Schanzenbach & Sitkoff on University Endowments

The brutal conflict between Hamas and Israel convulsed higher education. Student protestors have demanded that university endowments “divest” from Israel. University leaders have largely resisted those demands on grounds of fiduciary obligation, institutional neutrality, or both. In response, protestors have pointed to prior instances of purported divestment. Confusion abounds over the applicable fiduciary principles and the scope of prior divestments. This paper synthesizes the law and finance of endowment divestment and applies that analysis to past divestments and present divestment demands. 

We show that under prevailing law endowment divestment for nonfinancial reasons is permissible only if: (1) the divestment is consistent with the university’s charitable purpose of research and education, and (2) the divestment’s effect on the portfolio is reasonable in light of that purpose. Applied to the current state of university endowment management, this is a highly restrictive standard. The charitable purpose of most secular universities is research and education, full stop. Moreover, contemporary endowment practice relies on external managers, making a divestment today more costly to implement than in the past. Under current endowment practice, therefore, even a de minimis divestment, whether from Israel or otherwise, would likely be a fiduciary breach, potentially exposing university trustees to out-of-pocket damages for any resulting loss to the endowment. 

We also examine current divestment policies and purported prior divestments, including South Africa under apartheid, tobacco, the Darfur war, and fossil fuels. Consistent with our legal analysis, but contrary to conventional wisdom, we find that universities have generally not engaged in broad divestments, not even from South Africa under apartheid. Instead, most large university endowments adhere to a narrow divestment policy for “moral abhorrence” that has rarely been invoked. We show that a divestment for moral abhorrence could pass fiduciary muster as consistent with the public benefit principle of charity law if supported by a clear public policy established by confirmatory governmental actions.

This essay argues that universities should commit their endowments to a non-divestment policy, investing solely for risk and return. We acknowledge that there are narrow conditions under which divestment may be legally permissible. Instead, our argument is pragmatic and informed by our normative view of the university. Pragmatically, divestments do not pass a cost-benefit test. They are unlikely to produce the desired social benefits but are likely to complicate endowment management and create litigation risk. By contrast, investing solely for prudent risk and return minimizes management costs and is all but a fiduciary safe harbor. We consider the possibility that a divestment could be justified on reputational grounds but conclude that such a divestment would be legally problematic and is as likely to damage the university’s reputation as to improve it. Normatively, we argue that a non-divestment policy is most consistent with higher education’s long-standing ethos of open-ended inquiry and that universities will best serve society by focusing solely on their charitable purpose of research and education.