Summary:
- In November 2013, Chicago’s Alphawood Foundation announced a donation to SOAS of £20 million, one of the largest ever private gifts to a UK university. Of the total, £15 million was to support the study of Hindu and Buddhist Southeast Asian art and £5 million to pay for the renovation of SOAS’s Senate House wing.
- It is now revealed that the Alphawood Foundation fulfilled the £20 million pledge in US dollars, through installment payments spread over four years. In the gift agreement, SOAS guaranteed Alphawood a ceiling on the amount of dollars it would pay in total, no matter how exchange rates moved. All foreign exchange risk on $30+ million of payments was thus shifted from Alphawood to SOAS.
- By the time the eight installments were completed in December 2017, SOAS had accumulated a loss on dollar-pound conversions of £100,686.
- SOAS claims it is not to blame for the deficit because it was caused by fluctuating exchange rates between the time Alphawood determined its exchange rate and when Alphawood actually transferred the funds for each installment.
- Foreign exchange rates are constantly subject to flux. This fact in itself does not make losses inevitable. The deficit was due to SOAS management’s failure to safeguard in any way against the foreign exchange rate risk to which it exposed itself. Hedging risk is a basic task for any financial manager with foreign currency exposure, as any SOAS undergraduate Finance student can tell you.
- SOAS covered the loss by deducting it from the endowment fund designated for academic research in Southeast Asian art.
- How can SOAS use £100k in research funding to pay for a management mistake at the same time that it regularly solicits alumni and others for various fundraising campaigns considerably less than £100k?
- This is another example of incompetent management of donations at SOAS and in particular in relation to the Southeast Asian Art Academic Programme.
Below, I discuss this situation in further detail based on the emails and data provided by SOAS under the Freedom of Information Act.
Background: Risks Taken and Ignored
The Alphawood Foundation is a US-based charity funded by businessman and Asian art collector Mr. Fred Eychaner, a former student of SOAS’s Postgraduate Diploma in Asian Art programme. In November 2013, it was announced that the Alphawood Foundation had awarded SOAS £20 million, of which £15 million was earmarked “to advance the study and preservation of Hindu and Buddhist art in Southeast Asia” through a large scholarship programme, three new endowed academic posts, and research funding. The other £5 million was given to fund renovation at SOAS’s Senate House Wing.
The £20 million gift had a great impact on SOAS’s balance sheet. At the time, the university’s endowment assets totalled just £20.8 million, of which permanent endowments were £17.9 million. As of July 2017, the most recent data available, the Alphawood permanent endowment of £11.4 million constituted 31% of SOAS’s total permanent endowment of £36.1 million. The Alphawood donation should have been negotiated and managed with the utmost care.
The Alphawood Foundation and SOAS agreed and signed a Deed of Gift on 24 October 2013. The amounts pledged by Alphawood were specified as “£15,000,000” and “£5,000,000.” Note the amounts are stated in pounds sterling. There is no modifying language, such as, “£15,000,000 or the equivalent in US dollars.” However, Section 4.2 of the Deed of Gift enabled the donor to pay in dollars:
“For the purpose of ascertaining the amount of each instalment due from the Donor as set out in Schedule 2 in US dollars, the rate of exchange for converting the US dollar currency of the Donor into pounds sterling which shall be applied at the date when each instalment falls due shall be 0.6185 (being the rate of exchange quoted in the UK Financial Times newspaper on the date hereof).”
Section 4.4.2 provides:
“In the event of any future upward [sic] change in the rate of exchange after that date (resulting in a higher number of US dollars required to purchase a pound sterling) at the date of an instalment, the relevant instalment amount shall be at the rate specified in 4.2 and any shortfall in relation to the pounds sterling amount specified in Schedule 2 shall be at SOAS’s risk.”
The effect of these clauses was to place an upper limit on the amount of dollars that Alphawood would pay out in total. Its maximum obligation would be $32,336,297 (£20,000,000/£0.6185). If, at any time during the four years, the dollar weakened to a rate lower than £0.6185 per dollar, then Alphawood could continue to calculate its payments at the higher rate of £0.6185 and SOAS would bear any exchange deficit.
