Governance Challenges Facing Higher Education

By Jeremy Tennenbaum, Vanguard May 13, 2021 Blog Post

COVID-19 has inflicted significant financial damage on colleges and universities—both public and private—throughout the United States. Faced with intense pressure on their business models, many of these institutions have implemented furloughs and hiring freezes, reduced benefits, and delayed capital spending. Others have cut salaries, reduced course offerings, and eliminated departments as well as faculty and staff positions.

While cutting costs may be necessary for a college to keep its doors open, a single-minded focus on financial health could erode the culture and atmosphere that attracts students, professors, and employees in the first place. So how can institutions navigate this narrow path?

Let your nonprofit fiduciary duties act as your North Star. These include the duties of care, loyalty, and obedience. In this critical time, it’s important for fiduciaries to remember that they are responsible not only for the financial health of the institution, but for helping it continue its mission.

Imagining possible futures

According to one estimate, the pandemic could reduce revenues for 107 of the country’s top higher education institutions by 14% in aggregate for fiscal years 2020 and 2021.1 It’s unclear how much of this decline is permanent or how long-lasting the impact will be.

Many boards, particularly at smaller colleges and universities, risk being caught wrong-footed as they navigate this challenging terrain. While boards have scrambled to reduce near-term costs, it’s important that they assess their longer-term financial outlook too.

This could involve tasking their audit committees (or a special sub-committee) to work with administrators to develop medium- and long-term financial scenarios. Starting three years out, they can then develop a range of projections for revenues, expenses, debt and other balance sheet categories. The goal should be to develop best- and worst-case scenarios rather than a consensus view of the future.

Institutions may also wish to examine their cost structure and the tools they have available to reduce those costs. This exercise may take on additional urgency if, as we suspect, the expansion of many institutions over the past 20 years has increased fixed costs.

Cutting costs without hurting culture

We saw many schools rush to take dramatic action in the immediate wake of the pandemic. That sense of urgency was justified under the circumstances. However over the long term, a more considered approach makes sense. Committees can assess the relative merits of reducing staffing overall versus on a department-by-department basis, or the interplay between freezing tuition while stepping up fundraising efforts. Perhaps most importantly, committees should not only discuss the magnitude of different ways of reducing their breakeven point, but also the potential impact of those methods on the culture of the institution.

Cutting costs without harming culture can be tricky, particularly as many boards prefer to leave administrative details to the institution’s president. That said, if the board has communicated a sense of urgency to the administration about right-sizing the college’s cost structure, it bears a responsibility to ensure that shared governance models aren’t jettisoned with resulting harm to the institution’s mission and identity.

In the end, it’s about assessing trade-offs. This is an area where the three fiduciary duties, especially the duty of care, can serve as a guide:

Determining what is in the best interests of the institution is left to the governing board’s sound judgment under the duty of care. It will necessarily involve a balancing of interests and priorities appropriate to the institution’s mission and consistent with its strategic priorities. This should include explicit attention to the trade-offs inherent in achieving balance among employees’ interests (maintaining quality of education and protecting the institution’s assets), student interests (maintaining affordability), physical assets (buildings and grounds), fiscal assets (endowments and fund balances), consumer value of the degree (cost of degree attainment versus future job earnings), and community interests in the institution (jobs, economic development). 2

Taking proper time to assess trade-offs is essential. For example, eliminating tenure-track positions might lower costs but make it harder to recruit high-quality professors. Similarly, cutting sports programs that are highly valued by students and alumni might save budgetary dollars but decrease contributions. In short, discussions should involve more than just monetary considerations. While a board may reach the same decision they would have anyway, at least they’ll have reached it after thinking through all the elements.

These are difficult times for all of us, but we owe it to our institutions to do whatever is in our power to help them endure for the future, both financially and culturally. For more insights and solutions to the governance, operational, and financial challenges facing nonprofits, visit our Key Considerations for Nonprofits site.

1 “How Much has Covid cost colleges? $183 billion,” Paul Friga, The Chronicle of Higher Education, March 19, 2021

2 See the “AGB Statement on the Fiduciary Duties of Governing Board Members,” July 24, 2015, p. 6, Association of Governing Boards of Universities and Colleges (AGB)

Jeremy Tennenbaum is the Manager and Senior Nonprofit Strategist at Vanguard Institutional Investor Services.

References and Resources

With Thanks to AGB Sponsor: Vanguard

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Jeremy Tennenbaum
Manager and Senior Nonprofit Strategist
Vanguard Institutional Investor Services
jeremy_tennenbaum@vanguard.com

Opinions expressed in AGB blogs are those of the authors and not necessarily those of the institutions that employ them or of AGB.