbegunanotherupdatethatwillbereleasedinearly2017.

Sincethefindingsfromour2010studyareconsistentwiththosefromboththe1998and2000studies,I’llfocusonthismostrecentstudy.Thisstudyincludedpublicandprivateuniversities,mostofwhichthe2005CarnegieClassificationofInstitutionsofHigherEducationcategorizedas“ResearchUniversitieswithhighorveryhighresearchactivity.”Thesewereselectedbycombiningtheannuallistofthetop100“bestnationaluniversities”byUSNewsandWorldReport1andthelistofthetop100universitiesfromtheNationalScienceFoundation“SurveyofR&DExpendituresatUniversitiesandColleges”forfis-calyear2007.2

Wematchedthenamesofthepresidentsoftheseinstitutionsagainstboardsofpublicly-tradedcorpora-tionsusingtheElectronicDataGathering,Analysis,andRetrieval(EDGAR)systemoftheSecuritiesandExchangeCommission(SEC).Specifically,weusedtheFormDEF-14a,whichisknownasa“definitiveproxystatement,”completedin2010.Itisimportanttonotethatourstudiesoncorporateboard

1 The sample was selected from the 2011 edition of US News and World Report: Best Colleges Rankings. 2 This report was published on March 11, 2009. There is typically a 2-year lag between data reported and the reporting date. In 2010, this report was retitled the Survey of R&D Expenditures at Universities and Colleges.

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servicerelyexclusivelyontheseSECfilingsandnotonself-disclosurestatementsprovidedbypresidentstotheirgoverningboardsorotheragencies.3

TheseSEC-requiredpublicfilingsnotonlyidentifythosewhoserveasdirectorsofthecompanyandtheirroles(includingthecommitteesonwhichtheyserve),butalsoprovidedetailedinformationaboutboardcompensation.Proxystatementsalsoincludebackgroundinformationoneachdirector,listotherboardsonwhichtheyserve,andcompaniesarerequiredtodiscloseanypotentialconflictsofinterestfordirectors.Theseproxystatementsalsoprovideinformationallowingustoestimatethetotalnumberofmeetingsinwhicheachdirectorparticipates.Inall,wecollecteddataon40variablesforeachofouruniversitypresidentsservingasadirectorofapublicly-tradedcorporation.

Inaddition,in2010,IreceivedagrantfromtheEwingMarionKauffmanFoundationtoconductthefirst-everstudyofcontractsforpublicuniversitypresidents.4Aspartofthisstudy,weinterviewedthepresi-dentsofeightinstitutionsthataremembersoftheAmericanAssociationofUniversities.Ourgoalwastocreateanewdataset,albeitonethatisnotinherentlypublic,inaconsistentmannertoprovideamorecompleteunderstandingoftheroleofcorporateboardservice.Dr.WildeandIwillreleaseafol-low-upstudythisJune.5

Ourtestimonytodaydrawsfromthesetwosetsofstudies–(1)datafromtheSECproxystatementsand(2)datafrominterviewswithpresidentsaspartofalargerstudyontheircontracts.Thepurposeofourresearchhasnotbeentoidentifyindividuals,institutions,orcorporationsbyname.Rather,usingpub-liclyavailableinformation,ourgoalhasbeentodocumentthepracticeofuniversitypresidentsservingonboardsofpublicly-tradedcorporations.Indoingso,wehopetoassistgoverningboardsandothersingeneratingbothunderstandingsandpoliciesrelatedtothispractice.

ResearchfindingsSo,nowtoourresearchfindings.Inthe2010updatestudy,weidentified134publicandprivate

collegesanduniversities.Wefoundthatpresidentsof43oftheseinstitutions—approximatelyone-thirdofthesample—servedononeormoreboardsofpublicly-tradedcorporations.Asagroup,theseindi-vidualsservedonatotalof73boards.6 Here,wefocusonthreeareas—compensation,committeemembership,andtimecommitments.Withregardtocompensation,wefoundthefollowing.

1. Thetotalcompensationpaidtothese43universitypresidentsforserviceoncorporate

boardswasnearly$11million(that’sforjustoneyear).2. Theaveragedollarvalueforthesepresidentsservingasacorporatedirectorwasnearly

$148,000peryearforeachcorporateboard.Foroverhalfofthesepresidents,thevalue

3 For example, both the American Council on Education and the Association of Governing Boards, the major trade organizations for academic executives, report on surveys sent to presidents. These are not part of our data. 4 Ronald Forehand, Esq., Senior Assistant Attorney General, Commonwealth of Virginia, and Dr. Javier H. Beverinotti served as co-investigators for this study. 5 Sherilyn Streicker, Esq., former Deputy Director of the Georgia State Ethics Commission is a co-investigator for this study. This study will include the 100 contracts from the original study plus the contracts of presidents from the public flagship university in each state along with the contracts of public university presidents of the American Association of Universities. This study will be released at the annual conference of the American Association of University Professors to be held this June in Washington, DC. 6 There were 9 University of California campuses in the sample, no California State University campuses. Of the 9 UC presidents, 2 served on one corporate board each and 1 served on two corporate boards.

