Why financiers like to be university trustees

I break it down in an extended Chronicle of Higher Ed interview. Financier and former Penn trustee Scott Bok says I get it right.

The Chronicle of Higher Education just published an interview with me about my paper “Elite Embeddedness” with Albina Gibadullina. You can read my comments below. Chronicle reporter Francie Diep provided the following context for the interview. In a cool twist, she talked to financier and former Penn trustee Scott Bok about his take on our findings:

If it feels like there are a lot of billionaires mucking around in higher education, that might be because there are. In 1989, private-equity and hedge-fund managers held 3 percent of board seats at the top 30 private universities as ranked by Times Higher Education. By 2017, they held 17 percent of trustee positions, according to a study published earlier this year in Socio-Economic Review.

The upshot is that over the last generation, the most prestigious colleges have had the means to gather extraordinary wealth. That wealth reinforces those colleges’ exclusivity, which in turn is helping to fuel resentment against higher education, argues one of the study’s co-authors, Charlie Eaton, a sociologist at the University of California at Merced. “That’s become a political vulnerability,” he said.

Many of Eaton’s findings made intuitive sense to Scott L. Bok, an investment banker who served on the University of Pennsylvania’s board for 18 years. Wall Street grew rapidly over the years that Eaton’s study covers, and investors are motivated to sit on fancy boards.

“Wall Street, in many respects, is a networking business,” Bok said. “It’s useful for somebody in the private-equity business to be on a board that has people from all kinds of different industries on it, because their business probably touches all kinds of industries and they’re looking for opportunities everywhere.” - Scott L. Bok

Bok, too, thinks university boards would benefit from having fewer Wall Streeters and more trustees from other fields, who might have different ideas for dealing with crises.

Eaton has been in demand as a speaker lately. When The Chronicle interviewed him, he had visited the University of California at Berkeley and Stanford University the week before, and would fly to the University of Chicago the next week. It’s not just the political relevance of his research, which focuses on student loans, endowments, and inequities in higher education. Eaton is not shy about saying what he thinks faculty members and administrators should do about political efforts to reform colleges. In late March, he published an opinion essay in The New York Times, “$15 Billion Is Enough to Fight a President,” calling for the wealthiest colleges to tap their endowments to oppose the Trump administration.

Eaton published a book about the role of Wall Street in higher education, Bankers in the Ivory Tower: The Troubling Rise of Financiers in US Higher Education, in 2022. His Socio-Economic Review paper expands on findings in the book.

The Chronicle spoke with Eaton about his latest paper and what his work can tell us about how America got to this point in its views of college. This interview has been edited for length and clarity.

What did you find here?

The main finding of the paper is that private-equity and hedge-fund managers have come to make up a large and disproportionate share of board members at top private universities.

There are two reasons why. One is that they graduate from elite private schools at much higher rates even than tech billionaires. Twice as many private-equity and hedge-fund billionaires have top private degrees as do tech billionaires.

The second reason is that elite ties are really valuable and important for the private-equity and hedge-fund business model, because when they’re buying companies or doing financial transactions to try to outperform the stock market, what they do is trade on private information. That doesn’t necessarily require illegal insider trading. If you’ve got knowledge of what kind of public policies might change that could affect the value of a company or an industry, or if you’ve got elite information about companies that are privately held and that don’t have much public [Securities and Exchange Commission] reporting, you can make smarter decisions about what kind of private companies to try to buy out.

So when you’re on an elite university board with other business and government elites, you learn things that are valuable for making these private-equity buyouts, and we show this. We find that investment returns go up for private-equity firms after they gain a seat on a top university board.

Wow, so serving as a college trustee can help an investment banker make more money? How do you know it’s serving on the board that causes them to earn more? Maybe richer people are more likely to be asked to serve on boards.

There are always limitations for causal inference, no matter what your research design is, but the finding is pretty robust, because it’s what we call a panel fixed-effects model. We’re finding that there’s a sequence where, if, within a firm, you get a seat on a board of trustees at a top university, after you get the seat, your returns are likely to go up more than at a firm that, over the same period of time, doesn’t get a seat.

The way that the models are done, there’s not a potential risk that it’s actually because your returns are higher that you’re then getting a board seat.

It’s also not just a correlation across firms. It’s something that’s happening within firms that gain seats. We have a data set that’s all private-equity returns that are reported by 412 firms. We checked for those firms: Did they gain a board seat at any time during the 14-year period represented in the data set?

Several dozen of the firms gained board seats and several hundred of the firms did not, and we knew when, in time, each firm gained board seats. Then we can see what happens. What’s the trend within the firm for its investment returns over time, both before and after they gain the board seat?

I know you’ve written about some of these trends before, in your book, Bankers in the Ivory Tower. What’s new in this paper?

We statistically model that the universities that became the most selective have boards where financiers particularly gain seats. And we statistically model private-equity investment returns around when a firm gains a board seat, to show that those seats do, in fact, benefit private-equity performance. In my book, I theorized it, but here, we confirmed it with data.

This is totally anecdotal, but I recently interviewed two longtime trustees at two different private colleges, who made their money on Wall Street. Both were proud and excited that their alma maters had become more selective over the time they had served.

Yeah, and it’s hard to disentangle these things. It’s pretty clear that the social prestige of being on an elite-university board is attractive, but we’re trying to unpack how much of it is just the social status that comes from being on this board, or the alumni ties, or the economic advantages that come from elite social ties.

Sometimes people think of finance and financiers as cold and calculating, when in fact, just like in most of our economic lives, social relationships play a big role in what finance does. And that can contribute to who gets to do finance, who’s the most successful in finance, and can contribute to inequalities that involve our financial system.

What are some consequences for higher education that you see arising from the trends you’ve identified here?

Because the wealthiest financiers are particularly attracted to the most prestigious university boards, that means you don’t have as many financiers going onto the boards of less selective institutions. That can contribute to financial inequalities between schools.

At the same time, because one of the things elites, and especially financiers, value is the exclusivity of their university, that creates a pressure against making elite universities more accessible and more in the public service. The exclusiveness of these universities is one of the things that’s become a political vulnerability for them, and has fueled some of the right-wing attacks on universities and on public funding for research and for student financial aid.

Bottom line, is all this good or bad for colleges?

In the extreme, it’s a bad thing for higher education if financiers are overrepresented on university boards. You know, there’s been talk about improving viewpoint diversity in higher education, including by financiers on these boards. But if we really want to have our elite universities to reflect America more, then you want to have boards composed of people from across the different corners of society, who will set the tone for the university and support the university to take some of the steps that a lot of universities have said that they want to take — to be more accessible, more affordable, and more open to all Americans.