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The Harvard Corporation Reports

12.12.12

Robert D. Reischauer

Robert D. Reischauer

Photograph by Stephanie Mitchell/Harvard News Office

Two years after the Harvard Corporation enacted sweeping governance reforms, Senior Fellow Robert D. Reischauer '63 and his colleagues Nannerl O. Keohane, LL.D. '93,  and William F. Lee '72 offered a briefing on December 4 on how its work—and the University—have been changed in the interim.

The reforms involved expansion of the senior governing board’s membership; its creation of standing committees to oversee finances, facilities and capital planning, governance, and alumni affairs and development; and its attempt to focus more attention on the institution’s future and strategic issues.

The Governing Body

Reischauer, who chairs the new committee on governance, said that the overhauled Corporation—with its ranks expanded from seven to 13, bringing new expertise aboard, and with committees providing deeper coverage of critical matters within the board’s fiduciary purview—has “surpassed our greatest expectations.” As part of its heightened focus on governance per se, he said, the Corporation a year after the reforms asked vice president and general counsel Robert Iuliano and University secretary Marc Goodheart to interview all members, plus the vice presidents, deans, and staff who interact with the committees. Although the effort was intended to be “self-critical,” he said, the reactions were extremely positive across the board, among all the people who deal with the “new aspects of the Corporation.”

The committees (whose members and charters are detailed in these earlier reports) emerged as a particular source of strength. Reischauer said that in each area, they had yielded higher-quality analysis than the Corporation as formerly configured had been able to muster—in part because of the “deep expertise” brought to their deliberations by non-Corporation committee members (an innovation created by the 2010 reform measures). The committees have more time to work in their fields than the whole board does, and are staffed by “truly excellent” members of Harvard’s administrative team. Their work is summarized for the Corporation as a whole, so its members are kept abreast of critical issues but remain able to focus on other matters of general importance with confidence.

Keohane, past president of Wellesley College and of Duke University—where she was extensively engaged in buildings and facilities issues—said she had been “struck by how superficial our consideration of major capital projects had been” when they were jammed into the Corporation’s overall agenda, without expert vetting. The process since the reforms, she said, had become “exemplary.”

Lee, who serves on the facilities and capital-planning committee with Keohane, amplified that point. The committees enable the members to develop continuity and close relationships with both expert administrative staff members and deans, he said. That both enables the Corporation to devote itself to longer-term, strategic thinking, he explained, and makes it possible to execute decisions (like those concerned with building projects or other matters) in a disciplined, timely manner, and on budget. That is “all different from before,” he said—“and really necessary.”

Advancing Administrative Capacity

Reischauer emphasized that the University’s operations have changed significantly, too. For example, he said, there are “multiyear financial plans now,” developed during the past few years, and encompassing Harvard as a whole. (In the past, budgeting has filtered up, school by school, and largely been aggregated from those separate submissions—and has been a year-by-year exercise.) The advent of this basic tool, and the Corporation’s own augmented expertise in financial oversight, “allow us,” Reischauer said, “to look at problems proactively—and opportunities as well.” He characterized Harvard’s administrative capacity as “remarkable compared to where this University was a decade ago. This is a big deal.”

These improvements in administrative procedures and capacity, he said, “reinforced the bonds between the schools and the center.” (The coordination, he noted, exceeded anything in Harvard’s prior history.) As an example, Keohane said that executive vice president Katie Lapp, who manages facilities and capital planning, had built working relationships not only with schools’ administrative deans but also among her own and schools’ staff members, so that they are, collectively, “able to get things done” in that realm that “just couldn’t get done before.” Reischauer said that the result was “the best of two worlds—the old Harvard of every tub on its own bottom, and a more centralized one,” like Princeton. Keohane said that Harvard was “still knitting some things together,” but that across the board, people who had operated in isolation were now talking with each other regularly, sharing information, and learning about best practices.

In substantive terms, Reischauer said, these conversations are yielding efficiencies and economies as the schools cooperate, and as the smaller schools turn to the central administration for services they cannot afford or do well on their own.

Fiscal Fitness

That raises the issue of better financial management and oversight—an important rationale for the governance reforms, after the University’s roller-coaster experiences during the heady days of a decade ago, and the resulting strains revealed during the financial crisis and recession in 2008 and beyond.

Reischauer pointed to the consolidated budgeting practices now in place, and said that Daniel Shore, vice president for finance and chief financial officer, worked regularly with financial deans in each school—and “exerts pressure when pressure is needed to conform to the overall financial constraints the University faces.” Those constraints include limits on borrowing, the need to maintain sufficient cash for operations, and, generally, the impossibility of having “each tub making a set of uncoordinated decisions” of financial consequence to the larger enterprise. “We have to be all sailing in the same direction,” he said—and he felt that was now the case (as had not, by implication, always been true in the past).

Lee said the Corporation could now spend time on substantive financial questions, iteratively if necessary, “rather than having 27 budgets blow by us in two hours in May” as in the past. The Corporation as previously configured—with Harvard’s president and treasurer and five fellows—lacked the capacity to address financial issues comprehensively and in depth, particularly with periodic, monthly meetings and a large agenda. Today, both the governing board and the “administrative management and leadership” operate very differently, he said.