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wasapproximately$163,000peryearforeachcorporateboard.Obviously,servingonmorethanonecorporateboardwouldprovidemuchmoreextracompensation.

3. Thecompensationfortheboardsthatpaidcompensationvariedfromjustunder$18,000/yearforeachboardtomorethan$450,000/yearforeachboard;22directorshipsprovidedtotalcompensationofmorethan$200,000peryear,while4ofthesepaidmorethan$300,000peryear.Morethanhalf(48)paidmorethan$100,000/yearperboard.

4. Lookingacrossthe73boardsonwhichpresidentsserved,onlyeightreportedthatdirectorsreceivednocompensationofanykind.

Withregardtocommitteemembership,wefoundthat:

1. Universitypresidentsservedasmembersof114committees,withmostpresidentsserving

onatleasttwocommitteesforeachboardmembership;2. Nearly23percentofpresidentsservedontheAuditCommittee;and3. About20percentservedontheCompensationCommittee.7

Withregardtotime,wealsoestimatedhowmuchpresidentsdevotetotheircorporatedirectorships.Wefoundthatthenumberofboardmeetingsscheduledannuallyvariedfrom3to16.Accordingtotheproxystatements,therewereatotalof540fullboardmeetingsinthisoneyear.

Aswenotedearlier,mostpresidentsservedonatleastoneboardcommittee.Accordingtotheproxystatements,thesecommitteesscheduledfrom1to14meetingseachyear,foratotalof600committeemeetings.

The43presidentsinthisstudy,onaverage,participatedinapproximately24meetingsofvarioustypesduringtheyear.Withthisinformation,weestimatethat,onaverage,adirectorspendsapproximately12daysperyearparticipatinginboardandcommitteemeetingsforeachcorporateboardmembership.

(Asanaside,overthethreestudies,we’vefoundthatabout60percentofthecorporationswerenotlocatedinthesamestateastheuniversity.Almosttwo-thirds,howeverwereinthesameregion[thatis,East,Southeast,South,andsoon].Aboutone-thirdofthepresidentstraveledacrossthecountrytoat-tendboardmeetings,addingasmuchastwodays/meetingtotheirtimecommitment.)

Whilewehaven’tengagedinsystematicdatacollectiontodocumentthis,weknowanecdotallyfromthepresidentsweinterviewedforthe2010Kauffman-fundedstudy,thattheydidnottakeannualleaveforthedaystheyspentatboardand/orcommitteemeetings.Thissuggeststhattheyreceivetheirfulluniversitysalarywhilebeingpaidfortheirboardservicebythecorporation.

Ourgoalininterviewingthissubsetofpresidentswastocreateanewdataset,albeitonethatisnotin-herentlypublic.Thesedata,collectedinaconsistentmanner,providedamorecompleteunderstandingoftheroleofcorporateboardservice.Weaskedeachpresidentfivequestions:

7 Federal regulations require that all members of both audit and compensation committees be independent/outside directors. In the case of an audit committee, at least two members must be certified as a “financial expert.” No uni-versity president serving on an audit committee was so certified.

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1. Thebenefittotheirserviceaspresidentoftheirserviceasacorporateboardmember;2. Thebenefittotheinstitutionofhavingthepresidentserveonacorporateboard;3. Thebenefittothecorporationofhavingauniversitypresidentontheirboard;4. Theinfluenceofcorporateboardserviceontheirviewsofgovernance;and5. Theinfluenceofcorporateboardserviceontheirviewsoftheprivatesector.

Notsurprisingly,fewpresidentstalkedaboutthepersonaleconomicbenefitsofservingonacorporateboard,althoughoneindividualwassurprisinglycandidinstatingthathissawthisasawayforhisboardoftrusteestosupplementhissalary.

Thepresidentsidentifiedavarietyofwaysinwhichservingonacorporateboardwasabenefittotheirinstitutions.Theserangedfromnetworkingtogainingadeeperunderstandingofgovernancetoin-creasingopportunitiesforresearchcollaboration.

Thesepresidentsalsobelievedthat“prestige”wastheprimaryreasonthatcorporationswantauniversi-typresidentontheirboards.Incaseswhereacorporateheadquarterswaslocal,presidentsbelievedthattherewasabenefitintermsofestablishingstrongertiestotheircommunity.

Presidentswerelessspecificinansweringthelasttwoquestions.Onepresidenttoldusthatservingasacorporatedirectorprovidedhimwithabetterperspectiveofhowhewaslikelyviewedbyhisownboardoftrustees.Otherstoldusthattheylearnedaboutthedifferencesbetweencorporateapproachestofinanceanddevelopedideasabouthowtheiruniversitiesmightbenefitfromtheseunderstandings.

