TUNNELING THROUGH EXPENSE ACCOUNT REIMBURSEMENTS AT YALE: “DO WHAT I SAY, NOT WHAT I DO”

The Wall Street Journal reported in its January 10, 2005 edition that Florencio Lopez-de-Silanes allegedly double-billed Yale University for somewhere around $150,000 in business-travel expenses.  While this sort of scandal is always of interest, this one is particularly notable, given that Mr. Lopez-de-Silanes has served as the director of Yale’s...

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International Institute for Corporate Governance. Lopez-de-Silanes will reportedly resign his position with Yale in June.  As part of arrangements with the World Bank, Mr. Lopez-de-Silanes has trained foreign corporate directors. The World Bank is apparently conducting an investigation into several contracts that it had entered into with Mr. Lopez-de-Silanes.

There is not all that much that one can say about this highly disturbing story. Unfortunately, Yale has not issued a press statement at this time so all the facts are not known, but in a statement to the Journal, Mr. Lopez-de-Silanes said “I have taken appropriate corrective steps with all affected parties and I can offer no excuse except the intensity of my focus on my work.”

In our view, Yale University has set a very bad example in how it has handled this matter, thereby undermining its own credibility when it comes to offering governance training.  According to the Journal, Yale did not strip Mr. Lopez-de-Silanes of his tenure, but rather negotiated with his attorney to avoid a messy removal process.

In the field of corporate governance, the talisman is transparency. Yet we have anything but transparency here. Rather than a public process, Yale chose to hide the issue. As a consequence, we don’t know the facts, including the exact amount involved, the amount of intentional behavior on Mr. Lopez-de-Silanes’ part, or the extent of the weaknesses in Yale’s accounting system (which apparently did identify the issue).

If there was blatant wrongdoing, there should not have been negotiation.  Also disturbing are the comments of one Yale finance professor who is quoted by the Journal as having said that Mr. Lopez-de-Silanes is “a great scholar” and his alleged misconduct “was more likely incredible stupidity and carelessness on his part rather than anything deliberate.” We can only ask: If the conduct was merely a careless accident, why was a negotiated resignation necessary?  Nobody would expect someone to resign if all they did was accidentally transpose two numbers. Why should Mr. Lopez-de-Silanes’ reputation be sullied if there was no wrongdoing? However, if there was wrongdoing, why should Mr. Lopez-de-Silanes be allowed to offer corporate governance guidance in the future without those seeking that advice being fully aware of Mr. Lopez-de-Silanes’ past, so they can factor that past into their evaluation of the advice he is offering?

Yale has simply muddied the waters for all involved. Transparency is extremely important in this case. This is taking place in a business school, where the professors are training future business leaders. Many of these students will find themselves acting as fiduciaries during their careers. Consequently we are disturbed that a finance professor can be so dismissive of the alleged wrongdoing in the absence of clear and public disclosure. We would be willing to bet that if the members of Yale’s International Institute for Corporate Governance were advising an organization about a scandal involving the head of an organization that went to the institution’s core mission, the members would recommend an independent and public investigation—standard practice in the field of governance.

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