Kathryn Murtagh: The endowment overseer

Harvard’s endowment consists of more than 13,000 individual funds invested as a single entity; it remains the largest source of revenue supporting the University budget.

For the fiscal year ended June 30, 2017, the return on the Harvard endowment was 8.1 percent and the value of the endowment was $37.1 billion. It provides a critical source of funding for the University, distributing $1.8 billion in the fiscal year ending June 30, 2017—contributing over a third of Harvard’s total operating revenue in that year. Funding is restricted to specific programs, departments, or purposes and must be spent in accordance with terms set forth by the donor.

Since joining HMC in 2006, Murtagh has built an internal legal and compliance function for the endowment, while serving as a strategic business partner to HMC’s senior executives in their efforts to drive organizational change.

Murtagh’s broad mandate encompasses all traditional legal and compliance functions, as well as sustainable investing—the innovative intersection of legal and investment risk that integrates environmental, social, and governance risk factors into HMC’s investment framework.

As chief compliance officer, Murtagh is responsible for ensuring that HMC conducts business and implements operations in accordance with regulatory, ethical, legal, and industry best practices.

Can you tell us about Harvard Management Company, the university’s endowment, and your role in building an internal legal and compliance function for the endowment?

Harvard Management Company was formed in 1974 to manage Harvard University’s endowment. The endowment stood at about $37 billion in the last fiscal year, which is June 30 of 2017, and that makes us the largest university endowment in the U.S.

HMC’s singular mission is to help ensure that Harvard University has the financial resources that need to constantly maintain and expand its preeminence in teaching learning and research. The University’s endowment it really thought of as a perpetual asset, as it is intended to benefit both current and future generations. So, at HMC we focus on long-term investing to both meet the current liquidity needs of the university and to continue to preserve and grow the endowment.

What are the compliance challenges that come with that territory?

Harvard, as you might imagine, has a very broad and diverse investment portfolio, and each asset class really brings its own set of compliance challenges.

For example, at one point in our history, HMC operated an internal public markets platform that traded a very wide variety of financial products across geographies and across markets. It really required us to maintain a very robust trade compliance program that we modeled after best practices in the investment industry.

We also operate timber and agricultural assets around the world, some of which are in emerging markets. To ensure that our local managers operate with the highest standards of personal and professional ethics, we’ve developed anti-corruption and business contact policies. We conduct training with our managers on the ground in their local language.

With our external managers, we really seek to understand their policies and procedures on topics as diverse as insider trading and maintaining a harassment-free workplace. It’s a large—thankfully for me—very interesting set of issues.

It is fascinating to see how diverse the endowment is, especially with the many alternative assets it invests in. A lot of expertise must be behind those investments.

We are fortunate to have a very talented group of generalists and investors that work with us. We’ve switched up our model a bit from the past, where we used to operate very much with isolated, siloed asset classes. Under the leadership of our current CEO, we’ve really moved toward a generalist investment model, where the entire team thinks collectively and takes responsibility for the overall portfolio.

Can you further discuss an observation, submitted as part of your nomination? You were described as “a strategic business partner to HMC’s senior executives to drive dynamic organizational change across HMC’s investment and support organizations.”

I’ve been at HMC for almost 12 years now, and it has experienced some very important organizational changes. I’ve been fortunate in that we really work well together as a leadership team to best position the endowment for future success.

I’ve had an opportunity to partner with very strong CEOs and other senior colleagues throughout my career here, with a cross-disciplined approach, as we evolved business strategies and worked to implement those strategies across the organization.

Under the leadership of N.P. Narvekar, who joined us as CEO in December 2016, we’ve worked to restructure our agency into a generalist investment model. We’ve spun out various internal platforms. We’ve rebuilt our investment processes and analytics. I’ve had the opportunity to partner with my colleagues to make sure that we’re moving the agency forward.

We were told by colleagues that your “mandate encompasses all traditional legal and compliance functions.” How so?

On the traditional legal front, my team and I provide legal support for all investment activity across all asset classes and jurisdictions. That could be negotiating private fund documents, cross-border transactions in timber and agricultural assets, or executing public markets trades. We also manage a broad network of outside counsel relationships around the globe.

On the traditional compliance front, my team and I maintain the HMC’s regulatory compliance program, and we prepare all required filings relating to our investment activities.

We also monitor internal compliance with HMC’s code of conduct and other policies. That includes employee personal trading, the treatment of confidential information, and maintaining restricted lists to safeguard material non-public information.

I’m also the clerk of HMC. In that role, I’m responsible for governance matters, and support the work of HMC’s board of directors and its standing committees.

We also have a couple of slightly non-traditional responsibilities that my team and I look after. We manage communications. Another subset of my team and I also manage sustainable investment. It’s a very interesting, diverse, and exciting set of responsibilities.

It sounds as though you work closely with the board of directors. It is a dream for many compliance officers to have a direct line to them.

