Thursday, January 3, 2008

Enough Endowment Already!

Why Give to a College That Already Has Enough?

From the issue dated July 6, 2007

The law of diminishing returns, a simple but powerful concept that is widely known by everyone with a rudimentary understanding of economics, is often flagrantly disregarded by many — including the richest among us. The law states that there comes a time when additional infusion of a factor of production no longer leads to an increase in productivity. In fact, an increase in a factor of production may lead to negative productivity. Thus, bigger is not always better, and more is not always wiser.

This simple but important economic concept is generally observed religiously by investors who wish to maximize their returns. Investors search ardently for opportunities that will bring them the most returns and diversify their investments by redirecting funds to other ventures promising better yields. Although governments often indulge in endless and mindless expenditures on projects of dubious value, no business becomes successful by violating the principle of diminishing returns.

Why, then, do private donors — some of them entrepreneurs who should know better — engage in mindless donations of their money? After all, one who gives money to a university must (or should) have done so with a serious thought about the difference that money would make at the chosen institution. In this sense, "return on investment" refers to a concrete, positive change.

Yet in the past 10 years, donors have parted with vast sums of money in donations to colleges and universities that truly do not need them. When a university is richer than several countries put together, when a university can comfortably live off the returns on its billions of dollars in endowment, and when a university can no longer convincingly demonstrate how new money will make a concrete difference in the academic experience of faculty members and students, additional donations to the university are not only mindless but outright wasteful.

In February, Jerry Yang, the CEO and a co-founder of Yahoo and a trustee of Stanford, and his wife were reported to have donated $75-million to Stanford University. This is a generous deed, and they should be applauded for it. But would the Yangs' donation have made a bigger difference in the lives of students and professors at a lesser-known institution? Probably, particularly since, as The Chronicle noted in an article on the Council for Aid to Education's annual "Voluntary Support of Education" survey, Stanford was the top fund raiser in 2005-6 with more than $911-million raised in one year. Harvard University and Yale University followed behind with $595-million and $433-million, respectively.

In June 2006, the market values of those endowments were staggering: Harvard's was $29-billion, Yale's $18-billion, and Stanford's $14-billion. With that kind of money, one would think that those institutions would be less aggressive in their competition for donations. But such is not the case. Last year Stanford kicked off a $4.3-billion campaign, the largest drive in higher education. Endowments of several millions of dollars are becoming increasingly insignificant to universities; the desire now is to become members of the billion-dollar club. Even among them, the race is on for a two-digit billion-dollar membership. One wonders if campaigns of that size are merely to accumulate wealth and bragging rights.

In the philanthropic world, it takes money to raise money. The success of those institutions in raising many millions of dollars results from their huge investments in the cultivation process. Development officers who command six-digit incomes now occupy impressive positions as university presidents' right hands. Such academic gold miners know where the money is and how to warm the heart to unzip the wallet. Increasingly, presidents' effectiveness is judged less by the academic success of their institutions and more by the size of donations generated under their watch.

Consequently, it is futile to expect institutions themselves to put the brakes on their development machines. Instead, attention must be directed toward the general public, both the rich and the regular Joes, who wish to see their precious savings support good causes in education. Donations to higher education are a noble cause and should, by all means, be encouraged. At a time when states' appropriations to higher education are declining relative to the cost of tuition, and students and parents are assuming an increasing proportion of educational cost, private donations have the potential to lessen that burden, especially on middle- and lower-class families. Just as the gap between the rich and poor is getting wider in the nation, so too is the gap between well-endowed and poorly endowed institutions growing alarmingly wider. Higher-education leaders have a responsibility to address that issue.

The success of American higher education lies in the diversity of our institutions — diversity of mission, size, academic focus, cost of operation, and tradition, to mention but a few. Those differences enable institutions to respond to the needs and abilities of students from all kinds of backgrounds. Varied sources of money and generous private support to the little-known but effective institutions preserve the diversity of institutions, so the increasing concentration of donations to the Ivy Leagues and top fund raisers should concern us. The 10 wealthiest institutions in the Council for Aid to Education's survey accounted for half of the total growth in private donations during the 2006 fiscal year — meaning that about $1.2-billion of last year's $2.4-billion increase in private donations went to last year's top 10 fund raisers. In a nation with more than 4,000 colleges and universities, that statistic is disturbing.

Naturally, most of those donors gave to their alma maters. But when your alma mater is already fabulously wealthy, it is advisable, indeed wise, to shun your sentimental attachment to the institution and adopt other institutions that can yield better returns. Making a concrete difference in the lives of students and faculty members should be the basis for giving to higher education.

Donations to mega-rich universities do not directly improve the academic experience of their professors and students, or result in any qualitative improvement in student learning. However, there are institutions where noticeable changes can be brought about by small donations — where classrooms can be upgraded, libraries renovated and expanded, and the burden of cost on students alleviated. These institutions are no Ivy Leagues; they may have no name recognition beyond a 10-mile radius of their locations; and they may have little or nothing to invest in their development efforts. However, they constitute a sector where donations may yield the highest returns on investment.

Donors should rethink their contributions to hugely endowed institutions, no matter how tempting their baits may be. With the exception of those who stumble into their wealth or inherit it, most rich people get that way by spending less than they earn and investing the difference in ventures with high-yielding returns. The same thinking and logic ought to steer their generous hearts and guide their decisions to donate to universities. They should think of where their dollars will make the most difference, where they will affect the most lives, where they have potential to transform the institution, where the campaign is for genuine academic excellence not merely the growth of the endowment or the ego of the president.

If I had a million dollars to donate, I would think of investing it in higher education for sure, but universities with endowments of more than $1-billion would have a tougher time persuading me to part with my money, while a struggling institution that is doing a superb job educating its students and that can demonstrate how the money will make a difference will readily command my attention.

Steve O. Michael is vice provost and a professor of higher-education administration at Kent State University.
Section: The Chronicle Review
Volume 53, Issue 44, Page B10
Copyright © 2008 by The Chronicle of Higher Education

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