Alphawood’s Dollar Savings, SOAS’s Sterling Deficits
The actual dollar payments from Alphawood and their conversion to pounds by SOAS are summarized in a document prepared by an administrator of the Southeast Asian Art Academic Programme in February 2018. For the first two installment payments, Alphawood calculated its US dollar amounts according to the rate of £0.6185 set in October 2013. Thus, in December 2013, Alphawood owed £5,886,700 and transferred to SOAS $9,517,681 (£5,886,700/£0.6185). SOAS converted the $9,517,681 at the rate of £0.6113, yielding £5,818,158, or £68,542 less than the expected £5,886,700. The next payment from Alphawood, in May 2014, was supposed to be for £4,100,000. Based on the October 2013 exchange rate, Alphawood transferred $6,628,917, which was converted by SOAS to only £3,941,326, or £158,674 less than expected. Thus, after the first two installments, SOAS had a deficit of £227,216.
For the remaining six installments paid by it through 2017, the Alphawood Foundation abandoned the October 2013 exchange rate and used more up-to-date market rates: this was because the pound had a general downward trend during the four years, enabling Alphawood to pay out fewer dollars to meet its pledge. For the five payments from December 2014 through October 2016, the exchange rate achieved by SOAS was more favorable to SOAS than the rate used by Alphawood, so that SOAS received in total £187,588 more than it expected from the conversion of the third through seventh installments. On the final, eighth payment, in December 2017, however, SOAS’s conversion rate was lower than Alphawood’s and resulted in a loss to SOAS of £61,058.
In the end, the Alphawood Foundation paid a total of $30,353,386, a ‘saving’ (reduction in accounts payable) of $1,982,911 versus the $32,336,297 it was prepared to pay according to the Deed of Gift. SOAS, on the other hand, received a final total of £19,899,314, representing a deficit of £100,686 versus the £20,000,000 pledged by Alphawood.
This £100k may appear small compared to £20 million. But £100k can also be put into perspective with these figures:
- SOAS undergraduate tuition fees: £9,250 (UK) / £16,907 (Overseas)
- SOAS Master’s in humanities tuition fees: £9,225 (UK) / £18,980 (Overseas)
- Median-paid SOAS employee renumeration (incl. salary & benefits): £40,302
I am sure all of us have an idea of what we would do with £100k.
Why Was There a £100k Deficit?
Here is the explanation for the loss given by SOAS:
“Alphawood calculated the exchange rate on the day before the payment was due but it then took some months before the payment was authorised and actually paid across, by which time the rate may have moved but Alphawood still transferred the dollars they had calculated at the day before the payment was due. This is the reason for the currency deficit, not due to the any [sic] subsequent translation by SOAS into sterling.” (p. 5 of this email exchange)
In other words, SOAS claims that there was a long gap between when Alphawood set its exchange rate and when it actually transferred funds, during which time the exchange rate moved, causing SOAS to convert the dollars at disadvantageous rates. What is left out of this explanation is that (1) SOAS, in the Deed of Gift, specifically authorised Alphawood to pay in dollars – with a backstop exchange rate – thereby exposing SOAS to foreign exchange rate risk, and despite this, (2) SOAS did nothing to mitigate these risks.
Were someone to say, “My house got flooded because it rained,” we would ask, “Did you fix your roof before the storm arrived?” Rain is a fact of life; one protects against it with a solid roof. The fact is that foreign exchange rates are constantly subject to fluctuation. The foreign exchange loss was due to SOAS’s failure to safeguard itself against the risk of adverse movements. At the least, SOAS could have sought to work with its bank and Alphawood to agree a method that would at least approach, if not achieve, the expected amount of pounds. There are financial instruments such as forwards and options which are commonly and regularly used by institutions and even individuals to mitigate exchange rate risks and which can be structured to suit specific situations. Why didn’t SOAS seek advice from its banks and financial agents?
Another surprising aspect of this situation is that through the four years of payments, SOAS never mentioned the foreign exchange deficit to Alphawood. By May 2014, after the first two installments were paid, SOAS’s deficit stood at £227,216. However, SOAS said nothing of it to the Alphawood Foundation, even as, following each payment, the Development Department sent a confirmation receipt to the Foundation. (see p. 6 of email exchange) Given that the Deed of Gift clearly states that the amount of the donation was £20,000,000, and Alphawood declared a clear wish to donate that amount, it would have seemed entirely reasonable for Development to have informed the Alphawood Foundation of a six-figure foreign exchange deficit. As it is, SOAS management did not notify Alphawood until March 2018, three months after all of the payments had already been completed.
