Editors of the Stute, pay attention. Here are some of the questions you might want to seek answers to as part of some hard-hitting, but neutral investigative journalism. (click here to see our earlier post on neutral journalism and the Stute)
On December 30, 2009, Lawrence T. Babbio Jr., the chairman of board of trustees of the Stevens Institute of Institute, posted a three-page update on the Stevens website. Here are some of the points he makes, and our corresponding comments and questions:
A. Independent Investigation. Babbio begins his letter by noting that the board of trustees appointed a special committee and an investigative committee to review the allegations contained in the New Jersey Attorney General’s complaint. He indicates that the board has retained...
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the Gibbons law firm to act as an “independent fact finder.”
It is not at all unusual for a nonprofit in Stevens’ position to hire legal counsel to conduct an investigation. What many laypeople may not fully understand is that the institution is under no obligation to voluntarily release the findings. Moreover, the results of the investigation, if conducted by an attorney, often are protected from disclosure by the attorney-client privilege and work-product doctrine. In fact, the attorney conducting the investigation often hires other professionals, seeking to protect their findings from discovery by qualifying those findings for protection through attorney-client privilege and the work-product doctrine.
It may come as a surprise, but we are not troubled by this process. Everybody is entitled to legal representation and both privilege and the work-product doctrine facilitate quality legal representation. We are troubled, however, by the use of the word “independent.” We have trouble seeing how a lawyer-advocate can be called independent unless the engagement letter provides the lawyer with free rein. It is notable that the memorandum states that the firm is supposed to "report to the Board on best practices and any areas found in need of further improvement." That makes it more likely that the law firm's work will be protected by privilege and the work-product doctrine since the fact finding appears to directly connected to rendering legal advice.
We would be less troubled if the Stevens board is willing to release the engagement letter and agree that the report containing the finding of facts will be released unvarnished. If the goal of the board is a search for the truth, nobody should be disturbed if the truth is revealed. Certainly revealing truth is the mission of all colleges and universities.
But even if the Gibbons firm released its findings, we still would have some questions about the use of the word “independent” by Mr. Babbio. In particular, we would like to know the answers to the following questions:1. Did the Gibbons law firm render advice in connection with any of the matters referenced in the New Jersey Attorney General’s complaint? If so, we have trouble with characterizing the firm as independent. As CPA’s know all too well, you can’t audit your own work and be considered independent.We’d also like to know why the board chose the Gibbons firm (which we assume is a fine firm) over any of the large national law firms that have experience conducting these sorts of investigations for nonprofits that have run into governance and related difficulties.
2. Does the Gibbons law firm represent Stevens, any trustee, or any business with which a trustee or office of Stevens is affiliated in other matters? As was documented a little over a year ago by congressional hearings in the compensation consultant context, it is can be difficult to exhibit independence on one matter when the professional is being compensated for work on another matter.
As journalists, the editors of the Stute should be keenly sensitive to word usage. Certainly the Stute could remain neutral while asking questions about the word “independent.”
B. Reduced Operating Deficits. According to Mr. Babbio, a new CFO was brought in and operating deficits have been reduced. The expectation is that once the 2009 audit is completed, Stevens will report a surplus after accounting for depreciation. Operating deficits should be measured based on operating cash flow, not accounting income. The obvious question: Why is Mr. Babbio apparently focused on accounting income rather than operating cash flow? The difference involves focus. Is it on the income statement or the statement of cash flows? More importantly, why is the president of the university allegedly compensated at levels that appear to be well above average if the university has been running operating deficits?
There are two basic ways to curtail operating deficits. The organization can increase top-line revenue or reduce expenses. As students, the editors of the Stute should have a strong preference for cutting wasteful spending rather than raising tuition. For this reason, they should be particularly interested in the New Jersey Attorney General’s allegations over excessive compensation and perquisites. We certainly would be interested in knowing the relationship between tuition and the New Jersey Attorney General’s allegations. If we were a Stute reporter, we’d be asking Mr. Babbio exactly how reduction of the operating deficits was achieved. We wouldn’t think we’d lose our neutrality by asking that question. Maybe lots of wasteful expenses have been cut, in which case we would report the facts and then write an editorial commending the administration. On the other hand, if there were no cuts, but our tuition and other university-controlled revenue sources kept rising at a rate above the rate of inflation, we’d report that and write an editorial criticizing the administration.
