The Iowa Board of Regents and Fiduciary Duty

This post is part of an extended Open Letter to the Iowa State Auditor.

Rank and file state employees in Iowa are constrained in their financial decision making by their job descriptions and limited budgetary authority, and that includes the seventeen staffers at the Iowa Board of Regents, and thousands of similar employees at the regent schools. If those government workers spend state funds without a valid justification, they may end up being terminated, if not also having a criminal referral filed by the Iowa State Auditor. (Recent examples from the University of Northern Iowa here and here, and from the University of Iowa and UI Athletics here and here.)  

High-ranking state employees in the regents enterprise necessarily have greater financial authority and discretion, but are still bound by school policy, board policy and state law. For example, several years ago it was discovered that former Iowa State President Steven Leath routinely used the university’s two aircraft for personal trips, among other legitimate flights related to his official duties. While the incumbent state auditor refused to conduct an independent inquiry, even the board’s own audit showed that Leath misused the state-owned planes on dozens of occasions, and that compelled him to reimburse tens of thousands of dollars to the state. (Although Leath’s trips violated school policy, board policy and state law, Leath was neither terminated nor reprimanded by the board. Criticism of the board’s audit here and here, and of the former state auditor here.)

As to the financial decision making of the nine members of the Board of Regents, who are the arbiters of the multi-billion-dollar regents enterprise, one peculiarity of their status is that they neither state employees nor elected officials. Instead, they are citizen volunteers, appointed by the governor, and seem to exist in a gray area relative to how their financial decisions are judged. On an individual basis the regents have no apparent authority to spend any money themselves, and are at most reimbursed for reasonable travel expenses related to their official duties. (Because those duties are almost always collective, it would even be difficult for one regent to falsify expenses to their financial advantage, because they would stand out from the receipts submitted by others.)

At the same time, the members of the Board of Regents wield extraordinary power, including the legal authority to generate and spend staggering amounts of state revenue with a simple majority vote. With an enterprise-wide $6B budget, and individual agenda items involving tens if not hundreds of millions of dollars, expenditures that would be monumental in any other state context can seem almost trivial, but a million dollars in government revenue or assets is still a million dollars. Indeed, even when compared to the state legislature, with its power to levy taxes and appropriate billions of dollars in revenue, there may be no greater concentration of fiscal power in the state than rests with the nine members of the Iowa Board of Regents, who are neither vested with the liberty and immunity of elected office, or beholden to the usual constraints and obligations of government employees.

In that context, then, how would the Iowa State Auditor determine whether a given expense by the Board of Regents was valid or invalid? And if an expense was ruled invalid, by whatever criteria, from whom would the auditor seek reimbursement, or name in a criminal referral? For example, if the regents voted to buy a yacht for regent meetings on the Mississippi River, that extravagance would seem disallowable as a valid expense, but under what authority? If the regents conducted the vote in compliance with board policy and Iowa’s Open Meetings Law, how could the auditor’s office argue that what was a legal act was still in violation of the board’s statutory mission — and thus disallowable as an expense?

The legally binding obligation of one party to do what is in the best financial interest of another party is called a fiduciary duty or responsibility. For example, because of the power that attorneys wield over financial matters, they are commonly held to be fiduciaries by the courts, and can be fined or even disbarred if they put their own interests ahead of their clients. Unfortunately, even in situations where such an obligation would seem self-evident there may be no legally binding fiduciary requirement — as is often the case in the financial services industry, where financial planners can legally exploit or ‘churn’ client assets for their own benefit.

With specific regard to the Iowa Board of Regents, the closest thing to a legally binding fiduciary responsibility seems to be a statutory ‘duty of loyalty‘, which is described in the board’s policy manual, in a section primarily concerned with conflicts of interest:

To further enhance the credibility and accountability of the Board, the Board requires that all Regents and institutional officials promote at all times the best interests of the Board and its institutions consistent with policies, rules, regulations, and laws governing the Board, academic institutions, and academic freedom. The duty of loyalty requires Regents to exercise their powers and duties in the interests of the Board and its institutions and not in the Regent’s own interest or in the interest of another person or organization.

