Academics on Board: University Presidents as Corporate Directors

It can be very profitable for university presidents to serve on corporate boards. Are they seeking personal gain or trying to help their schools?

By Nancy P. Goldschmidt and James H. Finkelstein

Some observers claim that universities serve the interests of industry at the expense of liberal arts, curricular integrity, and intellectual freedom. Others suggest that institutions of higher education can ensure their survival by adapting to the new environment. Much of this discussion has focused on the entrepreneurial activities of professors, such as their entering into agreements with companies that want to turn the professors’ research into commercial products. Our recent research shows, however, that university presidents are also involved.

Today, a university president’s activities are more closely linked to the outside world than in the past. Twenty-five years ago, college presidents reported spending about one-third of their time in contact with individuals external to the university. Now presidents devote considerably more time and effort at the boundaries of their institutions: attending social functions to raise financial gifts from alumni and other potential donors; meeting with leaders in social, business, and political circles; and serving on external advisory boards. Most college presidents participate on at least one of these boards, and nearly a quarter are on some type of corporate board, the form of service that is the focus of this article.

To shed light on corporate-university connections, we examined the relationships between presidents of elite universities and the boards of publicly held firms in the United States. We determined the proportion of such presidents who sat on corporate boards, which firms elected the presidents to sit on their boards, and the personal financial benefits to the presidents. In our ongoing research, we are investigating others who benefit from these connections, the public and educational interests served by them, and the gains for the university and the corporation.

We conducted two separate studies, one in 1998 and the other in 2000, both of which we restricted to the "top universities" as ranked by two different sources. Each sample included the institutions (excluding medical universities) ranked by the National Science Foundation according to total research and development expenditures and the institutions cited as the "best national universities" by U.S. News and World Report. In 1998 there were 129 institutions in this pool, and in 2000 there were 117 institutions (the numbers differed because in each year some institutions appeared on both lists). Most of the institutions in both studies were classified as Research I or Research II universities according to the 1994 Carnegie Classification of Institutions of Higher Education, which groups American colleges and universities according to their institutional missions.

The primary sources of data for the corporations in our studies were the proxy statements filed with the U.S. Securities and Exchange Commission (SEC). All publicly held corporations are required by law to make full disclosure of material facts about issues on which shareholders will vote. In addition, they must provide information about the compensation and stockholdings of corporate executives. These documents are available online through the Electronic Data Gathering, Analysis, and Retrieval System (www.edgar-online.com/people). We excluded board memberships held in private companies, investment trusts, foundations, nonprofits, and start-up companies, all of which may compensate their directors, because the SEC database does not contain this information.

About one-third of the presidents in both of our studies served on from one to five corporate boards; more than half were presidents of public universities. We found that in 1998, 25 percent of the presidents served on only one board, 68 percent served on two boards, and 13 percent served on from three to five boards. In 2000, 60 percent of the presidents served on only one board, 24 percent on two boards, and 15 percent on from three to five boards.

Although the presidents were appointed to the boards of all of the major types of firms, most served three types: finance (22 percent), industrial manufacturing (23 percent), and technology (15 percent). The corporations for which the presidents worked were (and are) listed on several stock exchanges—the New York Stock Exchange, NASDAQ, and the American Exchange. Many of these corporations were listed on other major indicators as well, including the Fortune 500. Just over half of them reported revenues of more than $1 billion in both studies, and 40 percent had more than 10,000 employees. Some were multinational corporations.

Fees and Retainers

We documented several types of monetary benefits. Most corporations paid their board members a "retainer" for service. Usually, the retainer was a cash payment, but some corporations required or allowed their directors to take some of the retainer in either stock or deferred stock. Board members often had the option of deferring compensation (the retainer) to some later date, typically after retirement from the board. Most deferment plans paid interest.

The cash retainers ranged from slightly less than $800 to nearly $130,000. Of those boards providing a such a retainer, more than three-quarters paid $40,000 or less in 1998, but fewer than 50 percent paid $40,000 or less two years later. The amount of the retainer varied by industry type. Technology, chemical and pharmaceutical, and oil and mining firms offered the highest retainers.

Nearly all of the university presidents were on corporate committees (for example, the audit, compensation, human resources, or nominating committee). For each corporate board, the presidents served on from one to five committees, the audit committee being the most common placement. Audit committees, which must be composed exclusively of outside directors, carry important fiduciary responsibilities and usually require a substantial time commitment. Several university presidents chaired committees and, following customary practices, earned an additional fee for this responsibility.