C. Board Participation in Compensation Matters. Mr. Babbio’s memorandum states that the full board now participates in compensation matters with respect to senior management. That statement certainly doesn’t tell us much. Some boards take a close look at the work of the compensation committee. Others rubberstamp the committee’s recommendations. The Stute could ask neutral questions about the degree of the board’s participation. Some of those questions might include:
1. Is there a compensation committee?
2. Who is on the committee?
3. What input, if any, do those being compensated have in the committee's decisionmaking process?
4. Does the committee rely on outside experts in developing compensation packages?
5. Are the experts independent, or do they perform other work for Stevens and do people whose compensation is developed by the professionals have a say in choosing those professionals?
6. If comparables are used, what institutions comprise the data set?
7. If an employee's compensation places her in an above-average percentile, what are the facts that support such placement?
8. What information is provided to the full board when the board makes the decision?
9. Is the board provided with an annual tally sheet that provides a numerical summary of each material element of compensation, the dollar value of each material item, and the prior year's amounts for each material item?
10. How is the evaluation of executives linked to compensation increases?11. Do employment contracts that provide for bonuses and other types of incentive compensation set quantifiable metrics for determining when and how much incentive compensation will be paid? Relatedly, are there caps on incentive compensation if amounts are determined by objective metrics?
12. Has the IRS successfully asserted that any amounts paid to Stevens employees or other disqualified persons constitute excess benefits?
13. How are members of both the board and the compensation committee chosen?
14. Does the board have a nominating committee?
These are just a few of the questions that influence how the Stevens board sets executive compensation. Many of the answers would clarify the level of the board’s participation. All are neutral—as Sergeant Friday used to say, “Just the facts ma’am.”
D. Faculty Member Participation on Board Committees. Mr. Babbio’s memorandum indicates that Stevens has offered faculty members the opportunity to participate “as members of important Board Committees.” That sounds very open and transparent, but is it? The fundamental question: Can faculty members who are committee members act without fear that their actions will impact their compensation, research budgets, teaching loads, promotion, and other aspects of their jobs? Moreover, there is a distinction between participation and voting. So, are the faculty participants full voting members of these committees or are they just permitted to attend committee meetings and voice opinions? It also is important to ask whether the board's committees have authority to make binding decisions independent of the full board, or whether the committees are merely advisory. All seemingly neutral questions.
E. Semi-Annual Operating Reviews. Mr. Babbio’s memorandum indicates that new financial controls have been implemented, including semi-annual reviews of finances and operations. We’d like to know who is conducting those reviews. We also are surprised by Mr. Babbio’s apparently favorable impression about the semi-annual period. We’d hope that a major institution would be reviewing finances and operations on an ongoing basis. The question is not how often—that should be continuous—but at what levels the reviews are taking placing and how often each level is conducting those reviews. We would hope that the operations people are reviewing budget variances at least monthly, that a committee of executives would be reviewing the budget and operations at least quarterly, and that the full board would be reviewing these matters at each board meeting, with a finance committee meetings between board meetings including in-depth reviews. These are all areas that warrant neutral inquiry.
F. Stable and Liquid Endowment. Mr. Babbio’s memorandum then turns to the stable and liquid endowment. We don’t doubt that everything Mr. Babbio says about performance is accurate, but he doesn’t discuss spending rates, nor compliance with the terms of donor-imposed restrictions. The New Jersey Attorney General’s complaint makes allegations regarding compliance with donor-imposed restrictions (see, for example, Paragraphs 99, 100, and 209 through 229, among others) that are left unaddressed by Mr. Babbio’s memorandum.
Mr. Babbio also refers to “prudent” management. Prudence is hardly a neutral term. Embedded in it is a qualitative conclusion about the investment-decision process. Rather than reaching a legal conclusion, Mr. Babbio should disclose factual information about the investment process and let outsiders draw their own conclusion whether the process is prudent. We’d like to know the qualifications of those board members who sit on any investment committee or its equivalent, and whether any of the endowment is placed with firms affiliated with board members or other senior university officials.
G. Presidential Compensation. Mr. Babbio’s memorandum then turns to presidential compensation. One of the first statements in this section indicates that no loans to President Raveche have been forgiven. Given that this is relatively easy to verify in a court setting, we don’t doubt that the statement is accurate, but we can only wonder why the New Jersey Attorney General’s complaint reaches a different conclusion. One obvious question: Were the loans forgiven as of an earlier date, but reinstated because of the potential blowback that would come with public revelations that they had been forgiven? Messrs. Babbio and Raveche could eliminate all doubt by releasing copies of the agreement, notes, and canceled checks showing payments. The New Jersey Attorney General's complaint (Paragraphs 446-47) refers to a 2007 employment agreement that forgives a portion of the loan. That contract also could be made public. The Stute could certainly do an article on these allegations and the facts. It could ask the New Jersey Attorney General to comment on why she came to the conclusion that she did in view of the evidence provided by school officials. That certainly looks like a neutral inquiry to us.
To justify Mr. Raveche’s compensation, Mr. Babbio’s memorandum refers to the Fall 2009 entering class as the largest, a remarkable 7:1 student-to-faculty ratio, and the doubling of graduate programs and degrees conferred. Each has superficial appeal, but there may be another side to the story. Was increasing the size of the student body necessitated by a need for more revenue, in which case, we aren’t sure the president is entitled to above-average compensation—the implication that we think Mr. Babbio is trying to create is that the increase in enrollment reflects how desirable Stevens is as a school. Maybe it is, but maybe it isn’t. We’d also be interested in learning whether the increase in enrollment was achieved through more financial aid packages. If so, what will be the long-term financial impact of that decision? Did the increase in enrollment come reduce the overall quality of the student body? These are just a few questions that Mr. Babbio should answer.
But our two favorite justifications for Mr. Raveche’s high salary are the following:
Eighty-five percent of Stevens class of 2009 has accepted job offers or placements in prestigious graduate programs. Of those who accepted a position, 59% had two or more offers.Given the New Jersey Attorney General’s complaint, we’d like to know what the comparable numbers are for Carnegie Mellon, MIT, and CalTech. Those are schools that the New Jersey Attorney General alleges Towers Perrin was asked to include in its survey of peer-group comparability data when developing a basis for setting Mr. Raveche’s compensation package, but objected to including (Paragraphs 372 through 381).
Starting salaries for Stevens graduates were a full eight percent higher than national averages in the same fields for graduates of other institutions.
Other allegations in the New Jersey Attorney General’s complaint suggest that Mr. Raveche’s total compensation during the years in question was well above the average--for 2005, Tower Perrin allegedly concluded that Mr. Raveche's salary came in at somewhere around the 90th percentile of the selected peer group (allegedly 47.5% above the next highest compensated college president in the peer group). We’d like to know whether that places it at no more than 8% above the national average salary for college president. If we were a Stevens student, we would have trouble understanding why the university president’s salary should be higher in terms of national averages than the percentage by which our average starting salaries were above national averages for comparable starting employment. If the relative student starting salary is the metric by which the president’s performance is measured, why shouldn’t his relative salary be in line with ours? The editors of the Stute could certainly devote an article to exploring these questions on a neutral basis.
At the end of the day, Mr. Babbio’s memorandum raises many more questions than it answers. Many of the statements in the memorandum strike us as non sequiturs relative to the allegations that have been made: It does not follow from statement X that allegation Y is not true.
We now turn to Wesleyan’s student newspaper, the Wesleyan Argus. For those engineering students at Stevens who are not schooled in the liberal arts, Argus was Odysseus’s faithful dog in the Odyssey. In Greek mythology, Argus, who guarded Hera, had 100 eyes, and never slept with all eyes closed.
Second semester classes at Wesleyan don’t commence until January 21, 2010, yet the Argus headline in a January 4, 2010 article posed on its website is University Sues Former Investment Officer Thomas Kannam for $3 Million. We read about the story in the Chronicle of Higher Education, which credited the Argus with breaking the story. Seems the student editors take their newspaper's name seriously--never sleeping with all eyes closed.
Based on the growing list of online comments about the story, we suspect that this won’t be the last Argus article. The article is objective, but reveals appropriate and neutral skepticism about what the university is claiming about this scandal. The editors of the Stute might want to start to follow the Argus’ coverage. They might learn something form their peers at another school. Then again, the Stevens Police Recognition Dinner—the headline today on Stute’s web site—may be a far more interesting story. Or a more relevant story (also on the Stute web site today) may be the Clearview Cinemas in Hoboken opened a new theatre. Another venue for Stevens students to ignore reality.
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