Assuming that this ‘duty of loyalty’ would be sufficient to disallow the purchase of a party boat, the next question is who would be held responsible for improperly acquiring the yacht. The quote above covers members of the board and executives and professionals at the board office, so it’s worth asking whether one group could credibly blame the other for such an expense. If the regents approved the purchase of a yacht, but the board’s executive director signed the purchase contract, who bought the boat?

As interesting as such questions may be in the abstract, they are central to a decision that the Iowa Board of Regents made in 2015, which was to conduct a national search for a new president at the University of Iowa. Although irregularities in that search received a great deal of public notice after the fact, the question of whether the board should have embarked on and continued that expensive search has largely been overlooked. In fact, the case can be made — beyond a preponderance of the evidence, beyond clear and convincing evidence, and beyond a reasonable doubt — that the official, board-sanctioned 2015 UI Presidential Search was used as a smokescreen for a crony hire that could have been concluded at minimal cost to the state.

Importantly, as the Des Moines Register noted following the appointment of J. Bruce Harreld as president of the University of Iowa, the regents are not obligated to conduct any kind of search in order to fill a presidential vacancy at the state’s institutions of higher learning:

The fact is, the nine members of the Board of Regents, not the professors, are charged under state law with governing the three state universities. In replacing outgoing President Sally Mason, the board could have dispensed with a formal search process, cut to the chase and simply hired Harreld, just like the athletic director hires a new football coach.

Traditionally, the Iowa Board of Regents conducts what are called ‘open’ searches. In an open search several finalists are chosen and announced by a dedicated search committee, those finalists participate in campus forums, then the collective response to those forums ostensibly factors into the final decision by the board. In other states, some governing boards prefer ‘closed’ searches, which are also usually conducted by a dedicated search committee, but remain secret until a single finalist is announced, thus rendering the actual appointment a foregone conclusion.

In both open and closed searches it is also increasingly common if not the norm for colleges and universities to hire an executive search firm to aid in recruitment and vetting, often at considerable expense. As a matter of Iowa law, however, the regents are not obligated to do any of that, and can appoint anyone to preside over a state university with a simple majority vote. In that context, here are the key moments in 2015 which led to the appointment of J. Bruce Harreld at the University of Iowa:

* March: UI alumnus and megadonor Jerre Stead calls regent president Bruce Rastetter and recommends J. Bruce Harreld for the job.

* March: Rastetter calls Harreld to gauge his interest.

* April: Although still unconfirmed, it is believed that Rastetter and UI Vice President for Medicine Jean Robillard travel to Stead’s home in Scottsdale, Arizona, where they discuss, among other topics, the presidential vacancy at UI.

* June: Harreld meets in secret, for several hours, with Rastetter, Robillard, and then-UI Chief of Staff Peter Matthes, in a conference room at Kirkwood Community College in Cedar Rapids, in a gathering arranged by Jerre Stead. (Stead is originally slated to attend, but cancels at the last minute.)

* July: On the 8th, at the invitation of Robillard, Harreld gives a presentation to forty or so administrators at the University of Iowa Hospitals and Clinics. Robillard chauffeurs Harreld and his wife to the UI campus from the airport, and Rastetter is in attendance.

* July: On the 30th, Harreld meets with four members of the Board of Regents at Bruce Rastetter’s private place of business in Ames. The meetings are arranged by Rastetter in two sequential meetings of two regents each, to avoid violating Iowa’s Open Meetings Law. Rastetter chauffeurs Harreld to the meetings from the airport.

* August: Rastetter requests that governor Terry Branstad initiate a call to Harreld to encourage him to take the Iowa job. Branstad complies. (By chance, this request is actually captured on video.)

* September: On the 3rd, Rastetter and the four regents who met with Harreld in August appoint him to the presidency at Iowa. This despite the fact that Harreld has no prior experience in academic administration, and despite strong reservations and objections by the overwhelming majority of respondents on the UI campus. (By convention, the final vote by the board is recorded as unanimous.)

