Businessweek Archives

The Cracks In Stanford's Ivory Tower


People

THE CRACKS IN STANFORD'S IVORY TOWER

For Donald Kennedy, last year's Big Game was one to remember. As the annual football contest with archrival University of California at Berkeley neared the end, Stanford University's president could no longer bear to watch from the stands. Kennedy raced down to the sidelines, where he watched with elation as Stanford scored to narrow Cal's lead to 25-24 in the final minutes. When Stanford kicked a game-winning field goal with no time remaining, Kennedy rushed onto the field to celebrate amid the jubilant Stanford players and fans. Says senior Cameron Macky, a sportswriter for the Stanford Daily : "He's even more enthusiastic than I am."

But Kennedy, 59, hasn't had much else to cheer about lately. Stanford gets some $175 million a year in direct research funding from the federal government. Like other schools that receive these grants, it also gets reimbursed by Uncle Sam for overhead or indirect costs associated with the research. In Stanford's case, that's an additional $85 million or so a year, or roughly 20% of its operating budget. Last year, however, U. S. Navy accountant Paul Biddle took a close look at Stanford's books and alleged that the university may have overstated costs by as much as $200 million in the 1980s. Worse, Biddle discovered on the government's tab a long list of expenses related to Kennedy's university-owned home, such as $3,000 for a cedar-lined closet, as well as about $4,000 for a trustees' party following Kennedy's 1987 wedding.

Representative John D. Dingell (D-Mich.) has started a probe of how Stanford spends its research money, in conjunction with Congress' General Accounting Office, and may suggest tightening research funding. Plus, the Naval Investigative Service Command is conducting a criminal investigation. "How is the cost of putting cedar in a closet remotely relevant to organized research?" asks Biddle. "They were gilding the lily." Stanford officials say they know of no criminal wrongdoing, and no charges have been filed.

HUMILIATING. No one is claiming that Kennedy tried to profit from Stanford's billing practices. But the episode has been humiliating for him--and could jeopardize millions of research dollars. The timing couldn't be much worse: Although Kennedy has led a successful five-year fund-raising drive that is expected to raise $1.1 billion by February, 1992, a tight operating budget is forcing Stanford to cut $22 million in annual spending and eliminate 300 jobs. Fund-raisers are worried that angry alumni will begin to shut their wallets. "Anything that plants a crisis of confidencein people doesn't help you," declares Elizabeth Sloan, a Stanford development officer.

Initially defensive, Kennedy now concedes that many of Stanford's bills don't stand up under public scrutiny. But he maintains that the charges are more relevant to research work than they may seem. Functions at the president's house that involve faculty, including the party "introducing" his new wife, have legitimate business purposes, he argues. "They are in my judgment allowable," says Kennedy, who makes around $200,000 a year. "They just don't appear reasonable to most people."

Kennedy, a biologist by training, has had an intimate understanding of how government research funding works. The son of a U. S. Army officer, he earned bachelor's, master's, and doctoral degrees from Harvard University, coaching the ski team on the side. After four years on the Syracuse University faculty, he shot up Stanford's ladder, becoming chairman of the biology department at 34.

In 1977, Kennedy left for Washington, where he became commissioner of the Food & Drug Administration under Jimmy Carter. He was regarded as an activist regulator, plunging into public debates over saccharin, sodium nitrites, and laetrile, and often butted heads with industry. He tried unsuccessfully to ban saccharin and nitrites and refused to legalize laetrile, the controversial cancer treatment that remains unapproved for use in the U. S. He returned to Stanford as vice-president in 1979 and became president the following year.

'BEST JOB.' Friendly and unimposing in person, Kennedy makes a point of being accessible to students. He invites all comers to jog with him twice a week, and he makes cameo appearances in an annual student-written musical comedy. But he has also stirred up a few controversies. He stepped into a heated national debate a few years ago, when he advocated changing Stanford's Western Civilization course requirements for undergraduates to include more non-Western studies. More recently, his public call for a renewed emphasis on teaching angered some professors, who took it as a slap at research. And he raised eyebrows in 1987, when he divorced his wife of 34 years and two months later wed Robin Hamill, a university lawyer.

The research-funding mess is certainly the most embarrassing episode on his watch. In mid-March, he will have to face Dingell in congressional hearings. The Naval Investigative Service won't comment, but other investigators say it's looking into whether Stanford administrators knowingly overstated claims and if government overseers collaborated. Other colleges are watching carefully. Says David L. Goodstein, vice-provost of the California Institute of Technology: "The fear is that the partnership between government and universities is eroding and could fall apart on this issue."

Interviews with trustees suggest that Kennedy's job is not in jeopardy, and he says he has no plans to leave. "It's the best job in the world," he declares. But the pressure is certain to make some changes. Kennedy has already ordered Stanford to pay back the government almost $700,000, including the tab for his residence and for his post-wedding party. "We're not developing a bunker mentality about this," he says. To propose reforms in Stanford's accounting system, he has hired Arthur Andersen & Co. and formed a commission headed by retired Admiral Bobby Inman, former deputy director of the Central Intelligence Agency. He also hired Frank Mankiewicz, vice-chairman of Hill & Knowlton, to give him public-relations advice.

But the damage may already be done. The government recently declared that Stanford can only recover 70~ in indirect costs for every $1 of direct grant money it receives--down from 74~. That would eliminate $5 million from its $409 million operating budget. Because of the scandal, on Feb. 19 a Defense Dept. auditing agency recommended canceling 125 special agreements that let Stanford liberally define overhead costs. That could cost the university about $19 million a year. To Kennedy, running Stanford may still be "the best job in the world," but it isn't going to get any easier for a while.

QUESTIONABLE OVERHEAD

Donald Kennedy and Stanford have come under fire for aggressive accounting practices. Among the items charged to the government as overhead for research:

-- $2,000 a month in floral arrangements

-- $2,500 to refurbish a grand piano

-- $3,000 for a cedar-lined closet

-- $4,000 for Kennedy's 1987 wedding reception

-- $7,000 in bedsheets and table linens

-- $184,000 in depreciation on a yacht donated to Stanford's sailing program

DATA: BWMaria Shao in Palo Alto, Calif.


The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus