Systemic Racial Discrimination and Higher Education Endowment Fiduciary Duties

This post by Keith Johnson and Tiffany Reeves, of Reinhart, is part of a series in which IEN members and network partners share their thinking about intentional endowment investing to address racial injustice and other diversity, equity, and inclusion themes. Follow along to read members' insights on higher education endowments and foundations'  legal obligation to actively participate in efforts to address inequities associated with systemic racial discrimination. 


Keith Johnson, Chair of the IEN Fiduciary Duty and Policy Working Group and Co-chairs Institutional Investor Legal Services, Tiffany R. Reeves, Shareholder at Reinhart Institutional Investor Services, Reinhart Boerner Van Deuren s.c.


The Intentional Endowments Network (“IEN”) Primer for College and University Endowments on Investing in Racial Equity (the “Primer”) contains a comprehensive analysis of the impact that systemic racial discrimination has on the U.S.  In addition to personal and social damage, these racial inequities in income, wealth, home ownership, workplace advancement, health and education impose a heavy toll on the American economy.  The IEN Primer cites McKinsey research which estimates that closing the racial wealth gap would add up to $1.5 trillion to the U.S. economy and increase GDP by as much as six percent.

The investment arms attached to institutions of higher education have a major role to play in addressing the impact of socioeconomic inequalities.  Effects of racial discrimination present not only investment risks but also opportunities to share in creation of the economic value that would result from addressing racial inequities. These risks have not been priced into the markets and these opportunities have been historically unrecognized by the investment community. However, higher education endowments and foundations have a unique legal obligation to actively participate in efforts to address the inequities associated with systemic racial discrimination – as part of the fiduciary duty of obedience to the mission and goals of their respective colleges and universities.


Fiduciary Duty of Obedience

Unlike other investment organizations, nonprofit investor fiduciaries have a legal duty to recognize and serve the public purpose mission and goals of their principal organization.  This obligation flows from the requirement that nonprofit entities are required to generate a public benefit in exchange for being subsidized by taxpayers through the grant of a tax exemption.


The United States Supreme Court summarized this legal principle in a case which involved application of the public policy to eradicate racial discrimination to a nonprofit university. “Charitable exemptions are justified on the basis that the exempt entity confers a public benefit – a benefit that society or the community either may not itself choose or be able to provide, or that supplements and advances the work of other public institutions already supported by tax revenues.” Bob Jones University v. United States, 461 U.S. 574, at 591 (1983).


This public benefit requirement is called the “duty of obedience.” The Uniform Prudent Management of Institutional Funds Act (”UPMIFA”), which governs most higher education endowments and foundations, includes a Prefatory Note from its Drafting Committee. The drafters of UPMIFA explained that it “requires a charity and those who manage and invest its funds to… develop an investment strategy appropriate for the fund and the charity.” The Committee also explained, “[The] decision maker must consider the charitable purposes of the institution and the purposes of the institutional fund for which decisions are being made. These factors are specific to charitable organizations.” [Emphasis added]


Courts have described the connection between public purpose and the fiduciary duty of obedience as a foundational aspect of nonprofit organizations.  “[The duty of obedience] requires the director of a not-for-profit corporation to be faithful to the purposes and goals of the organization, since unlike business corporations, whose ultimate objective is to make money, nonprofit corporations are defined by their specific objectives: perpetuation of particular activities are central to the raison d’être of the organization.”  Manhattan Eye, Ear and Throat Hospital v. Spitzer, 186 Misc. 2d 126, at 152 (New York 1999) [Emphasis added]


Even Internal Revenue Service Federal tax regulations recognize that state duty of obedience laws “provide for the consideration of the charitable purposes of an organization or certain factors, including an asset’s special relationship or special value, if any, to the charitable purposes of the organization, in properly managing and investing the organization’s investment assets.”  IRS Notice 2015-62


This duty of obedience may be a new concept to investment professionals from other types of institutional investors. However, fiduciaries at higher education endowments and foundations must recognize that the duty of obedience mandates that they develop an understanding of the mission and goals of their college or university. This requires ongoing engagement between the institution’s administration, the investment fiduciaries and related service providers.


Higher Education’s Public Purpose, Mission and Goals

The IEN has developed a Roadmap for Intentionally Designed Endowments that outlines key steps toward aligning university and college investment practices with institutional mission. The Roadmap’s first step involves developing an understanding of the mission of the institution and learning about current sustainable investment practices that integrate material environmental, social and governance (“ESG”) issues into the overall investment analysis process.


For most institutions of higher education, this process will require that the investment office examine the role that investment management plays in promoting business practices that would help dismantle the legacy and continuing impact of systemic racial discrimination and inequality. It might also provide an opportunity for the investment office to develop an up-to-date understanding of sustainable investment practices. IEN produced a report that summarizes the growing body of evidence from academics and practitioners which demonstrates that sustainable investing strategies, in general, perform as well as or better than traditional approaches.