Summary

Basedonourresearch,weconcludethatservingasacorporatedirectorhasconsiderablefinan-cialbenefitsfortheindividual.Theseincludedirectors’fees(bothretainersandpaymentsforattend-anceatmeetings),stockawards,andoptionawards.Inaddition,somecorporationsprovidepensionandnon-qualifieddeferredcompensationplansfordirectors.Theremaybeotherfinancialbenefitsaswellincluding,forexample,insurance(travel,life,andother),travel,anddirectedcharitablegiving.

Inaddition,wecanstatewithhighconfidencethatthesedirectors,especiallytheindependentdirectors,arerequiredtomakeasubstantialtimecommitment—notjustintermsofattendingboardandcommit-teemeetings,butalsoinconferencecalls,preparationtime,andtravel.

PotentialpolicyissuesTodate,wehavefoundthatjustoverhalfofthepresidentsoncorporateboardsinoursample

ledpubliccollegesanduniversities.Thisbringstomindasetofquestionsregardingthepublic’sinterestinthesepresidents’serviceoncorporateboards.

Itisworthnotingthatpresidentsoftheseuniversitiesarenearlyalwaysamongthehighest-paidpublicexecutivesinastate.Basedonouron-goingresearchonpresidentialcontracts,itisincreasinglycom-monforTier1(high-level)researchuniversitypresidentstohavemulti-yearcontractswithtotalcom-pensationexceeding$1millionperyear,inclusiveofbenefits,bonuses,andvariousperks.Whenthevalueofpost-presidentialappointmentsisincluded(manybecomehighly-paidfacultymembers),publicuniversitiesoftencarryfutureliabilitiesforapastpresidentintothemillionsofdollars.Mosthigh-levelpublicexecutiveswhoareelectedorappointed(forinstance,governors,legislators,agencyheads)aresubjecttorestrictionsontheiroutsidebusinessactivities,ethicsreviews,andstrict

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financialdisclosurerequirements.Incontrast,presidentsofpublicuniversitiesarerarelysubjecttotheselimitations.Infact,overtheyears,we’vefoundonlyonepresidentinourstudieswhovoluntarilyreducedhisannualsalarybysomeamountasaresultofremunerationfromboardservice.Inaddition,we’vefoundonlyoneproxystatementwithevidenceofapublicuniversitypresidentseekinganopinionfromastateethicscommissionregardingreceiptofcompensationforserviceoncorporateboards.

Thisgivesrisetoafundamentalquestionofpublicpolicy—shouldthesepublicexecutivesbeallowedtoreceiveoutsidecompensationbeyondtheirstatesalaries?Ifso,thenadecisionneedstobemadeastowhetherthepoliciesgoverningthispracticeshouldbethepurviewofeachinstitution’sgoverningboardorthelegislativeprocess.

Assumingthatadecisionismadetoallowpresidentsofpublicuniversitiestoserveoncorporateboards,wealsobelievethatthereisasetofoperationalquestionsthatmustbeaddressed.Theseincludethefollowing.

• Areuniversitypresidentsrequiredtoobtainpriorapprovalfromtheirownboardsoftrus-

tees?• Arepublicuniversitypresidentsrequired,likeothergovernmentofficials,tosubmittothe

reviewofanethicscommissionorsimilarbody?• Douniversitieshavepolicies,oraretheyconsideringadoptingpolicies,tosupportorregu-

latesuchpresidentialrelationshipswithcorporations?• Arethereboundariesforthistypeofparticipation,especiallyintermsofrealorperceived

conflictsofinterest,andwhatshouldthesebe?• Whataretheappropriatemechanismsfordisclosureandassuringtransparencywithstake-

holders?Asecondsetofquestionsdealswithpotentialadvantagesanddisadvantagesofpresidentialboardser-viceforinstitutions.Someofthesemightbeasfollows.

• Aretherereasons,beyondaugmentingpresidentialcompensationpackages,toappoint

presidentsastrusteesofcorporations?• Dosuchappointmentsbenefituniversities(forexample,intheformofresearchsupport,

fundingofotheruniversityprojects,consultingopportunitiesforpresidentsorfaculty,oremploymentforgraduates)?

• Arepresidentswhoserveoncorporateboardsmorelikelytopromotebusinesspracticesorentrepreneurialactivityontheircampuses?

• Docorporationsinfluenceuniversityprogramsand/orresearch?

Untilweunderstandmorefullytheextentofpresidentialserviceoncorporateboards,andthemotiva-tionsofcorporationsforseekingoutuniversitypresidents,wecannotdeterminewhetherthepracticebenefitsorharmshighereducation.

Weclosewiththefollowingquestion:Areuniversitypresidentswhoserveoncorporateboardspursuingself-interests,seekinginstitutionallegitimacy,orboth?Whatevertheanswer,weanticipatethatpresi-dentialboardservicehasthepotentialtochangehighereducation.Inresponse,eitherlegislatures,stateagencies,and/orboardsofuniversities(oruniversitysystems)willneedtodeveloppoliciestoensurethatsuchservicesupportsthemissionsoftheirinstitutionsandtheneedsofsociety.