As regents bicker, questions raised about UTIMCO report

Why did two UT professors resign from the panel reviewing investment company?

By Robert Elder Jr. and Ralph K.M. Haurwitz
Saturday, May 8, 2004

As seasoned members of the state's business, political and social elite, the regents of the University of Texas System measure their words carefully. Especially in public.

So it was all the more remarkable last week when Regent Woody Hunt of El Paso told his fellow regents that a report they had commissioned contained a lie.

At issue in the report concerning the University of Texas Investment Management Co., which manages $16.4 billion for the Board of Regents, is a single sentence declaring that two UT-Austin finance professors on the "working group" that produced the report quit the panel because of "time constraints."

Hunt told the regents that one of those professors had a different explanation.

"They had time and resigned because their integrity was challenged," Hunt said.

Hunt later joined in the unanimous regents' vote to adopt the report's key findings. But the episode and other questions about the report illustrate rare fault lines in the Board of Regents, and it suggests that the regents might not have an easy time deciding just how extensive their oversight of UTIMCO and its CEO of two years, Bob Boldt, should be.

It also highlights regent Chairman Charles Miller's dominating role in examining the nonprofit investment company: He urged regents in December to create the working group, picked its members and even added a new member long after the work had begun.

Hunt's comment later brought a bristling response from Miller, who has relentlessly pushed for closer scrutiny of UTIMCO.

"To bring up the question of integrity, as far as I'm concerned, is baloney," Miller said in an interview last week. "Some people just didn't like the results" of the report.

Other questions have also emerged concerning the working group. One of the professors charges that he and his colleague were "marginalized" when their duties were given to a paid consulting firm. A third professor brought onto the panel was paid $25,000 but wrote nothing for the final report. And a top official of the Texas A&M University System is complaining that A&M was shut out of the panel, even though it owns a third of the $7.7 billion Permanent University Fund, one of several accounts managed by UTIMCO.

The dissension doesn't invalidate the working group's recommendation that the regents step up their oversight of UTIMCO. The regents are ultimately responsible for the endowments and other accounts that generate millions of dollars a year for construction projects, salaries and other purposes at the UT System, the A&M System and other state institutions.

The report's key suggestion was to increase oversight of UTIMCO's investment policies, hiring and compensation, and budget, starting with a task force led by UT System Chancellor Mark Yudof.

So far, the regents have spent about $578,000 on two reviews of UTIMCO.

Miller makes no apologies for his strong views. As the retired CEO of a large money management firm, he says other regents give him tacit approval to take the lead on UTIMCO.

Even if he were alone on the issue, Miller said, he'd continue to try to find ways to improve UTIMCO.

"That's the problem with governance in general -- even if it's one voice, you should be allowed to speak up and be addressed with civility and seriousness. That's what I'm trying to do."

The two professors who resigned from the panel are Laura Starks and Keith Brown. Starks, who chairs the finance department at UT's business school, did not return calls seeking comment.

Brown, a specialist in portfolio theory who advises two big state pension funds, wouldn't comment directly on Hunt's assertion that his and Starks' "integrity was challenged." But Brown said he made it clear to Francie Frederick, the regents' counsel and secretary, on at least two occasions that time was in no way an issue. Suggesting otherwise "is a flat-out misrepresentation," he said.

"To say that our integrity was challenged is a whole lot closer to the truth than 'time considerations,' " Brown said.

Brown said he and Starks wrote a detailed outline of issues for the group to consider, an outline they were to continue to flesh out and coordinate as the group's work progressed. Miller essentially reassigned the professors' job, Brown said, by directing Chicago-based consulting firm Ennis Knupp & Associates to duplicate what he and Starks had agreed to do.

"I will say I was very uncomfortable continuing to participate in a process where the work product we were going to contribute had been, in my opinion, marginalized," Brown said. "We were given the opportunity to stay on and produce nothing, and we wanted no part of that. So we resigned."

Brown said he and Starks then refused Miller's offer of compensation for their work.

Frederick gave a different account. She said in an interview that when Starks called to say the pair were stepping down, Frederick's sense was that the resignations were prompted by the tightened deadline for the report. Its due date had been changed from late to mid-April, Frederick said.

Frederick said she told the working group that the professors were no longer participating and then learned from Hunt that it was his understanding that the pair had felt their academic freedom had been affected, including their freedom to research and write for the working group's report. So, Frederick said, she asked the professors about it and they assured her that was not the case.

"It's a difficult issue," Frederick said. "I feel like there's been some miscommunication."

Miller said the professors quit over a nonissue. Given the intended free-form nature of the group, "I expected to have overlapping (duties) and differences of opinion," he said.

"I said to both of (the professors) and to Ennis Knupp: Take a blank slate and see how this money could be managed," Miller said.

As Brown and Starks were leaving the panel, Miller added a third and final UT professor. Henry Hu, a law professor and corporate governance authority, was paid $25,000, at a rate of $450 an hour. Hu's pay was part of the $375,000 estimated cost of the review.

Although he did not write anything for the final report, Hu participated in the working group's meetings and, Miller said, produced private memoranda for its members. Hu estimated that he worked up to three times more hours than he was paid for.

"I agreed to do it irrespective of whether I was going to get paid or not," Hu said. "Mr. Miller insisted on all the professors getting paid in connection with this project."

A&M's role is also a sticking point. Greg Anderson, associate vice chancellor and treasurer for the A&M System, said the Aggies "would have appreciated the opportunity to be included" in the working group. Anderson said he provided some basic material to the group and was later briefed by UT officials as the report neared completion.

Miller and Frederick described the effective exclusion of A&M as a tactical decision to ensure that the working group's internal documents would not become part of the public domain. The panel was informal, but adding someone outside the UT System would have opened the records to the public, they said.

In addition, Miller said, the UT System "is a much bigger beneficiary" of UTIMCO than A&M.

"This is an internal review," he said. "This is for our benefit. It's what our Board of Regents needs to do to make it work right."

The question of how much scrutiny the regents should give to UTIMCO is such that even the company's recent stellar investment returns are an issue. The company recently concluded the best 12-month period in its history, ranking in the top tier of large university endowments and far outstripping its internal benchmarks in the stock, bond, private equity and other markets. All of its major endowments were up about 34 percent over the year that ended March 31.

But, Miller said, "one year's performance in a highly rising market is no evidence of anything -- anyone knows that."; 445-3671; 445-3604