Editor’s Note: Today’s story is the third in the Daily’s four-part “Anatomy of an Endowment” series. It discusses how the University’s investors take into account social responsibility and ethics when investing the endowment’s funds. By the end of the series, our goal is to have dissected, described and analyzed in simple terms a massive, intricate financial portfolio — one that is critical to the University’s success.

The purpose of the University of Michigan’s endowment is simple.

As University Chief Financial Officer Timothy Slottow wrote in his “Statement on University Investment Policies” in November 2005, “There is one overarching principle related to our endowment and investment strategy: The University’s governing board and officers have a fiduciary responsibility to protect our assets for the long term, so that we may leave to succeeding generations a University at least as strong as the one with which we have been entrusted.

“Therefore, the primary purpose of our endowment,” he concluded, “is to generate the greatest possible income, subject to an appropriate amount of risk, in support of the University’s missions of teaching, research and service.”

But for nearly as long as colleges and universities have had endowments, there has been pressure on these institutions to not only focus on maximizing endowment gains, but also to act as engaged, socially responsible shareholders with an interest in the policies, practices and transparency of the companies and corporations in which they invest.

This concept of shareholder activism in the United States began in the 1940s, when federal regulations allowed shareholders to introduce resolutions about a company’s affairs on which all shareholders could vote, according to a working paper written by Harvard Business School Prof. Michael Toffel and Harvard Business School doctoral student Erin Reid.

One of the most vivid examples of shareholder activism took place in the 1970s and 1980s, as American opposition to apartheid in South Africa reached a fever pitch. At that time, many different individuals, companies and institutions, among them universities, looked at the investments they had involving apartheid South Africa and, in many cases, decided to divest their holdings as a repudiation of that country’s policies.

The University of Michigan was one of the schools to divest, pulling its investments in the late 1970s.

More than 20 years later, in 1999, many in the University community voiced concerns over the endowment’s investments in tobacco manufacturing and tobacco-related companies. In response, a temporary committee of faculty, staff, students and alumni, the Ad Hoc Advisory Committee on Tobacco Investments, was created to assess whether the endowment’s tobacco-related investments were irreconcilable with the University’s teaching, research and service missions.

The ad hoc committee ultimately recommended to the University Board of Regents to “sell all of the University’s currently owned shares of stock (and not to purchase any new shares) in companies that, either themselves or through their subsidiaries, manufacture significant quantities of cigarettes or other tobacco products,” the University Record reported.

Soon after, then-Chief Financial Officer Robert Kasdin soon after instructed the University’s investors to sell all stock holdings pertaining to the tobacco-related investments within the next 10 months.

One of the only major divestment campaigns since then came in 2006 when a group of University students called on University officials to investigate the possibility of divesting from any investments with companies doing business in Israel. There was no official action on the part of the University and its investors in response to this campaign.

SPEAKING UP AS A SHAREHOLDER

Divestment is one of the more severe forms of shareholder activism.