‘Pursuing academic excellence in challenging economic times’

Good afternoon and welcome. I am pleased to see so many of you here today. This past year has presented a number of new challenges; at the same time, Stanford has made important progress in several key directions. This afternoon, I would like to briefly review some of the progress we have made and then turn my attention to the implications of the changed economic environment and our pursuit of excellence. After my remarks, I have invited Kathleen Sullivan, Ewart Thomas and Michael Keller to join me in a panel discussion on strategies we might use to enhance Stanford’s teaching and research programs in a financially constrained environment.

Highlights of the Past Year

Let me start by sharing a few of the highlights of the past year.

At last year’s Academic Council meeting, I spoke about the importance of multidisciplinary initiatives, and several such projects have made substantial progress.

This fall, the Institute for International Studies, in partnership with the Law School and the Graduate School of Business, established the Center on Democracy, Development and the Rule of Law (CDDRL). As we have seen so visibly in the last month, countries in transition face difficult and complex issues that cannot be addressed by a single discipline. We are excited to be playing a role in understanding the critical interaction of political, legal and economic development throughout the world.

This past fall, we celebrated the 40th anniversary of one of our best-known research centers, the Stanford Linear Accelerator Center. As the frontiers in experimental particle physics move beyond the capabilities of the SLAC facility during the next decade or two, our colleagues in physics both on-campus and at SLAC have searched for new opportunities to leverage our incredible research capability. In March, we inaugurated the Kavli Institute for Particle Astrophysics and Cosmology that will bring together some of the brightest minds in cosmology, physics and particle astrophysics. This joint initiative by faculty on campus and at SLAC will explore fundamental questions about the origins and evolution of the universe.

Last June, after several years of discussion and planning by our colleagues in the Schools of Medicine and Engineering, the trustees approved the creation of the new Bioengineering Department. It is the first department at Stanford to be established jointly in two schools, and our colleagues, Professor Scott Delp from Mechanical Engineering and Professor Paul Yock from Medicine, will lead this new department. Although we recognize that there are challenges in bridging disciplines that are culturally and operationally quite different, the opportunity to focus on translating discoveries in the biosciences into clinical advances in human health is too compelling to ignore.

At last year’s meeting, I stated my belief that the environmental area held great potential for multidisciplinary research and teaching collaborations. While a committee of faculty charged by the provost is actively working on a plan for a broad environmental program, one initiative in this area was launched in November: the Global Climate and Energy Project, or G-CEP for short. G-CEP will explore economically viable methods for the environmentally benign generation of energy, one of the most challenging problems we face both in the developed and developing world. Professor Lynn Orr, after serving as dean of the School of Earth Sciences for eight years, is leading G-CEP, and Professor Chris Edwards from Mechanical Engineering is the deputy director. An international group of companies, representing a wide range of energy producers and users, anticipate investing up to $225 million in this research over the next 10 years.

This past October we dedicated Wallenberg Hall. Originally built at the close of the 19th century, Wallenberg Hall was the last major building in the quadrangle to undergo seismic retrofitting in a series of projects that began more than 20 years ago.

In addition to the innovative, high-technology teaching spaces, Wallenberg Hall houses two exciting new multidisciplinary research initiatives. Media-X focuses on the interaction of people and technology. It brings together faculty from a range of departments, schools and centers, including the Center for the Study of Language and Information, Linguistics, Philosophy, Computer Science, English, Psychology, Engineering and Education to study issues in how people relate to and use technology as well as the role of artistic execution in improving this interaction.

Also housed in Wallenberg Hall is the Stanford Humanities Laboratory, or SHL, a 3-year-old experiment in undertaking humanities research using a collaborative model. Resource rich and encompassing multiple forms of expression, including exhibits, artifacts and interactive displays, SHL is led by Professor Jeffrey Schnapp. The Laboratory already has sponsored 12 research projects incorporating faculty from History, French and Italian, Education, Asian Languages, Drama and Classics, as well as staff from the libraries and the Cantor Center.