There are three things to note about the sequence of events that led to the appointment of Harreld at Iowa. First, in every instance the president of the Iowa Board of Regents, Bruce Rastetter, is present, and in some cases coordinated those events. Second, while all of the interactions above were directly related to hiring Harreld, none were a function of, driven by, or related to the formal search process that was underway at the same time. Third, all of the people involved either lied about the above events by omission, at the time, or by commission after the fact. (More on those premeditated and concerted lies in a moment.)

As for the formal, board-authorized search process, former UI president Sally Mason announced her August 2015 retirement on January 15th of that year. At its January 20th meeting, the Board of Regents initiated the hiring of a search firm and the formation of a search committee. At the meeting on February 5th the executive director gave the board a progress update (audio 51:00). On February 25th the search committee was announced, with Robillard as chair, and Rastetter, two other regents, and Jerre Stead among the twenty-one-person panel. At the board’s March 11th meeting, in his capacity as chair, Robillard provided a search update to the board (audio 00:00).

While the official administrative search process was well underway by mid-March, it was only on March 13th that the board hired a search firm to help conduct the search, thus obligating the regents to pay for those professional services. In the contract signed on that date by then-executive director Bob Donley, the board agreed to pay a set fee of $200K, payable in three monthly installments, plus expenses capped at 10% of the set fee, plus “advertising, committee interview and travel expenses, and candidate travel expenses” (p. 68-72 here). The contract also included the following termination clause:

You may terminate the searches for any reason upon notice. If this occurs within the first three months after we commence our agreement, the fee for our services up to that point shall be equal to the set free, prorated on a per diem basis over the initial 90-day period. If the termination occurs after this 90-day period, the fee for our services shall be the set fee, which is equal to $200,000 plus administrative expenses (capped at 10%) and reimbursable expenses.

In March of 2015, the Iowa Board of Regents committed to pay for a service that was not needed in order to satisfy its statutory obligation to appoint a president at Iowa. While a nationwide search — whether managed by a search firm or not — would indeed help locate and screen other candidates, it is clear from the timeline above that no candidate other than Harreld was ever in serious consideration, despite the substantial time and expense devoted to the formal search process. What the board should have done in March was void or suspend the search until it could be determined whether Harreld would take the job, but instead the regents committed state revenue to a search that effectively provided cover for the singular pursuit of Harreld.

For example, in early May — which was still well inside the ninety-day termination clause — Robillard was taking openly about hiring a business executive, instead of a traditional academic administrator:

During the May 8 meeting of the 21-member UI Presidential Search and Screen Committee, Chairman Jean Robillard said when members of the UI community are dismissive about even the idea of a candidate from outside academia, he often brings up Microsoft founder and former CEO Bill Gates as a test case.

After the board hired business executive J. Bruce Harreld — who was never the CEO of anything — press reports soon revealed a web of lies by the co-conspirators who orchestrated his appointment. For example, the day after Harreld was announced as the next president of Iowa, Jerre Stead lied to the Gazette’s Vanessa Miller, in a story which was cross-posted on the KCRG site:

So when Stead — as a member of the search committee charged with identifying finalists for the UI presidency — saw Harreld’s name among the candidates, he wanted to give him a look. Stead said he wanted to vet him and make sure he was prepared and qualified for the job.

In reality, Stead introduced Harreld to Rastetter long before any list of prospective candidates was compiled by the search committee. How do we know? Because Rastetter himself said so, in a deposition under oath in a related case (p. 9):

Q. Had somebody recommended Mr. Harreld to you?

A. Jerry Stead had recommended him.

As for Jean Robillard, when it was reported that he had invited Harreld to speak at UIHC, Robillard told not one but two lies to the press. From the Chronicle for Higher Education, in mid-September (p. 2):

Jean E. Robillard, Iowa’s interim president, its vice president for medical affairs, and the head of the 21-member search committee, was also familiar with Mr. Harreld. Earlier in the summer he invited the businessman to speak with some senior staff members at University of Iowa Health Care. Dr. Robillard did not recall how he had first heard of Mr. Harreld, but he brought him to the campus early in July to offer perspectives on improving health-service operations.

