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May 29, 2005
David Warsh, Proprietor


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Adult on Board

As the US government’s case against Harvard University for the collapse of its Russia Project under economist Andrei Shleifer winds towards its suspenseful conclusion, one question more than any other has taken on additional interest.

Who has oversight of the legal strategy for the seven-member corporation that rules the university — the President and Fellows of Harvard College, as they are known?

Lawrence Summers, president and ordinarily the university’s chief executive officer, is recused in the matter, because of the several ways in which he is involved in it: through his long-time friendship with his protégé Shleifer, through the duties he performed in the Treasury Department in the 1990s; and through his presidency of the university since 2001.

Obviously, there is no way to delegate responsibility down in a university in which everyone works, one way or another, for the recused president. The lawyers don’t run things; they offer advice and follow the directions they are given. 

In other words, there is nothing automatic about what happens next. The case must be actively managed. Often Harvard has insisted that it wants a jury trial to argue that it is entitled to keep some portion of the $33 million or so that the US government paid it to furnish advice to the Russian government, before the project collapsed amid charges of corruption. The Assistant US Attorney in Boston who is trying the case, Sara Miron Bloom (Harvard Law 1988), wants all the money back.

(Last summer Judge US District Court Judge Douglas Woodlock found Harvard liable for simple breach of contract instead of fraud, ruling out treble damages against the university while maintaining them against Shleifer, a relatively wealthy man, who had been found liable on two counts of fraud.)

At the same time, its lawyers have been engaged in settlement negotiations with the government. Shleifer has changed lawyers. The university’s attitude towards its prodigal professor may have evolved since he last lobbied to have Harvard pay his legal bills. Within the university itself, tensions have increased. The stakes change on a weekly basis.

The parties haven’t met in court since late last year, when a jury took barely two hours to dismiss a narrow aspect of Harvard’s and Shleifer’s joint defense — that it didn’t matter that the economist (and his deputy, Jonathan Hay, together with their wives, had been investing in Russian securities, even attempting to elbow their way into the mutual fund business for themselves, for despite the fact that Shleifer had been hired by the US government to advise the Russian government on how to create a market economy, he wasn’t technically “assigned” to Russia.

(Shleifer grew up in the former Soviet Union, before emigrating as a 16-year-old, with his parents, to Rochester, New York. As a sophomore at Harvard, he met Summers, who was then a graduate student. By the age of 25, Shleifer had earned a PhD in economics from the Massachusetts Institute of Technology.)

Now, an oft-postponed conference before Judge Woodlock is scheduled for June 2.  It could bring news of a settlement, partial or complete; even an abrupt end to the proceedings. Or it could result in a decision to schedule a trial on damages, beginning as late as June of next year.

So who is minding the store for Harvard?

According to two sources familiar with aspects of the university’s defense, the corporation’s senior adviser in the matter is none other than Derek Bok. The former president has been asked by the corporation to “look at” not just Russia, said one, but “all kinds of things” within the university.

A standing Joint Committee on Inspections — joint between the seven-member corporation, which has ultimate authority over the university, and the Board of Overseers, a thirty-member advisory panel elected by alumni — presumably also plays a role as the university’s audit committee.

Bok is especially well-qualified by to training, temperament and experience. He is a lawyer, a former professor of law and dean of the Harvard Law School. From 1971 until 1991 he was Harvard’s president. Among his salient policies was a thoughtful annual report on significant developments affecting the university.

He has written five books on higher education and two on government: Beyond the Ivory Tower (1982), Higher Learning (1986), Universities and the Future of America (1990), The State of the Nation (1997), The Shape of the River (1998), The Trouble with Government (2001) and Universities in the Marketplace (2003).

One case in particular during the Bok years has some bearing on the question of errant behavior among professors.  In 1984, tenured government professor Douglas Hibbs Jr. was compelled to resign despite his tenure, after being found to have demanded sexual favors from a graduate student.

Similarly, Yale University earlier this year dismissed tenured economics professor Florencio López-de-Silanes for double-billing his expense accounts to the university and The World Bank.  López-de-Silanes, 38, a protégé and frequent collaborator of Andrei Shleifer, had been recruited from Harvard’s John F. Kennedy School of Government to head the newly-created Institute for Corporate Governance at Yale’s School of Management.

Harvard began is Russia Project with great fanfare in 1992, with Shleifer as its 30-year-old team leader.  The program came to a dramatic end in May 1997, when the US Agency for International Development cancelled it after a brief investigation, having been tipped off to its team leaders’ investments. Angered by the loss of its favorite advisers, Boris Yeltsin’s government promptly severed its relationship with USAID.

By then, nearly 2 percent of Harvard’s endowment had been directly invested by its managers in Russian assets.  They were taking part in the great gold rush that unfolded as the Russian government (which Shleifer had advised) sold off its state-owned assets at bargain prices. As Harvard investigated internally the collapse of its mission to Moscow, the Asian financial crisis spread in early 1998 to Russian securities markets. By August 1998, an abrupt devaluation of the ruble briefly threatened the global financial system with paralysis.

Point man in the US effort to maintain order was Deputy Treasury Secretary Larry Summers. Among his eyes and ears presumably were those of his protégé Shleifer, no longer a US government employee.

The crisis passed.  Amid considerable internal uncertainty at Harvard, the decision to aggressively defend the conduct of Harvard’s Russia Project was taken in the months immediately before and after the government filed a fraud suit in September 2000, seeking more than $120 million in damages.

By then, Harvard was searching for its next president. Provost Harvey Fineberg, in charge of the Russia matter, was hoping to succeed Neil Rudenstine as president. Summers had become Treasury Secretary and was an informal adviser to presidential candidate Al Gore.  The university has not deviated from the course it set then.

Complicating the oversight process today is the lack of deep experience among members of the corporation, the oldest self-perpetuating body in the Western hemisphere. When Robert Stone stepped down in 2002, it was after 27 years of service. Hanna Holborn Gray, president emerita of the University of Chicago, replaced Henry Rosovsky in 1997. She retires next month.

At that point, only James Houghton and Conrad Harper will have become members before Summers became president in 2001 — Houghton, recently renamed chairman of Corning, Inc., since 1995; and Harper, a partner in Simpson, Thatcher and Bartlett, a prestigious New York law firm, since 2000.

Citigroup’s executive committee chairman Robert Rubin, Urban Institute President Robert Reischauer, university treasurer and McKinsey director James Rothenberg and Nannerl Overholser Keohane, president emerita of both Duke University and Wellesley College, have joined since — and Rubin was Summers’ boss through most of the 1990s.

Also disruptive was the resignation in 2002 of Herbert Winokur Jr., CEO of Capricorn Holdings, who left the corporation after only two years, when his role as a key director at Enron became a potential source of embarrassment.

All the more reason, therefore, for the President and Fellows of Harvard College to turn to Derek Bok, a man of sound judgment and deep experience in the university, as they prepare to write the end to a most peculiar episode.

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