Universities Should Just Say No to Divestment (opinion)

During the disruptive student protests that roiled higher education in the 2023–24 academic year, a common demand was for divestment from Israel. Nearly every university rejected that demand, often citing fiduciary obligation or principles of institutional neutrality. In response, protesters cited as precedent purported prior divestments from South Africa, tobacco and fossil fuels. This is no small fight. Aggregate university endowment value is nearly $1 trillion, with the 25 largest university endowments accounting for roughly half that total. The trustees at the richest universities faced the most vociferous student protests, but those trustees also bear the largest exposure to personal liability for fiduciary breach.

Things are, for the moment, calmer on university campuses. But divestment is a perennial source of contention. Before the next paralyzing controversy, universities should take stock and get their divestment policies in order. In a new article in the Harvard Business Law Review, we synthesize the law and finance of university endowment divestment. We show that divestment may be legally permissible if it is consistent with the university’s charitable purpose and comes at a reasonable cost. But the charitable purpose of a typical secular university is limited to research and education, and modern endowment practice, which relies heavily on pooled investment with outside managers, tends to make divestment financially and administratively costly. All told, endowment divestment today is hard to square with fiduciary duty.

The Law of Divestment

Under prevailing law, endowment divestment for nonfinancial reasons is permissible only if two conditions are met: (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. A useful heuristic is to ask whether a direct distribution of university funds for the same purpose would have been permissible. If not, the divestment could not plausibly satisfy the even stricter fiduciary duties applicable to endowment management. If a distribution by a university to, say, the Sierra Club to fight climate change would be impermissible, skewing the endowment to fight climate change would likewise be impermissible.

A further complication is that restricted gifts, such as for an academic chair or a student scholarship, have an even narrower purpose than research and education writ large. These restricted endowment funds are typically pooled with the university’s unrestricted endowment funds for managerial efficiencies. Accordingly, a divestment must also align with the myriad narrower purposes of the various funds that make up the overall endowment.

Still another complication is the rise of the so-called Yale model and the shift from internal managers who picked individual, publicly traded securities to external managers and illiquid investments. This shift has increased the administrative and portfolio costs of a divestment. In today’s endowment practice, a divestment constraint would tend to reduce the pool of available managers, reduce diversification and impede the use of low-cost index funds.

Under prevailing endowment practice, therefore, it will be difficult to square a divestment with the applicable fiduciary principles. Nonetheless, there may be some activities, such as apartheid and genocide, that are so abhorrent that they are contrary to public policy and thus may justify divestment in accordance with the public benefit principle applicable to all charities. Establishing such a public policy, however, requires objective indicia such as governmental actions. And indeed, the South Africa and Darfur war divestments were consistent with well-established governmental policies. By contrast, ongoing federal and state government support of Israel—including statutes forbidding or discouraging divestment—undermines the claim that divestment from Israel would be allowable under the public benefit principle.  

Past and Current ‘Divestments’

Our analysis of past divestments—from South Africa under apartheid, from tobacco and from Sudan during the Darfur war—reveals a significant difference between perception and reality. In general, American universities did not engage in broad or costly divestments. To the contrary, it appears that only one of the 25 largest endowments, the University of California system, divested broadly instead of selectively from South Africa, and it did so only after the regents were promised indemnification for any resulting fiduciary liability.

Our research found that only five large university endowments undertook a significant divestment from tobacco between the 1990s and the 2010s, and four of those later apparently reversed course. More recent divestments from Sudan during the Darfur war involved only a small handful of firms and thus were likely de minimis. In truth, most universities have adhered to the fiduciary principles described above, although a few divestments likely involved fiduciary breach. Harvard divested from tobacco in the 1990s at the direction of its president, Derek Bok. Bok explained in his recent book that he directed Harvard’s investment managers to divest following a conversation with his spouse about the harms tobacco companies were causing, and that he implemented the divestment without further fiduciary analysis.

With respect to fossil fuels, it appears, based on our analysis, that only three of the top 25 endowments—Princeton, Yale and the University of California system—have openly and broadly divested for nonfinancial reasons. These universities are likely in breach of their fiduciary obligations. Several other universities in the top 25 claim that they have divested from “direct” ownership in fossil fuel companies, are winding down their private fossil fuel investments or have divested from specific forms of fossil fuels, mainly thermal coal or tar sands oil.

But universities own very little directly in their endowments, which makes this claim misleading, if not dissembling. Furthermore, some universities assert that their fossil fuel divestments were made for sound financial reasons as well as to fight climate change, muddling their motives. A lurking irony is that several institutions that claim to have divested from “direct” holdings in fossil fuels, including Harvard and Dartmouth, reportedly operate dirtier-than-typical fossil fuel energy plants for campus heat or electricity.

Zooming out, we canvassed the current divestment policies, stated or inferred from conduct, of the 25 largest university endowments. The majority disclaim divestment, either categorically (including MIT and the University of Chicago) or with narrow exceptions for rare and morally abhorrent circumstances (including Stanford and Northwestern). Some policies that permit divestment explicitly call for consideration of the likely effectiveness of a divestment in achieving its purpose. We could find no analysis that concluded divestment would have any substantive impact. Given the liquidity of public capital markets and uncertain substitution effects in private markets, such a requirement will in practice amount to a nondivestment policy. 

Litigation Risk and the Academic Program

Even if legally permissible, a divestment gives rise to fiduciary litigation risk and complicates endowment management. Investing solely for prudent risk and return, by contrast, is virtually a fiduciary safe harbor. Endowments have not yet been the subject of much litigation, likely because standing to sue has historically been limited to state attorneys general and dissenting board members. However, with increasing polarization and the recent recognition in trust law of donor standing, there is good reason to suppose that prospective litigation risk is greater than in the past.

To be clear, we do not mean to suggest that universities must avoid pressing social issues. To the contrary, universities have wide latitude in their academic programs. They may fund research on social and environmental issues. Instead of divesting from fossil fuels or giving money to the Sierra Club, they may invest in a climate research center or a green campus. Or they may choose not to do so. The point is that ordinary operational decisions, including the scope and content of the academic program, are practically unreviewable as a fiduciary matter. This stands in sharp contrast to endowment management, which is subject to stricter fiduciary principles.

Conclusion

Some universities have straightforward nondivestment policies. Others have policies that limit divestment to abhorrent situations. The abhorrence policies have rarely, if ever, been invoked. But they have invited contentious debates over the definitions of genocide and apartheid. A few universities with large endowments openly divest for nonfinancial reasons, likely in violation of their fiduciary obligations. But there is a middle group of universities that create the illusion of divestment by declaring that they have imposed restrictions on their direct holdings, of which they have very little. Instead of educating students through forthright explanations of fiduciary obligation and the general ineffectiveness of divestments, some universities have shirked one of their chief purposes—education. Consistent with the university’s charitable mission of truth-seeking through research and education, universities should educate the students who ask for divestment, not mislead them.