University Endowments Under Fire: Legal and Reputational Risks in an Era of Governance Scrutiny

The governance of university endowments has become a lightning rod for political and ethical controversy in 2023–2025. As institutions of higher education grapple with mounting legal challenges, reputational damage, and shifting regulatory landscapes, the traditional model of endowment management is under existential threat. From mismanagement scandals to politically motivated tax hikes, the risks facing these financial engines of academia are reshaping investment strategies and institutional priorities.

Political Pressure and Taxation: A New Era of Uncertainty

Congressional Republicans have made university endowments a central target of their fiscal agenda. Proposals to increase the endowment tax from 1.4% to as high as 35% for institutions with assets exceeding $10 billion reflect a broader ideological critique of elite universities' spending on diversity, equity, and inclusion (DEI) initiatives, according to a Forbes analysis. The Woke Endowment Security Tax Act, for instance, includes one-time levies on the wealthiest institutions, framing endowments as tools of "woke" activism rather than educational stability.

These proposals are not hypothetical. In March 2025, the U.S. government canceled $400 million in federal funding for Columbia University over concerns about campus safety and its handling of antisemitic protests, according to an Observer report. Such actions signal a willingness to weaponize financial pressure against institutions perceived as misaligned with political priorities. Meanwhile, proposed changes to endowment tax calculations-such as excluding foreign student revenue-could expand the tax net to include mid-sized institutions in blue states, the Forbes analysis warned.

Governance Failures: A Case Study in Mismanagement

While political forces loom large, internal governance failures have also exposed endowments to legal and reputational risks. Averett University's lawsuit against its former CFO and an investment firm, Global Strategic Investment Solutions (GSIS), highlights the vulnerabilities of smaller institutions. The suit alleges that unauthorized withdrawals of nearly $20 million-used for margin loans not approved by the board-reduced the endowment to 25% of its value by 2024, the Forbes analysis reported. The university was forced to implement drastic cost-cutting measures, including program eliminations and staff furloughs.

This case underscores a critical issue: the lack of transparency and oversight in endowment management. Unlike Ivy League institutions, which often have robust investment teams and external auditors, smaller universities may lack the infrastructure to detect or prevent such mismanagement. Even elite institutions, however, are not immune. Harvard's endowment, for example, delivered an 8.3% return in fiscal 2024-well below the S&P 500's performance-and has resorted to issuing $434 million in tax-exempt bonds to buffer against potential federal funding cuts, according to the NACUBO-Commonfund study.

Reputational Risks and the DEI Dilemma

Reputational damage has become a collateral casualty of the political battles over endowments. Columbia University's handling of pro-Palestinian protests in 2024 drew national scrutiny, leading to federal funding reductions and a public relations crisis, as the Observer reported. Critics argue that universities' DEI initiatives have become politicized, fueling perceptions of bias and mismanagement. A Forbes article noted that, according to a 2024 Pew Research study, only 36% of Americans express significant confidence in colleges-a decline that has real financial implications.

The reputational hit is not merely symbolic. As public trust erodes, institutions face pressure to redirect endowment spending toward "traditional" academic priorities rather than DEI programs. Yet, the FY24 NACUBO-Commonfund Study reveals that nearly half of endowment spending supports student financial aid. Increased taxation or redirected funds could exacerbate affordability crises for low- and middle-income students, creating a feedback loop of declining enrollment and further financial strain.

Strategic Adaptations: Debt, Liquidity, and the Future of Endowments

Faced with these challenges, universities are rethinking their financial strategies. Debt issuance has surged, with Ivy League schools raising record levels of bonds to offset uncertainty, the NACUBO-Commonfund study finds. Harvard's 2025 bond offering, for instance, reflects a broader trend of prioritizing liquidity over long-term growth. Smaller institutions are also pivoting, with Cerulli Associates noting increased participation in secondary markets and alternative investments to stabilize returns, the Observer reported.

However, these adaptations come with risks. Reliance on debt increases vulnerability to interest rate fluctuations, while alternative investments often lack the transparency of traditional assets. For investors, the shifting landscape raises questions about the sustainability of endowment models and the ethical implications of funding institutions under governance scrutiny.

Conclusion: A Tipping Point for Endowment Governance

The confluence of political pressure, governance failures, and reputational risks has created a perfect storm for university endowments. While elite institutions leverage debt and alternative investments to weather the storm, smaller universities like Averett face existential threats from mismanagement. For investors, the lesson is clear: endowments are no longer insulated from the broader political and ethical currents shaping higher education. As tax policies evolve and governance standards come under scrutiny, the future of these financial pillars will depend on transparency, adaptability-and perhaps, a reimagining of their role in society.