We’re very fortunate to have a very strong and dedicated board of directors at HMC, and it is one of the great pleasures of my career to have an opportunity to work with them.

How challenging, necessary, or rewarding is sustainable investing, especially in a college environment where many, especially civic-minded students, have vested and vocal interests. How has sustainable investing changed and evolved since 2006 when you joined HMC?

At Harvard, we’re very fortunate to have engaged stakeholders who are very interested in this work. We always appreciate their involvement.

As a long-term investor, HMC is really focused on material environmental, social, and governance (ESG) factors that could have an impact on the performance of our investments, either now or in the future. ESG factors can be found in traditional areas like energy consumption, resource scarcity, and even things as broad as diversity and inclusion, and effective board oversight.

At HMC we believe that configuring these ESG factors in our investment analysis and decision making is aligned with our mission to provide strong, long-term investment results to Harvard University.

If I look back over the past decade, sustainable investment has become a broader part of the mainstream investment debate.

In the past, particularly in the U.S., investors feared that they would be trading off investment returns if they incorporated ESG factors. Now, increasingly, investors are discovering that the consideration of ESG factors can not only mitigate risk but also drive value. The more institutional investors become interested in sustainable investing, the more willing asset managers are to engage in this dialogue and develop their own programs.

What might you be able to tell mainstream investors and corporate America regarding the current, and ongoing, debate over short-term versus long-term vision and investments?

I was at a conference a couple weeks ago where we had an opportunity to speak with some Fortune 500 CEOs specifically about the issue of long-termism. I think CEOs are hopefully moving beyond the quarterly earnings calls and are now thinking about how issues impact the long-term view of their business.

What are the most challenging of these sustainability issues to deal with when choosing investments? What do you look for? How do you weigh the benefits and risks inherent in ESG matters?

One of the challenges of sustainable investing is that it very much depends upon the type and form of the investment, whether that’s a public equity investment, or a direct investment in real estate or natural resources. There really is no one-size-fits-all approach. We base our efforts on a lot of factors, such as asset class, geography, and investment model.

At the most basic level, when we engage with our external managers, we look for a familiarity with material ESG factors that could impact portfolios, coupled with a willingness to engage with us in a dialogue on sustainability and a desire to see continuous improvement in this area.

What’s your view of training to maintain an ethical culture and minimize organizational and investment risk? It is obviously one thing to be socially minded, another to maintain the level of performance needed for an endowment.

Training is a critical part of the program. At HMC, we are committed to promoting the highest standards of personal and professional integrity for our employees. We’ve developed a series of policies to help ensure that all of our employees are familiar with applicable laws and ethical obligations. For example, our code of conduct covers conflicts of interest, the handling of confidential information, and prohibitions on insider trading.

We also have very robust anti-corruption and business conduct policies and policies on anti-money laundering, information security, and whistleblowers. We conduct training with our staff on all those policies. 

It’s a critical way for people to understand the framework we want them to be operating under, while also opening up a dialogue. These can be complicated areas, and there could be complicated questions. We really want to make sure that our staff feels comfortable coming to me and the members of my team if they have any questions.

In 2014, Harvard President Drew Faust announced that Harvard University had become the first U.S. university endowment to become a signatory to the United Nations-supported Principles for Responsible Investment. Can you tell us more about the PRI and Harvard’s role, especially given that one of your many hats is managing director of sustainable investing?

Harvard’s leadership in sustainable investing dates back to 1972 when it formed committees focused on matters of shareholder responsibility, specifically proxy voting. Being the first U.S. university endowment to become a signatory to the PRI was really a natural extension of that work.

The PRI itself joins together a network of international investors working to implement a set of voluntary principles that we’ve all agreed to. Those principles provide a framework for integrating environmental, social, and governance factors into our investment analysis and ownership practices. We really feel those are very much aligned with our fiduciary duties as an investor.

We’ve served as a co-lead investor in two significant PRI coordinated collaborations. There was one targeting corporations that publicly support climate risk regulation, while privately lobbying against those measures.

We also worked on a collaboration that sought to encourage energy and utility companies to improve their management of methane emissions and strengthen disclosures about that process. My colleagues and I also serve on the PRI’s hedge fund advisory committee and the private equity advisory committee. We’ve also hosted educational events to introduce the PRI to our peer institutions and have spoken at the annual conference which was held in Berlin in 2017.

Harvard is also a signatory to a PRI global statement on investor obligations and duties, which called for policymakers to clarify what investors are supposed to be doing in relation to integration of ESG issues and to investment practices.

It must be rewarding to know that the policies you put in place at Harvard evangelize a message of responsible investing to the broader investment marketplace.

It is wonderful. Harvard is certainly viewed as a thought leader in so many spaces, in terms of their research and their educational work. It’s been very rewarding to take the lead for them in this in this important area as well.