On several occasions during 2001, I spoke about the importance of continuing to enhance the gender and ethnic diversity of our faculty, as well as our graduate students. In 2002, the provost established the Diversity Action Council to generate recommendations that would promote continued progress on these important goals. One area of particular focus was improving diversity among our graduate students, who represent the future pool of faculty. To address this issue, Stanford faculty and staff created Graduate Diversity Admit Weekend. This year 37 percent more admitted candidates attended than last year, and, based on preliminary numbers, the fraction of those attending the event who are enrolling for the next academic year has risen to an astonishing 85 percent.

In the area of undergraduate student diversity we are considered by many to be a model among private universities. In January of this year, I reaffirmed Stanford’s commitment to a diverse undergraduate student body, and in February, we joined MIT in filing an amicus brief in support of the principle of considering ethnicity as one factor in the admissions process. If we are to prepare our students to be the next generation of leaders, we must have a diverse student population that learns from others with different backgrounds, strengths and talents.

Two and one-half years ago during my inauguration, I mentioned the importance of improving our relations with the local communities, through a variety of steps including improved outreach. One of our successful outreach programs has been a community reading project, “Discovering Dickens.” Over a six-month period, with the help of Continuing Studies and others at Stanford, Dickens’ Great Expectations was serialized from holdings in our Special Collections archives and published on the web for weekly reading and discussion. Victorian England read Dickens in serial installments — Internet distribution was our innovation. Perhaps it was the power of the Internet, but the response to the Dickens project far exceeded our expectations, and more than 6,000 readers participated worldwide.

On April 6 the public was invited to join us on our second Community Day. From the Centennial Celebration for Memorial Church to the Founders Day ceremonies to the numerous family events, more than 8,000 people came to campus for this year’s Community Day. I want to extend a special thanks to the many staff and student volunteers who helped make our second Community Day such a wonderful experience.

Greatness comes from excellence, and much of our focus over the past 10 years has been on achieving excellence in our undergraduate programs. As you all know, at my inauguration in October 2000, I announced that we were embarking on a five-year, $1 billion Campaign for Undergraduate Education, or CUE. Given the challenging economic times we have faced, you may be wondering how we have fared in fundraising for CUE. With the remarkable support and generosity of Stanford alumni and friends around the world, we have raised more than $850 million. I want to recognize the incredible effort of development staff that was needed to achieve these results. Of course, the success of this campaign is also a tribute to the loyalty and affection our alumni have for Stanford, and I will return to the importance of this later in my talk.

Although we have had success in development and celebrated some notable academic achievements this past year, the reality is that we face some significant challenges ahead. We must ask ourselves how we can meet those challenges and continue to achieve excellence.

Challenges Ahead

This week’s BusinessWeek has a banner on its front cover that reads: “Colleges: The Coming Financial Crisis.” Indeed, many colleges do face a crisis, but I can tell you that neither the provost nor I expect that a crisis is coming to Stanford. As the provost said when he talked about the budget challenges: “Don’t panic!”

Thus, the purpose of discussing our financial challenges is not to instill fear but to provide information, so that we can collectively make the best possible decisions about the future of Stanford.

I would like to focus on three specific financial challenges, which are, compared to our peers, Stanford’s distinctive challenges. These are the size of our endowment, the sources for undergraduate financial aid and the university’s debt capacity.

Stanford’s endowment ranks among the largest in private universities at $7.6 billion at the close of the last fiscal year, and endowment income covered almost 18 percent of our fiscal year 2002 expenses. In comparison, however, Harvard’s endowment was $17.2 billion, and its endowment income covered 32 percent of its operating budget. Furthermore, although our endowment is the fifth largest in the country in absolute terms, on a per-student basis, we do not even rank in the top 10. Of course, we have always done more with less, but doing so requires us to be selective in our choices and more efficient in our execution.

Stanford has long prided itself on maintaining a need-blind admission policy, but we are faced with a growing problem in meeting this commitment, and recent increases in financial aid packages by our peers have worsened the strain. For example, over the past five years, Princeton has introduced significant improvements to its financial aid packages by reducing and, in some cases, eliminating the use of student loans.