Using Research Funds to Cover Loss Caused by Managerial Incompetence
That the years-long deficit drew no concern until this year should be a grave concern to those who are in charge of SOAS. To be fair, there has been turnover in most senior management roles at SOAS since the Deed of Gift was signed in 2013; however, managers, neither then nor now, seem to have thought the exchange rate risk a problem. Initially, the deficit was placed in the accounts of the Faculty of Arts & Humanities, and then at some point it was transferred to the account that pays the salary of the administrator of the Alphawood-funded Southeast Asian Art Academic Programme (SAAAP). (see pp. 1-2 of disclosed emails) In late 2017, this administrator noticed the account’s falling balance, and with the help of Finance Department staff, reconstructed the history of the foreign exchange deficits. (see pp. 11-14 of disclosed emails) The SAAAP administrator then brought the deficit to the attentions of the Chair of the Board of SAAAP, Dr. Tamsyn Barton, and the head of the university, Ms. Valerie Amos. After securing Alphawood’s permission in March 2018, they deducted the £100k loss from the SAAAP Academic Programme Support Fund, the endowment fund established to finance Southeast Asian art research. (see pp. 1-9 of disclosed emails and the memo prepared by SAAAP’s administrator for Alphawood. I note that in the emails provided to me, the SAAAP administrator and rank-and-file Finance staff are shown performing their work with diligence; in this situation, senior administrators must bear responsibility for dropping the ball.)
Why was the deficit taken out of the Academic Programme Support Fund? SOAS noted that the Deed of Gift specifies that capital may be taken out of this fund “to meet any shortfall in income.” (memo) But was it intended to pay for managerial mistakes? SOAS also states that that fund’s invested capital had increased in market value by £553,895 (from £1,886,200 to £2,440,095) since 2013 and so the deduction of £100k could be undertaken “without comprising any area of our work.” SOAS management claims this deduction is a “normal financial management action.” (see p. 6 of email exchange) However, market investments go up, and they go down. SAAAP is lucky that, at this time, it has sufficient investment wins to offset the £100k loss. But the deduction reduces amounts available to fund future research and to cushion against potential future investment declines. Also, the full £100k loss was charged to this fund even though the Southeast Asian art programme is only 75% of the gift from Alphawood.
Should the use of academic research funds to cover managerial financial errors be described as “normal,” as SOAS would have it? Is this a one-off case, or, have similar actions been taken before? Is the fact that this is “normal” an indication of a problematic attitude to financial management in SOAS Development? In this regard, it is interesting to consider an email sent in December 2017 from the Acting Head of Development, Ms. Ruth O’Hanlon, to the Director (head) of the university, Ms. Amos. (see p. 16 of disclosed emails) The Acting Head of Development stated she was “very happy” to report the receipt of the final installment from Alphawood, though “just for your information,” she noted that following the sterling conversion, SOAS received £1,360,927, which is £61,073 less than the £1,422,000 expected from Alphawood. Nonetheless, she wrote of this payment, “It is great news.”
To be fair, the Acting Head of Development may well have inherited this unthinking approach to the Alphawood deficit from predecessors. But she – like the Director of the university – is a Member of the Board managing the Alphawood Programme. For 2017-2018, the Board approved funding for 23 Southeast Asian art projects, the largest of which was £55,000 and the smallest £325 (pp. 55-57, SAAAP annual report). Was there no contemplation of the value of £61,073 for the Alphawood Programme?
This breezy acceptance of a £61k loss is also incongruous with the reality of fundraising at a small university. SOAS’s endowment funds, both permanent and expendable, total only £42.2 million as of 31 July 2017, the most recent data available. SOAS crowdfunds a number of modest-sized programmes through appeals to alumni and others. For instance, the SOAS “Questions Worth Asking” campaign to raise money for academic research is crowdfunding £25,000. Can SOAS, on the one hand, ask us to give our hard-earned savings to such campaigns, while, with the other hand, it waves away a £100k loss on another donation? This is a question worth asking.
