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Monday, January 10, 2005

Travel Expenses Prompt Yale To Force Out Institute Chief


January 10, 2005; Page B1

In the latest setback for the corporate-governance movement, Yale University's School of Management is quietly forcing out the prize-winning head of its International Institute for Corporate Governance over alleged expense-account abuse.

Florencio López-de-Silanes, 38 years old, allegedly double-billed Yale for about $150,000 in business-travel expenses since mid-2001, according to people familiar with the situation. The tenured finance and economics professor has made full restitution, they say. Under an agreement with Yale, he will remain on unpaid leave until his departure from the university in June. The embarrassing flap has sparked probes by both his employer and the World Bank, where he has been a governance consultant and helped train foreign corporate directors.

Neither Yale nor Mr. López-de-Silanes -- known as a strong advocate of prompt disclosure of corporate misdeeds -- has announced his planned exit. Responding to an inquiry from The Wall Street Journal, Yale spokesman Tom Conroy said, "He has resigned from Yale as a result of financial misconduct and irregularities in his role as director of the International Institute for Corporate Governance." He added: "Appropriate corrective actions have been taken."

Mr. Conroy also said that "Yale's audit department has undertaken a special examination of expense procedures at Yale to ensure best practices." He declined to say whether the pending broader review resulted from the López-de-Silanes affair. Mr. Conroy said Yale has "no plans" to issue a general announcement about Mr. López-de-Silanes's unpaid leave. He declined to comment about why the university isn't doing so.

In a statement prepared for the Journal, Mr. López-de-Silanes acknowledged his mistake. "I deeply regret any unintended harm," said the statement, issued Friday by his attorney Peter E. Fleming III. "I have taken appropriate corrective steps with all affected parties and I can offer no excuse except the intensity of my focus on my work. I am leaving Yale because it is the right thing to do for the Institute and all concerned."

A separate World Bank inquiry into various contracts awarded to Mr. López-de-Silanes "is continuing at this time," said Damian Milverton, a spokesman for the Washington bank, which seeks to alleviate poverty.

The Yale imbroglio comes in the wake of other brouhahas at some of the corporate-governance movement's leading lights. TIAA-CREF, a large institutional investor as well as a prominent governance activist, is the target of a Securities and Exchange Commission inquiry into a business relationship that its auditors entered into with two of the fund's trustees in 2003. The pair resigned their TIAA-CREF positions Nov. 30. SEC rules bar accounting firms from entering business ventures with their audit clients.

Similarly, Sean Harrigan, president of the California Public Employees' Retirement System, the nation's biggest public-pension fund and a veteran crusader for better corporate governance, wasn't reappointed by the state personnel board late last year after the fund came under fire for meddling in labor-union issues with little connection to improving shareholder return. Mr. Harrigan, a top executive of a food-workers' union, blamed his ouster on pressure from Republican politicians and business lobbying groups.

Governance experts fear fallout from the Yale incident. It's another example "of why leadership by example is fundamental" in the corporate and public sector, said Anne Simpson, executive director of the International Corporate Governance Network, a London-based group largely comprised of activist institutional investors. "We all need to make sure we are what we do, not just what we say."

Mr. López-de-Silanes, born in Mexico, was recently honored by the World Economic Forum as one of the 100 Global Leaders for Tomorrow. He has run the International Institute for Corporate Governance since Yale created the academic think tank in July 2001. The idea was to bolster the business school's visibility and promote better governance abroad. One of Mr. López-de-Silanes's working papers, according to a Yale Web site, is entitled, "Theft Technologies."

Ira Millstein, a long-time governance adviser for major companies, and Jeffrey E. Garten, the management school's dean, recruited Mr. López-de-Silanes from Harvard University's John F. Kennedy School of Government, where he was an associate professor. The new institute was a powerful lure for the young academic, a rising star being wooed by several universities.

Mr. López-de-Silanes soon attracted positive attention at Yale by advising stock-market commissions in several countries, among other things. On the other hand, he earned a reputation as a hard-driving boss who often demanded that assistants work 12-hour days seven days a week, one knowledgeable individual remembers. The globe-trotting governance specialist also preferred to amass his business-travel receipts for a year before seeking reimbursement, this individual reported.

Mr. López-de-Silanes "is no tougher on his employees than he is on himself," observed another person familiar with the situation. "The guy is an obsessive workaholic."

Unhappy subordinates began to complain about his difficult management style in late 2002. It's unclear whether those complaints finally prompted Yale to launch its investigation of Mr. López-de-Silanes last September. Officials uncovered alleged evidence that he double billed for hotels, flights and similar travel expenses, according to the second person familiar with the situation.

On Dec. 8, Mr. Garten summoned the senior faculty to divulge the inquiry during a tense, somber meeting. He told them Yale had found a pattern of financial impropriety and was negotiating with Mr. López-de-Silanes' attorney to avoid the messy process of removing his tenure, attendees recall. Through Mr. Conroy, Mr. Garten declined to comment.

Stripping a professor of his tenure, academia's ultimate sanction, rarely occurs. An estimated 50 to 75 tenured professors out of 280,000 in the U.S. lose their positions for cause each year and the number fired over financial improprieties "would be very small," said Jonathan Knight, an expert on tenure at the Washington-based American Association of University Professors.

Some of Mr. López-de-Silanes's colleagues are rallying to his defense. "I consider Florencio to be a great scholar and of great integrity," said Ivo Welch, a Yale finance professor. His purported financial misconduct "was more likely incredible stupidity and carelessness on his part rather than anything deliberate," Mr. Welch suggested.

"I am extremely saddened and distressed by these events," said Mr. Millstein, a Yale visiting professor, chairman emeritus of the institute's advisory board and a senior partner at Weil, Gotshal & Manges in New York.

Mr. Conroy said Yale won't pick a replacement for Mr. López-de-Silanes until it finds someone to succeed Mr. Garten, who previously announced he will relinquish his post this June. The School of Management revealed his decision last April; he currently is completing his second five-year term as dean.

Other faculty members say they are upset that Mr. López-de-Silanes can consult, testify as an expert witness and remain on the School of Management's Web site during his lengthy unpaid leave. Late yesterday afternoon, the biography posted there still identified him as the institute's director.

posted by Brian Moran @ 1:45 PM   2 comments

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