Harvard Endowment Points One Way Forward for Struggling Japanese Universities

Daniel DOLAN (Professor of Business Communication, Tohoku University)

Ask anybody familiar with higher education in Japan to identify the key issue driving the growing sense of crisis surrounding universities in this country, and the reply likely will focus on the declining pool of potential university applicants due to changing demographics in Japan. Clearly, this is a serious problem that requires creative thinking and responses. But enrollment numbers is only one of many challenges currently faced by both national and private universities in Japan. Throw into the mix weak alumni networks and activities, lack of effective teaching and learning development resources, inefficient and entrenched bureaucracies (particularly in national universities) and unimpressive financial management and a more accurate picture of the crisis emerges.

Let's look more closely at one of these problems - financial management - focusing on private university endowments. In the United States, a university endowment generally consists of donations of cash, securities and real estate by individuals, corporations or foundations. Gifts to endowments can be restricted by the donor for specific purposes, or unrestricted. For example, 85 percent of Harvard University's endowment is restricted, consisting of 11,000 individual funds that support items such as faculty salaries, financial aid and facilities maintenance. How large are such endowments? Harvard University's endowment in fiscal year 2007 totaled an amazing $34.9 billion, which accounts for 33 percent of total income. In fiscal year 2006 alone Harvard collected $595 million, topped by Stanford University's $911 million in gifts. Compare these numbers with the $67.5 million in donations received in fiscal year 2005 by Keio University, considered by many to be the Harvard of Japan (total endowment figures for Keio University are unavailable on its website). Although Harvard has total student population of 19,000 and Stanford 15,000, compared with 11,000 at Keio, the huge endowment disparity raises some important questions for Japanese universities.

On a recent visit to the University of Southern California ($3.1 billion endowment) with a few Japanese university colleagues, we were taken on a guided campus tour by a student volunteer who pointed out from our motor cart the School of Cinematic Arts (supported by a $175 million donation by George Lucas); the Annenberg School for Communication, whose founder Walter Annenberg launched the school with a $100 million gift and later created a $500 million endowment in 1993 called the Annenberg Challenge; the Mann Institute for Biomedical Engineering ($112.5 million endowment); the Andrew and Erna Viterbi School of Engineering ($52 million donation), and the Thornton School of Music ($25 million gift by Flora Thornton). The list of campus giving goes on, reflected in state-of-the-art facilities and highly regarded academic programs.

Where are the endowed buildings, programs, professorships and other visible signs of donations at Japanese universities?

Endowments assist universities to meet fixed costs, and also insulate institutions from potential economic downturns. More tangibly, endowments also allow universities to create and maintain attractive and effective academic environments for students and faculty. This establishes a positive cycle in which the best students and faculty are drawn to cutting-edge facilities and programs, and potential donors give to institutions that show promise of success. This relationship is clear upon examination of college rankings and endowment rankings (see 2004 study). Six of the top ten ranked schools by U.S. News & World Report for 2008 are also ranked in the top ten for endowment value (and nine of the top ten ranked schools are included in the top 20 on the endowment list). I recognize that the utility of the U.S. News & World Report rankings have been questioned, and that many excellent schools in the United States do not have rich endowments, but the positive relationship between a school's wealth and its quality makes sense, and is supported by findings from the study cited above.

But endowments are only as effective as their management. At Harvard, the Harvard Management Company is responsible for managing the university's endowment, and for fiscal year 2007 enjoyed an incredible 23 percent return on investment. This performance easily beat average returns at other investment institutions. Money management at Harvard and other universities in the United States is done by highly skilled financial professionals, often recruited from the private sector.

Universities in Japan face very difficult times ahead as the Ministry of Education reduces the general budget for national universities one percent per year, and private universities fight for a diminishing pool of prospective students to remain viable. Japan also spends a surprisingly small percentage of GDP on education spending (see chart).

Effective financial management will demand reforms in many areas, including launching of creative alumni management strategies, lobbying for tax code changes to encourage corporate and individual giving, strategic branding initiatives, and engaging with top quality higher education consulting firms from within and outside Japan.

Japanese universities do not need to be as wealthy as Harvard, but students and faculty need and should demand buildings, research facilities and campus environments that are not only safe and comfortable, but also inspire and support high-quality work. Once universities in Japan achieve financial health they can look to other important areas in need of reform.

During my tour of the USC campus a dean of one of the university's top-ranked professional schools remarked in a private meeting that his program receives so many donations and requests to give donations that he can barely keep up with demand. Japanese universities, corporations and individuals need to recognize that strong university endowments are essential for the future of the country, and then act on this understanding.