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John Harvard's Journal

The Corporation Reports

March-April 2013

Two years after the Harvard Corporation enacted sweeping governance reforms in December 2010, Senior Fellow Robert D. Reischauer ’63 and his colleagues Nannerl O. Keohane, LL.D. ’93, and William F. Lee ’72 offered a briefing on how its work has changed. The reforms involved expanding the senior governing board’s membership; creating standing committees to oversee finances, facilities and capital planning, governance, and alumni affairs and development; and attempting to focus more attention on strategic issues.

Reischauer, who chairs the committee on governance, said the overhauled Corporation—with 13 members, up from seven—has “surpassed our greatest expectations,” thanks to new expertise and internal committees providing deeper coverage of critical matters. Reischauer said each committee had yielded higher-quality analysis than the Corporation had been able to muster previously—in part because of the “deep expertise” of non-Corporation committee members (an innovation created by the 2010 reform measures).

Keohane, past president of Wellesley and of Duke—where she was deeply engaged in buildings and facilities issues—said she had been “struck by how superficial our consideration of major capital projects had been” when these 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, noted that the committees enable the fellows to develop continuity and close relationships with both administrative staff members and deans. That makes it possible, he explained, to execute decisions (as on building projects) in a disciplined, timely manner, and on budget.

Reischauer emphasized that the University’s operations have changed significantly, too. For example, there are “multiyear financial plans now,” encompassing Harvard as a whole. (Past budgeting was largely aggregated, school by school, from separate yearly submissions.) That, and the board’s augmented financial oversight, “allow us,” he 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.”

He called the result “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 people who had operated in isolation are sharing information and learning about best practices. These conversations, Reischauer said, are yielding efficiencies and economies as the schools cooperate, and the smaller schools turn to the central administration for services they cannot afford or do well on their own.

That raises the issue of better financial management and oversight—an important rationale for the reforms (see “Sober Finances,” on Harvard’s 2012 financial report, January-February, page 47). Pointing to the new consolidated budgeting practices, Reischauer said that Daniel Shore, vice president for finance and chief financial officer, worked regularly with financial deans in each school—and “exerts pressure when…needed to conform to the overall financial constraints the University faces” (including limits on borrowing and the need to maintain sufficient cash for operations).

Lee said the board 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, given its then-smaller size and large agenda.

The fellows were asked if the new processes had led 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 employee pension and retirement healthcare benefits.) Might the Corporation alter 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, calling undergraduate House renewal—expected to cost more than $1 billion—the “poster child of what happens when you don’t focus on these needs.” The stakes are large. Requiring that 2 or 3 percent of building value, say, be set aside yearly to pay for future capital improvements would raise schools’ costs by tens of millions of dollars, reducing their capacity to fund current academic operations—but also avoiding either an enormous deferred-maintenance backlog 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 such a campaign. Keohane, a veteran of such exercises, said Harvard was pursing “a good process—it’s always iterative” as the development team works with deans and potential donors to sort out what is feasible. President Drew Faust, she said, had brought the deans together so that those with related academic missions are discussing objectives jointly. The Corporation receives regular, efficient briefings from the committee, and is “digging deeply” with the appropriate staff.

In general, said Lee, the governance reforms have enabled the Corporation and Harvard to move more quickly. Significant initiatives such as the Harvard Innovation Lab and the edX online-education venture, launched in the previous academic year, proceeded, he said, at “light speed” and “warp speed,” respectively—a critical improvement for Harvard in an era of rapid change.

Having committees vet details for the Corporation, Reischauer said, makes possible a “move in the right direction”: toward more strategic thinking about broader economic challenges, the pressure on tuition revenue, federal research funding, and the costs of investing in educational technology. “We spend a lot of time on these kinds of issues, in every meeting,” he added—although, he hastened to say, “We’re not fully there yet. It’s a cultural change.”

For a more detailed report, see http://harvardmag.com/corporation-13.

Patricia A. King and James W. Breyer

Corporation Changes

At its early-December meeting, the Harvard Corporation announced that Patricia A. King, J.D. ’69, Waterhouse professor of law, medicine, ethics, and public policy at Georgetown Law Center, and a member of the University’s senior governing board since 2006, would step down by year-end, for family reasons. On February 4, the election of her successor was announced: James W. Breyer, M.B.A. ’87, a partner of Accel Partners, the Palo Alto-based venture-capital firm (famously, an early investor in Facebook). He is the first of a new generation of fellows, and brings expertise in technology-focused venture financing, from a firm with unusually broad global reach. Breyer joins the Corporation as of July 1. For a full report, see http://harvardmag.com/breyer.

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