Most corporations paid directors for attending board and committee meetings. Usually, this payment was in addition to an annual retainer. The fees varied, but directors commonly received more remuneration for board meetings than for committee meetings. Some companies paid directors for attending committee meetings even when they occurred on the same day as a board meeting or another committee meeting. Other firms reduced or eliminated the fee paid for a committee meeting if it was held on the same day as another meeting. Directors were also paid for participating in teleconferences and for contributing to written actions taken by committees. We found that fees ranged between $400 and $3,500 for each board meeting attended.

Stock Ownership

Many boards required members to hold stock, and a significant number allowed a portion of the retainer, if not the entire retainer, to be paid in stock. About one-fourth of the university presidents received a stock grant as part of the retainer. The stock grant ranged between 200 and 3,000 shares and was valued between $5,000 and $70,000. Many corporate directors received both a cash retainer and a stock grant.

Proxy statements do not always reveal how directors acquired the stocks they hold (for example, as a previous stock retainer, an exercised stock option, a stock split, or a purchase unrelated to board service). It is therefore difficult to determine whether the value of a director’s holdings reflect compensation for board membership. Consequently, we assessed only the value of annual stock grants or retainers.

A significant number of the firms in our studies also offered stock options to board members. An option is the right to purchase shares in the company stock at a specified price. There is no requirement that a board member actually purchase any shares. Options are often valid for an extended time, sometimes up to ten years. Most of the firms in our studies offered options at the fair market value of the stock. Several corporations, however, either discounted the options or provided loans to purchase them. Slightly less than half of the university presidents studied held stock options. Among those who did, the number of options held ranged from 1,000 to slightly more than 44,000.

The access to stock options by corporate directors gives an indication of the potential personal benefit that a university president might receive. We found that 68 percent of the presidents held unexercised stock options. The value of these options may be negligible, or it may be considerable. Accepted means exist to value the options of corporate executives as part of their total compensation packages. But doing so for outside directors is a bit more difficult. We therefore limited ourselves to identifying the number of options held and used those figures to assess the "potential" rather than the "realized" value to each president.

Other Benefits

Perhaps the most interesting benefit was "directed charitable giving." Some corporations take out life-insurance policies for directors, who name a charitable organization as beneficiary. Of the types of eligible beneficiaries, educational institutions seem to be the most common. Because the proxy statements we examined did not identify beneficiaries, we could not determine whether the university presidents serving on boards named their employing institutions as beneficiaries. Only 10 percent of the companies we studied reported this benefit, but its value ranged between $250,000 and $1 million.

Based on the relevant data we collected from corporate proxy statements, we cal-culated the annual remuneration each university president received for serving as a board director. We added board and committee retainers and meeting fees for each corporate board, assuming that university presidents attended all meetings except where noted. Over the course of our studies, the total annual remuneration for serving on a single corporate board ranged from $3,000 to $128,000, with a mean of about $40,000 for each board membership.

Together, the presidents in our studies received about $3 million annually for their participation. After accounting for multiple corporate-board memberships, we determined that the average compensation per president was just over $70,000 a year. The highest amount earned was nearly $219,000 in 1998 and $281,000 in 2000. In both studies, this payment excluded stock grants and options, which in some cases were significant.

Time Commitments

Board meetings tend to last a full day, including working lunches, and directors often have dinner commitments the evening before. Committees usually meet at breakfast or at other times in tandem with the regular board meeting. To capture the potential time spent in travel, we compared the location of the corporation to the location of the university. We found that 57 percent of the corporations were not located in the same state as the university. Almost two-thirds, however were in the same region (that is, East, Southeast, South, and so on). About a third of the presidents had to travel across the country to attend board meetings.

To estimate the number of days presidents spend away from campus at board meetings, we multiplied the number of scheduled board meetings by two. For example, a president who attended five corporate board meetings probably spent ten days away from campus. For those with several corporate board appointments, time away from campus was substantial but varied depending on the board. We estimated that the presidents in our 2000 study had a total of eight hundred meeting days in one year, which equals about twenty days away from campus for each president.