…

Dr. Robillard stressed that Mr. Harreld was not a candidate to be Iowa’s president at that time.

The first lie was Robillard’s assertion that Harreld was not a candidate at the time, and had simply been invited to speak as a consultant — who, curiously, was not only not paid for his appearance, but not reimbursed for his expenses. Only days later, however, the university acknowledged not only that Harreld had an interest in the open presidency, but that Robillard himself — through UI Chief of Staff Matthes — had sent separate itineraries to Harreld and his wife, the latter of whom was given a guided tour of the campus her husband would begin presiding over a few months later. (During the formal search, no declared or undeclared candidate and/or spouse received similar invitations or considerations.)

The second lie in Robillard’s statement to the Chronicle was exposed by Harreld himself, in a press report the day before Harreld took office in early November. In that report, Harreld revealed his secret Kirkwood meeting with Rastetter, Robillard and Matthes, which Stead had arranged. And of course it was at that meeting that Robillard not only “heard of Mr. Harreld”, and indeed met Harreld face to face, but spoke with Harreld for several hours.

As for Bruce Rastetter, the secret regent meetings that he arranged for Harreld in late July were a clandestine tour de force. Not only did Rastetter host those meetings at his own private place of business, instead of at the board offices or on one of the regent campuses, but he arranged those meetings using non-regent email addresses. When the meetings were subsequently revealed in the weeks after Harreld’s appointment, that was also the first time that the four uninvited regents knew anything about those meetings. (Meaning the five regents who met with Harreld on that day also kept quiet through the final interviews and vote by the full board.)

Shortly after those secret meetings were revealed in the press, Rastetter released a statement on regent letterhead — a copy of which can only be found on the Inside Higher Ed website, and does not seem to have ever been posted on the regents site.

The entire nine-member Board of Regents had the opportunity to interview each finalist, and on September 3 unanimously voted Bruce Harreld to be the next president at the University of Iowa.

In truth, the four regents who met with Harreld in late July were able to speak with him in two hour-long meetings of two regents each. By contrast, during the final interviews in early September, each regent had only about twenty minutes with each candidate — meaning Harreld had four times the face time with a majority of the board than any of the other finalists. (As for the “unanimous” vote, again, that was reported by convention, and did not reflect the actual sentiments of the full board.)

There is no indication that the formal search committee approved of the secret regent meetings with Harreld in advance, or that other candidates were notified that such face-to-face regent meetings were available. One way to make that determination, however, would be to request — or subpoena if necessary — all records from the search, which should still exist either at the board offices or at Parker Executive Search. (See also: 1.5 Record Retention Policy, p. 11-13.)

The deception at the heart of the 2015 UI presidential search was not only pervasive, but the key players involved in that deception were only ever interested in one candidate, who could have been hired with little or no cost to the state. Specifically, if Rastetter, Robillard and Stead wanted to hire Harreld, all they had to do was convince four other regents to vote yes, and as we now know that only took a couple of hours of face-to-face meetings in late July. In that context, and assuming again that the members of the Board of Regents do have a fiduciary duty to the state, we are left with an obvious question:

Who owes the state of Iowa $350K for the fake 2015 presidential search at the University of Iowa?

The obvious answer would be former regents president Rastetter, who not only participated every step of the way in the covert hire of Harreld, but made sure that Harreld passed through the formal search process at critical junctures. But what about the other four regents who met with Harreld in secret in July — do they share some responsibility? Or how about every regent who authorized the search, even if they were ended up being victims of the scam themselves? Or perhaps the only person legally responsible is former board executive director Bob Donley, who signed the actual contract with the search firm.

As a practical matter, compelling Rastetter, or Rastetter and four other regents, or a long-gone former board executive, to cough up $350K would be time consuming and costly, and could even result in a net loss. As a factual matter it could be proven that the 2015 search at UI was extraneous to Harreld’s hire, but even if a judgment was rendered there would be the problem of collecting on that judgment, which is never a given. Fortuitously, however, there is a more direct option, which would not consume any state resource.

