Fighting Short-Termism: The Untapped Power of University Endowments
January 25, 2018
By Susan Holmberg
In the last few years, a wave of student divestment campaigns has swept across American colleges and universities as a way to combat climate change and, more recently, Puerto Rico’s debt crisis. These students should exert similar pressure on their universities’ endowments to fight against the toxic, shortsighted forces of next-quarter capitalism—a growing trend in corporate behavior that prioritizes short-term gains (in share price and payouts) at the expense of long-term business investment and growth.
Students from hundreds of schools are pushing their administrations to divest (or, said another way, pull their investments) from fossil fuel corporations as a way to fight global warming and to politically shame these companies for their role in this 21st century crisis. To what extent these divestment protests will help mitigate climate change remains to be seen, but this effort has elevated the role university endowments can play as important, yet highly underutilized, levers of social and economic change. The latest pressure on university endowments presents an opportunity to harness recent criticism directed at shareholder capitalism and its role in driving economic inequality.
The past few decades have seen a dramatic shift in corporate strategy from investing in the long-term to prioritizing next-quarter share prices, from a balanced recognition that corporations have multiple stakeholders to the belief that only corporate stakeholders are shareholders. While globalization and technological change have long received much of the blame for driving down median wages and the loss of good manufacturing jobs, analysts are increasingly pointing to short-termism and shareholder ideology as a fundamental driver of economic inequality.
To understand how university endowments can be leveraged to fight short-termism requires recognizing who corporate shareholders are. While corporate share ownership was once dominated by wealthy households, the majority of stocks today are managed by institutional investors—pension, mutual, and hedge funds—on behalf of individual investors.
“Activist” hedge funds in particular, while owning just 3 percent of the stock market, are driving the pressure on corporate executives to cut expenses, especially by using available cash to buy back stocks, sell off company assets, and merge with other companies on the hunt for double-digit returns.
As institutional investors themselves, university endowments have enormous power to push back against the short-term pressures that hedge funds are putting on corporate executives and boards.
As an example, let’s take the issue of CEO pay. In the last four decades, CEO pay has risen 937 percent, more than 70 percent faster than the stock market. In 2016, CEOs made an average of $15.6 million in compensation, 271 times the pay of the average worker.
Exorbitant CEO pay comes with enormous costs to our society. Not only do the total rates help drive our inequality crisis, but executives are being paid with stock options to align their interests with shareholders. This creates catastrophic problems by motivating CEOs to make shortsighted, excessively high-risk, and occasionally fraudulent decisions in order to boost stock prices. It has also escalated a corporate habit—stock buybacks—that props up stock prices by using excess cash to repurchase shares rather than paying workers more and investing in growth and innovation.
Shareholders have historically had no voice in determining executive pay packages—until Dodd Frank. The Say on Pay provision of Dodd Frank gave shareholders this voice by requiring companies to hold a proxy vote on executive pay packages every three years.
Say on Pay is not a binding vote, but it has been shown to curb some of the most egregious pay practices. Yet, far too many problematic pay packages are left uncontested, partly because the main proxy advising services—Institutional Shareholder Services (ISS) and Glass Lewis—that most institutional shareholders rely on do not pay much attention to the issue.
University endowments, regardless of size, can apply pressure to these corporations by voting to approve or reject executive pay packages.
The problem is, we currently do not know whether university endowments vote on Say on Pay or, if they do, how they vote. According to Rosanna Landis Weaver of As You Sow, a shareholder advocacy organization, “Unlike pension funds, very few universities disclose their proxy voting records, even upon request.” Pension funds are disclosing their proxy votes as a goodwill gesture. University endowments should do the same, and students can pressure them to do so.
Say on Pay is just one example of how university endowments can push back against short-termism. When activist hedge funds get aggressive with companies to merge with another company or use cash that could be spent on workers or investment to buy back shares, all in order to quickly drive up the company’s share price, university endowments can exert their shareholder power to vocalize their own preference for a long-term corporate strategy. They might also be investors themselves in predatory hedge funds and may need to re-evaluate their portfolios.
Just as greenhouse gases are toxic to our air, corporate short-termism is toxic to our economy and society. University endowments can’t divest entirely from public corporations with, for example, high CEO pay, because the problem isn’t limited to one industry. Students, however, can pressure their schools to push back against the forces of short-termism and fight these troubling economic trends.