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Harvard's PR problem

The board of Harvard Management Corp., which oversees the billions at the world's richest university, met yesterday on the 13th floor of the Federal Reserve tower in Boston with a new chairman sitting at the head of the table for the first time in 15 years. Next week, annual returns for the $19.3 billion endowment are due, and they will be strong again. That, in turn, will start the annual compensation watch among Harvard Management's critics. The question, as always: How much will Harvard money managers make this year?

Year after year, Harvard Management has delivered among the best returns in the business and paid some of the highest compensation in the business to its managers. Year after year, the people who run Harvard have been willing to take whatever heat comes with those big paychecks. But the ground is shifting, both inside the university and out. And significant change is probably in the cards for Harvard Management. Out in the big world, compensation continues as a hot-button issue. Nonprofits, in particular, are coming in for tougher scrutiny from the Internal Revenue Service and others. The Securities and Exchange Commission, prodded by a certain attorney general from New York, is now back out on the beat.

Inside Harvard, the environment is changing, too. Start at the top: Larry Summers is no Neil Rudenstine. The current Harvard president is a world-class economist, a former US Treasury secretary and a man who knows markets; Rudenstine was a Renaissance literature scholar who was hands-off at Harvard Management. Summers is incapable of being hands-off anything.

The wild card is James F. Rothenberg, Harvard's new treasurer, who chaired his first Harvard Management board meeting yesterday. Rothenberg, president of Capital Research and Management Co., the Los Angeles investment firm, replaced Ron Daniel, Harvard's treasurer for 15 years. Daniel hired Jack Meyer to run Harvard Management in 1990 when the place hit a bad patch, and it was Daniel who always defended Meyer and his complex compensation system. What does Rothenberg think? We have yet to hear from him.

Another man to watch is Robert Rubin. One of the first things Summers did was to appoint his mentor, the former Treasury secretary, to Harvard's seven-member governing board. Rubin knows markets, too, and those familiar with his thinking say he believes Harvard's money managers are more analogous to the traders at Citigroup, where he heads the executive committee, and Goldman Sachs, which he used to run, than to hedge fund managers. Citi and Goldman traders can make millions, but millions less than Harvard pays its top managers. If Rubin tells Summers Harvard's managers are overpaid, then they are overpaid.

What has made Harvard different all these years is it managed most of its money in-house rather than hiring outside managers, as most institutions do. Change would probably mean making Harvard look more like everyone else. Harvard is already well down that road: Today about half the money is managed internally, down from 85 percent eight years ago. The big money still inside is managed by Maurice Samuels and David Mittelman, the fixed-income guys. The two also happen to be Harvard's biggest public relations problem; together they made $69 million last year.

But the critics should be careful what they wish for. The bottom line in investing is not what you pay in fees, but what you get to keep at the end of the day. By that measure, the system has served Harvard well. Over the past 10 years the university ranks third among more than 400 other institutions, with an average annual return of 14.7 percent. Here is another way to think about that: Middle-of-the-pack performance would have left Harvard with an endowment about half of what it is today.

With results like that the alumni should be raising dough to put a statute of Jack Meyer in Harvard Yard, not taking potshots at him.

Steve Bailey is a Globe columnist. He can be reached at bailey@globe.com or at 617-929-2902.

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