The Legal Risks of Divestment from Israel for University Endowments

There are many reasons why it’s a bad idea for university endowments to divest from Israel. Divestment serves to delegitimize Israel and puts the onus for solving the longstanding Palestinian-Israeli conflict on only one side. It could also likely lead to economic ramifications, such as reduced alumni giving and lower returns, as well as open up the potential for heavier taxation of endowment income.  

Beyond all of these arguments, universities that decide to divest from Israel could face more concrete obstacles to following through on it: They may be in breach of their fiduciary duties and even face legal risk in some states.   

Fiduciary Breach 

 
University endowments generally have a professionally staffed Investment Office and an Investment Committee. The Investment Office is responsible for analyzing and proposing investment strategies, as well as eventually implementing those strategies. The Investment Committee is responsible for reviewing asset allocation policies, endowment performance, and strategy proposals and has ultimate oversight over investment decisions. Investment Committee members are usually individuals with investment expertise and some members may also be trustees of the university. 

Among the fiduciary obligations of Investment Committees is a legal responsibility for duties of care, loyalty, good faith, confidentiality, prudence and disclosure when serving the best financial interests of the university through managing the endowment investment. 

Divesting from Israel “would be a breach of fiduciary obligation that could expose trustees to personal liability" for not prioritizing the financial health and efficiency of the endowment portfolio, Max M. Schanzenbach, a professor at Northwestern University Pritzker School of Law and an expert on fiduciary law, wrote in the Wall Street Journal. 

The Uniform Prudent Management of Institutional Funds Act (UPMIFA), enacted in 49 states (all but Pennsylvania), governs the management of institutional funds donated to charitable institutions. It was enacted to protect the assets of nonprofit institutions from misuse and loss.  

Among other things, UPMIFA provides guidance to those responsible for investment decision-making on behalf of nonprofit institutions, which includes most private and public colleges and universities. Nonprofits are encouraged to adopt spending policies that are not only aligned with donor intent but also flexible enough to accommodate economic changes, thereby preserving an endowment's principal over time.  

Under UPMIFA, voting to divest a university’s endowment from Israel could be deemed imprudent, as it is politically motivated rather than based on sound investment decisions and a decision made without adequate economic analysis. Violators of UPMIFA can face legal challenges, monetary penalties, or even loss of nonprofit status.  

State Laws 

Campus demands for Israel divestment stem from the longstanding anti-Israel Boycott, Divestment, and Sanctions (BDS) movement. Among U.S. states, there is broad bipartisan consensus opposed to BDS, with 38 states taking some action–laws, resolutions, and/or executive orders–to discourage BDS activities.  

State attorneys general could therefore take legal action against universities pursuing divestment from Israel, potentially leading to costly lawsuits and further legal complications. 

In some states, laws prohibit state entities from contracting with businesses or other entities that boycott Israel–meaning that universities that engage in the BDS movement could be jeopardizing existing state contracts and/or putting at risk other forms of state financial support of their institution.  

It’s important to note that these concerns extend to private universities in addition to public ones. Private universities may very well have contracts with state entities and/or receive financial support from the state (such as research grants or for student financial aid programs), all of which could be in jeopardy. And UPMIFA requirements apply if the university operates as a nonprofit organization or its endowment is used for charitable purposes – which is the legal structure of nearly all universities. 

University trustees and Investment Committee members who disregard the legal and fiduciary responsibilities associated with Israel divestment expose themselves and their institutions to significant risk. 

ADL publishes this piece in partnership with JLens.