Despite the fact that J. Bruce Harreld openly acknowledged that he would have to serve an apprenticeship just to know how to do the job he had been hired to do, the Iowa Board of Regents gave Harreld an unprecedented five-year contract guaranteeing him almost $600K a year in salary, plus another $200K deferred. Precisely because Harreld will be owed $1M at the end of his contract, however, it would be administratively trivial to reduce that amount by $350K, thus reimbursing the state for the sham 2015 UI search that led to his hire.

Why should Harreld have to pay back that money? Because despite relentlessly positioning himself as an innocent in the corrupted 2015 search, not only did Harreld lie to the people of Iowa to get his job, but he told another lie immediately after he was hired, and two more lies just before taking office — all of them designed to obscure his prior relationship with Jerre Stead. Meaning not only was Harreld no innocent, but he clearly and repeatedly abetted his crony hire with lies of commission and omission, which he is now profiting by to the tune of $4M over five years. (And that’s not counting Harreld’s silence about the lies that others told, which he new to be lies at the time — like Stead’s false claim that Stead only learned about Harreld’s interest from a list of candidates.)

For example, in a video clip from his candidate forum, only two days before his done-deal appointment, you can see Harreld forcefully responding in the negative to a question about possible conflicts of interest with members of the search committee. Three days later, in the Gazette/KCRG article quoted above, Jerre Stead exposed Harreld’s lie by acknowledging that they had worked together in the past.

Stead said he first encountered Harreld earlier in his career, in 1993, while he was working for National Cash Register and Harreld was with Boston Market Company. Stead said he recalls being impressed with Harreld, the team he was on, and its vision for the then-small business.

Harreld’s company ended up using NCR equipment in its 1,300 Boston Market restaurants, according to Stead and media reports.

Two months later, on the day before he took office, Harreld acknowledged his lie, albeit in mealy-mouthed fashion:

Other critics among the UI faculty have expressed concerns about potential conflicts of interest arising from Harreld’s longstanding relationship with Stead, who represented the UI Foundation on the search committee.

“I would say he was more of a coach,” Harreld said to a question about whether he and Stead had ever been in business together. “Yes, I think if you actually go back through, technically, he was working for an organization that was trying to sell something to us. Or I was working with an organization (trying to sell something to him). Both of us have had multiple moves. … I view him as very much a mentor of mine at various stages of my career.”

In early September, only moments after he was appointed — and only one day before Stead’s symbiotic lie was published on the KCRG site — Harreld asserted that his candidacy has been prompted not by Stead, but by the president of another Big Ten school, which was later confirmed by both Robillard and Purdue President Mitch Daniels. Except it turned out they were all lying, because Jerre Stead had in fact introduced Harreld to Rastetter in March.

Flash forward to the weekend before Harreld took office, and not only was the Mitch Daniels lie no longer operative, but in its place, in a matter of two days, Harreld told two different lies in his ongoing attempt to obscure the fact that Jerre Stead promoted his candidacy. First, in an interview with the Press-Citizen, Harreld claimed that some anonymous person at Boston Consulting put his name in play. Second, in an interview with the Gazette on the same weekend, Harreld acknowledged that Rastetter had called him, but claimed that he did not know who prompted Rastetter to call.

If you are a state employee in Iowa, and you lied to get your job, and lied to keep your job, and lied not once, not twice, but three more times to protect the people who rigged your hire, not only should you not receive $1M in deferred compensation, you should be fired. Because the Iowa Board of Regents clearly wanted to hire Harreld, however, and went to the time and state expense of authorizing a fake $350K search to validate his crony appointment, it is unlikely that the board will cut Harreld lose. What should be possible, however, is to reach an administrative settlement in which the board reduces Harreld’s deferred compensation by $350K, in order to reimburse the state — along with promising not to pass Harreld another $350K in the future if his contract is extended.

Mark Barrett