Princeton was able to implement that change in financial aid policy because 80 percent of its undergraduate aid comes from endowed or restricted funds. Yale gets more than 70 percent from endowed or restricted funds. Stanford, with its smaller endowment for financial aid, gets less than 50 percent of its undergraduate aid from endowment or restricted funds. Instead, we must find more than $20 million every year from sources that could otherwise be used for critical academic needs. Realizing the importance of a larger endowment for financial aid, we set a goal to raise $300 million for financial aid as part of CUE. Even this amount, however, will likely leave us with a relatively smaller endowment for financial aid than most of our close peers.

The other key piece of our financial picture is debt. Why is debt important? Debt is how we finance most of our capital expenditures, including new academic buildings, housing and other facilities. Two primary factors limit the amount of debt the university can take on. One is the ability to service the debt with limited budgets.

The second factor is the ratio of debt to assets, which is a measure of the financial strength of an institution. Among a set of six peer universities, Stanford has the second highest ratio of debt to assets — a ratio that is 1.3 times higher than the average of the peer group. Because of our need to preserve emergency debt capacity to deal with a possible earthquake, the trustees have decided wisely to place an upper limit on our debt to asset ratio. With the reduction in assets arising from the falling endowment and significant increases in new debt incurred during the 1990s, we are rapidly approaching that limit.

The Potential

At the same time as we face challenging economic times, we are uniquely positioned to pursue a thoughtful plan of enhancing the excellence of the institution with high probability for success. Why am I confident about our prospects?

First, we have an extraordinary faculty known as outstanding researchers around the world and committed to excellence in teaching. Our staff display a comparable level of dedication and outstanding service without which the faculty could not continue to be so effective.

Second, our students are also extraordinary: At both the undergraduate and graduate level, we attract the very best young minds in the world. In the undergraduate program and most of our graduate programs, admission has grown significantly more competitive over the past 10 years.

Third, our educational and research programs are widely admired by colleagues outside of Stanford. More than 75 percent of our departments are ranked among the top 10 in their discipline based on surveys of our peers. Our breadth is also amazing. No institution of our size can match our combination of breadth and excellence.

Maximizing Our Potential

It is on this broad platform of excellence and on a vision of exciting new opportunities that Stanford should plan a future that maximizes its potential. Given the array of financial handicaps under which we labor, how can we fulfill our dreams for Stanford?

First, I believe that our faculty will continue to display a pioneering spirit and an entrepreneurial character that have characterized Stanford from its beginning. Our faculty has shown an ability to foresee new directions and new opportunities, and to grasp those opportunities. There is ample evidence for this across the university — from the new initiatives I talked about earlier to increases in sponsored research, which demonstrate the ability of our faculty to put together compelling new research programs.

Second, the leadership of the institution will need both wisdom and foresight as we shape a vision for Stanford. As many of you probably know, we have been engaged in a universitywide planning process for the past few years, but the hardest part of that task is before us — making tough choices among competing priorities. We must choose how much to devote to maintaining existing strengths, what areas need increases in resources, what new ventures to initiate and, perhaps most difficult of all, what areas to deemphasize. These will not be easy choices, given the constraints of dollars and of space. For example, I anticipate that we will need to make difficult choices between building new facilities and building additional endowment.

Third, there is the remarkable dedication and loyalty of our alumni and friends. Simply put, much of Stanford’s success in the past 40 years has been enabled by generous alumni and friends who have made critical investments in this university. For example, in the last several years we have ranked among the top three universities in total gifts. Additionally, over the last 10 years, we have ranked first among our peers in the relative growth in our endowment from gifts. The success of CUE should remind us that a clearly articulated, compelling vision, which convincingly demonstrates that we have set priorities and made choices to forgo some possibilities, is critical to getting the philanthropic support of our alumni and friends.

Conclusion

This has been a challenging year, and there will be more difficulties ahead. But I hope you realize that with every decision we make today, we are investing in tomorrow. Personally, I am very optimistic about the future of this university. Our faculty, staff and students are incredibly talented, resourceful and deeply committed to the excellence of Stanford. The leadership within the schools and departments exemplifies the pioneering spirit that has served us so well. And our alumni are a tremendous resource. I am confident that we will meet the challenge and ensure the university’s continued leadership in teaching and research.

Thank you for your attention this afternoon.