Because corporations must publish certain data on attendance at board meetings, we are reasonably confident that the presidents in our study attended about 90 percent of all scheduled meetings. Based on our data, we determined that one president who served on four corporate boards had a total of forty-two board meetings in one year; another who was on three boards had thirty-one meetings; and yet another who was on five boards had a total of thirty-two board meetings.

Many people worry about corporate influence in higher education. At least since the passage of the Bayh-Dole Act in 1980, which gave universities the right to seek patents for scientific discoveries made by their faculty during federally funded research, the ties between universities and business have grown stronger and more formal. Until now, however, little attention has been paid to the influence, if any, that board service by university presidents has had on the "corporatization" of higher education.

As states and the federal government have decreased support for higher education, colleges and universities have turned increasingly to funds derived from student tuition, personal gifts, nongovernmental research funds, endowments, and royalties on inventions. Corporate support for higher education, whether in the form of companies’ endowing chairs, funding scholarships or joint ventures, or placing their names on university facilities, is one of the fastest-growing and most controversial areas in higher education finance. Some people suggest that the traditional sources of investment in higher education—state funding and federal research and development dollars—will never return to prior levels. To survive, they say, universities will have to rely more, not less, heavily on nonpublic revenue sources. As the importance of such sources grows, we should expect a concomitant increase in influence from the benefactors.

A related concern is that the priorities of institutions of higher education, especially public research universities, are increasingly shaped by market forces instead of the academy Corporations often select board directors to meet the needs of their own organizations or to satisfy other organizations. Placing a university president on a board can be a strategy to obtain information or expertise, influence a particular university (or the higher-education sector generally), manage corporate relationships with specific groups, or integrate local community interests. For their part, presidents may choose to serve on corporate boards as a way to seek legitimacy from the external environment.

Some observers have commented that university presidents, not unlike faculty members, may see academic capitalism as a way to enhance their institution’s political power and chances of survival. Such a goal is especially likely at research uni-versities, where research money brings the prestige that such universities seek. The extent of research conducted differentiates universities, and faculty members within universities, from one another. Most faculty members teach and many perform public service. But relatively few win competitive research funds from the government or industry. Just as faculty turn to academic capitalism to maximize their research resources and prestige, presidents pursue a similar strategy for their institutions. The presence of a president on a corporate board may be a key to success inacademic capitalism.

Just over half of the university presidents in our studies led public as opposed to private institutions. Does that suggest the need to consider whether public interests are served by such participation? Presidents of public research universities are often among the highest-paid public officials in a state (although their salaries are typically lower than those of presidents of private, non-church-related research universities). Most high-level public officials who are elected or appointed are subject to restrictions on their outside business activities, ethics review, and strict financial disclosure requirements. Presidents of public universities, not having been elected or appointed, are not necessarily subject to the same limitations. Only one president in our studies appeared to have voluntarily reduced his annual salary by some amount as a result of remuneration from board service. And only one proxy statement had evidence of a public university president seeking an opinion from a state ethics commission regarding receipt of compensation for service on corporate boards.

Several issues warrant further consideration: Are university presidents required to obtain prior approval from their own boards of trustees? Are public university presidents required, like other government officials, to submit to the review of an ethics commission? Do universities have policies, or are they considering adopting policies, to support or regulate such presidential relationships with corporations? What are the boundaries for this participation and what should they be? How "public" are public universities, given the diminishing support from taxpayers?

A second set of questions deals with potential advantages and disadvantages of presidential board service for institutions: Are there reasons beyond augmenting presidential compensation packages to appoint presidents as trustees of corporations? Do such appointments benefit universities (for example, in the form of research support, funding of other university projects, consulting opportunities for presidents or faculty, or employment for graduates)? Are presidents who serve on corporate boards more likely to promote business practices or entrepreneurial activity on their campuses? Do corporations influence university programs and research?

Until we understand more fully the extent of presidential service on corporate boards and the motivations of corporations for seeking out university presidents, we cannot determine whether the practice benefits or harms higher education. Are university presidents who serve on corporate boards pursuing self-interests, seeking institutional legitimacy, or both? Whatever the answer, we suspect that presidential board service has the potential to change higher education. In response, boards of universities (or university systems) will need to develop policies to ensure that it serves the missions of their institutions and the needs of society.

Note

Nancy Goldschmidt is assistant vice chancellor in te Oregon University System's Office of Academic Affairs. James Kinkelstein is senior associate deanin the School of Public Policy at George Mason University.

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