The Corporation members were asked whether the new processes had lead to changes in financial policy as well. Was there discussion, for example, about changing the assumed 8 percent rate of investment return on endowment assets? (A lower return, reflecting recent investment conditions, would have profound consequences: endowment distributions are the largest source of funds for the schools; and lower returns raise the cost of paying for unfunded pension and retirement healthcare benefits due to employees.) Was the Corporation considering altering budgets so that schools not only had to make an accounting entry for depreciation of the buildings, but also to levy an actual cash charge against operations for depreciation—to fund future maintenance and improvements?

Reischauer said such matters were “more than under discussion.” For instance, “depreciation is part of the budget process” now—“schools have to include it in their budget presentations.” Harvard has “large deferred-maintenance needs,” he noted. 

Undergraduate House renewal—expected to cost in excess $1 billion—is the “poster child of what happens when you don’t focus on these needs,” he said: it is the largest priority identified so far by the Faculty of Arts and Sciences for the forthcoming University capital campaign.

(The stakes are obviously anything but trivial. Since the early 1990s, Harvard’s annual financial statements have shown depreciation as an expense; in fiscal year 2012, depreciation expense was $289 million, and fixed assets were carried on the University’s books at $5.8 billion, after $3.4 billion of accumulated depreciation. But the expense accounting entry is not an actual cash cost; the schools and University are not putting that sum aside for future building replenishment. Requiring that 2 or 3 percent of building value, say, be put aside each year in a cash reserve to pay for future capital improvements would raise schools’ current costs by tens of millions of dollars, reducing their capacity to fund current academic operations—but also avoiding either an enormous backlog of deferred maintenance or reliance on capital-campaign funding to pay for such routine work.)

The Corporation and its alumni-affairs and development committee (jointly with the Board of Overseers) are focusing keenly on that campaign. Keohane, who has been through such exercises as a past university president, said Harvard was pursing “a good process—it’s always iterative” as the development team works with school deans and potential donors to sort out what is feasible. President Drew Faust, she said, had brought the deans together in a useful way, so that those whose academic missions are related are jointly discussing campaign objectives. Again, the Corporation as a whole is receiving regular, efficient briefings from the committee, and is “digging deeply,” she said, with the appropriate staff, led by vice president for alumni affairs and development Tamara Elliott Rogers.

A Faster Pace, a Wider Purview

In general, said Lee, the governance reforms enabled the Corporation and Harvard to move more quickly. Significant innovations such as the Harvard Innovation Lab, launched in late 2011, and edX, the online-education joint venture with MIT unveiled last May, proceeded, he said, at “light speed” and “warp speed,” respectively. “You never could have moved at that pace in the past,” Lee said—and that was a problem for Harvard in an era of rapid change for higher education.

As a whole, Reischauer said, “We’re certainly spending less time on the transactional issues,” because the committees are now in place to vet the details for the Corporation. That makes possible a “move in the right direction,” toward more strategic thinking—although, he hastened to say, “We’re not fully there yet. It’s a cultural change.”

He cited large concerns:

  • An uncertain, and perhaps more constrained, general economy for the foreseeable future, posing challenges for the University’s economic model in the next decade and beyond. (See the sober discussion in the fiscal 2012 financial report, with comments by Daniel Shore and Corporation member James F. Rothenberg, Harvard’s treasurer.)
  • An altered outlook for tuition revenue. Is it realistic, he asked, to plan for 4 percent to 5 percent annual increases in tuition during the next decade, given public and government concerns about the cost of higher education? (Think of an $80,000-plus annual College term bill a decade hence—and of the resulting increase in the financial-aid budget, to the tune of tens of millions of dollars per year, that would be required to maintain current standards of access and affordability.)
  • Limitations on federal sponsorship of research given the budget problems in Washington.
  • The costs of pursuing technological change, and its effects on campus and in the classroom.

“We spend a lot of time on these kinds of issues, in every meeting,” Reischauer said.

The Corporation can do so because it has created a different way of dealing with the transactions requiring its oversight and decisions, Lee said. During the Corporation meeting earlier in the week, for example, the facilities committee had reviewed and taken necessary actions on nine projects, to which the Corporation then had to devote no more than a few minutes of its time—making space for a 90-minute discussion of edX.

And as Keohane noted, the governance reforms were built on the assumption that the Corporation did not itself need to have a significant, formal academic-affairs committee, as most unitary trustee bodies must. Because Harvard has dual governing boards, with the Overseers performing the academic-oversight and visiting-committee functions, the Corporation has deliberately engaged more regularly and fully with this “junior” governing board, thereby better involving itself in such issues without organizational duplication. “That’s the way it ought to work,” she said of that substantive, constructive, cooperative engagement—an example, she implied, for the renewed Corporation and Harvard governance generally.

Continuing Transition

During the same week, Patricia King, Waterhouse professor of law, medicine, ethics, and public policy at Georgetown Law Center, a Corporation member since 2006, also announced that she would step down this month, for family reasons. The Corporation had only just reached its intended full membership of 13 fellows with the appointments of Jessica Tuchman Mathews and Theodore V. Wells Jr., announced in September. A search for King’s successor may proceed expeditiously, since the Corporation has vetted many candidates during the past two years.

See also the Harvard Gazette interview on the Corporation with Robert Reischauer and President Faust.  

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