A sample of mission and purpose statements from institutions of higher education illustrates the materiality of racial equity issues to higher education investment practices.


  • “Miami University is committed to and fully embraces the philosophy and belief that a diverse academic community is among an institution’s greatest strengths. As decades of research and experience have shown, every unit and individual on campus benefits from diversity when there is an environment where people from a wide variety of backgrounds learn from one another, share ideas, and work collaboratively to ask and solve questions. . . . Together, these benefits help Miami achieve its special mission as a public institution in Ohio, educating students across the state and preparing them to be leaders in a variety of fields who are ready for the demands of the 21st century workforce.”


  • “Wright State University celebrates diversity. Our daily life is made rich by the diversity of individuals, groups, and cultures. The interplay of the diverse stimulates creativity and achievement in all facets of our existence. . . . Wright State University will be a model for our geographic region, exemplifying that a human community can exist that celebrates diversity, enjoys the richness that diversity brings to our lives, and grows stronger with every new member.”


  • “[At UCLA] we believe that diversity is critical to maintaining excellence in all of our endeavors. . . . We acknowledge that modern societies carry historical and divisive biases based on race, ethnicity, gender, age, disability, sexual orientation and religion, and we seek to promote awareness and understanding through education and research to mediate and resolve conflicts that are from those biases in our communities.”


  • “The primary purpose of the University of Wisconsin–Madison is to provide a learning environment in which faculty, staff and students can discover, examine critically, preserve and transmit the knowledge, wisdom and values that will help ensure the survival of this and future generations and improve the quality of life for all. . . . It also seeks to attract and serve students from diverse social, economic and ethnic backgrounds and to be sensitive and responsive to those groups which have been underserved by higher education.


Application of Mission and Goals to Investment Management Practices

The IEN Primer provides guidance for higher education investor entities on implementation of the fiduciary duty of obedience in the context of their institution’s racial equity goals. Fiduciaries who are committed to going beyond the bare minimum of legal compliance to become leaders in implementation of their fiduciary responsibilities will find the Primer to be of great assistance. 

For example, action steps laid out in the Primer for consideration by college and university investment fiduciaries include:


  • Commit to discussing racial equity at investment committee meetings to have conversations necessary to assess how your investments provide solutions to or perpetuate racial inequality.


  • Conduct bias training as perceptions of race can inform both business and investment operations through hiring and retention, manager selection and risk assessment.


  • Diversify the Board and the Investment Committee to bring in new insights, spur new approaches and expand networks.


  • Update your Investment Policy Statement to reflect your diversity and inclusion priorities.


  • Engage with consultants and ask your asset managers about their approach to internal diversity and inclusion.


  • Allocate to racially diverse consultants and asset management firms to diversify talent and deal flow and improve the investment portfolio’s risk and return profile.


  • Allocate to funds with a racial equity investment thesis or businesses that produce products and services that address key issues for communities of color, such as Community Development Financial Institutions (“CDFIs”).


  • Engage with companies as a shareholder on issues that relate directly to diversity, equity and inclusion, such as those requesting that companies connect executive pay to diversity and inclusion-related outcomes or addressing board and executive leadership diversity; require transparency from external managers as to how they engage with companies on these issues.


  • Use investor voice in partnership with organizations focused on racial justice to advance anti-racist public policy through investor statements, pledges and public comments to spur collective action.


  • Offer internships in the Investment Office for underrepresented students to aid in developing diverse talent in the finance industry, or create a student-managed fund focused on diversity of the team as a racial equity investment strategy.


  • Disclose information on your diversity and inclusion strategy and progress to encourage transparency and accountability.



College and university investment organizations are not independent investment funds that happen to have an attached academic institution.  Rather, they are bound by law to obediently exercise investment management responsibilities consistent with the mission and goals of their college or university.  On a practical level, it makes little sense for the investment arm of a higher education institution to manage assets in ways that are inconsistent with or harmful to achieving the institution’s mission and goals.

Fiduciary duties require that academic investment fiduciaries have a clear understanding of their institution’s mission and goals, as well as understand evolving 21st century sustainable investment and financial management practices and how current practices can be used to support the institution’s mission and goals around diversity and racial equity without sacrificing returns.  IEN resources offer invaluable tools for endowment and foundation fiduciaries to fulfill those obligations.

With assistance from advisors and other service providers that have demonstrated expertise in racial equity investment issues, and with the benefits of peer knowledge which IEN offers, academic fiduciaries can align their investment practices with their institution’s mission and goals to achieve the public benefits they exist to provide.











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