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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: [email protected] Judith A Wilde, PhD, is an Adjunct Professor with SPGIA. She also is the founder and principal of βeta Group Consulting. Contact: [email protected] Tameka Porter, PhD, is a senior researcher at the Wisconsin Center for Educational Research within the University of Wisconsin-Madison. Contact: [email protected]
TestimonybeforeJointHearingoftheAssemblyBudgetSubcommittee#2 onEducationFinance&theAssemblyCommitteeonHigherEducation
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.
TestimonybeforeJointHearingoftheAssemblyBudgetSubcommittee#2 onEducationFinance&theAssemblyCommitteeonHigherEducation
April4,2016 JFinkelstein,JWilde,&TPorter 2
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.
TestimonybeforeJointHearingoftheAssemblyBudgetSubcommittee#2 onEducationFinance&theAssemblyCommitteeonHigherEducation
April4,2016 JFinkelstein,JWilde,&TPorter 3
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.
TestimonybeforeJointHearingoftheAssemblyBudgetSubcommittee#2 onEducationFinance&theAssemblyCommitteeonHigherEducation
April4,2016 JFinkelstein,JWilde,&TPorter 4
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
TestimonybeforeJointHearingoftheAssemblyBudgetSubcommittee#2 onEducationFinance&theAssemblyCommitteeonHigherEducation
April4,2016 JFinkelstein,JWilde,&TPorter 5
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.