This article is part of the Finance Committee Chair Toolkit, a resource that highlights a variety of perspectives, including how to assess disruptive scenarios and what types of actions to consider.
Higher education is facing multiple crises at this moment and many believe the very business model is unsustainable. The AGB 2020 Trustee Index, which surveyed trustees during 2019, found that 85 percent of trustees (up 12 percent from the prior year) are concerned about the future of higher education over the next decade, with financial sustainability and affordability as the drivers for that concern. The path forward for higher education in the face of such significant challenges— declining enrollments, shifting demographics, reduced public funding, eroding public confidence, market disruption, and a social justice movement—requires imagination and innovation. Trustees have a critical role to play in securing the path to prosperity for their institutions and it starts by changing the way the governing board thinks about risk.
Governing boards must reimagine risk as the spark to innovation rather than as something that solely needs mitigation. The shift in the framing of risk is akin to a new paradigm. The new risk paradigm in higher education requires trustees to (1) have a vision that embraces risk, (2) understand and develop a risk appetite, and (3) foster a culture of innovation.
Context
The convergence of seismic issues this year has accelerated the reckoning for higher education. It is appropriate to characterize the environment colleges and universities now operate in as one marked by volatility, uncertainty, complexity and ambiguity—a concept commonly known as VUCA. Challenges are plentiful in a VUCA environment but so are opportunities. Capitalizing on the opportunities presented in a VUCA environment requires governing boards and university leaders to be bold and embrace risk.
Risk is any issue that has potential to affect an institution’s ability to meet its objectives. Risk is multidimensional, and can include financial, operational, reputational, and compliance, as well as others. Yet the prevailing application of risk is often narrow—focused on one type of risk at a time and solely on the downside potential—in a manner that ignores the interplay of the risk categories and obscures the inherent opportunity. Each institution, and very likely each individual trustee, will have their own understanding of, and comfort with, risk. However, the common analogy of risk to cholesterol is instructive here, because just as there is good cholesterol and bad cholesterol there is good and bad risk. The new risk paradigm needed across higher education in these uncertain and tumultuous times requires trustees to embrace good risks.
The idea of embracing risk in a VUCA environment is admittedly counterintuitive, but business as usual will not suffice, nor will subtle changes to a business model under substantial pressure. The idea of playing it safe is anything but safe at this moment, and governing boards that lack the requisite vision, do not articulate a common risk appetite, and foster a culture of innovation will likely pay a heavy price in terms of the future of their institutions.
A Vision that Embraces Risk
Vision is about what the institution aspires to be in the long term. Vision is the answer to the question—“where are we going?” In many ways, the vision is a fixed point in the distant future, something akin to a North Star—distant but bright. It is important to note that vision is distinct from strategy. Strategy is all about how the institution will arrive at the vision. Strategy is the roadmap and comes naturally after the vision is determined. Although the governing board has a role to play in overseeing strategy, and there is risk associated with strategy, it is more important in a VUCA environment for trustees to spend focused time on the vision for the institution.
Trustees, because of the long-term perspective they bring, must be part of developing a vision for their institutions. The governing board can accomplish this by engaging in a strategic visioning exercise, which will provide the time and space for trustees to articulate their ideas on the direction of the institution and, most importantly, achieve alignment on a common direction. A strategic visioning exercise, particularly in a VUCA environment, will also make clear that there is no path to prosperity for the institution without risk because risk is the essence of a VUCA environment. Trustees are committing more time to their institutions than ever, and board-meeting agendas are full of operational items. However, it is critical to find time (preferably in a retreat setting) to engage in robust dialogue about the vision. Any lack of clarity or alignment in terms of the vision can set the institution off course and be damaging to its ability to reach its destination no matter how good the strategy.
Amidst the challenges facing higher education today, trustees must resist the urge to focus too narrowly on surviving the pandemic or on a return to “normal,” whatever that looked like. Rather, trustees should maintain their gaze on a bright and distant future—the vision for the institution. Trustees must be aligned on a common vision for the institution, and in pursuit of the vision be willing to support bold, transformative, and innovative ideas from across the institution, which requires the governing board to embrace the inherent risk.
Understand and Develop a Risk Appetite
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) commissioned a project earlier this year in an effort to help decision-makers—governing boards and executives— understand how risk appetite can help organizations succeed amidst changing conditions. The resulting guidance, Using Risk Appetite to Thrive in a Changing World (2020), asserts that understanding and establishing risk appetite is an important element of governance, strategic planning, and decision-making because taking risks in pursuit of innovation is inherent to business; the challenge is to know the right amount of risk necessary. The amount of risk any organization should take is a question of its risk appetite. There is a growing body of literature about risk appetite, and some have suggested risk appetite is the purview of management; however, as fiduciaries, trustees have a central role to play in determining the amount of risk an institution should take. To fulfill their responsibility for risk appetite trustees must understand and develop a risk appetite.
The COSO framework, Enterprise Risk Management—Integrating with Strategy and Performance (2017), defines risk appetite as the types and amount of risk an organization is willing to accept in pursuit of its objectives. Risk appetite is therefore not about risks in isolation, but it is about an institution’s strength of will to accept risk in order to meet its stated objectives. Whether an institution has the fortitude to achieve its vision in a VUCA environment, is contingent upon the readiness of the governing board to accept a certain amount of risk in pursuit of strategic objectives along the journey.
Risk appetite is a concept likely familiar to trustees and one they already understand in the context of the institution’s endowment. However, risk appetite is also applicable—albeit far less ingrained— in strategic contexts. To develop a risk appetite, the authors of Using Risk Appetite to Thrive in a Changing World suggest that management and governing boards engage in (1) facilitated discussions related to mission and vision, (2) discussions related to strategies and objectives, and (3) analysis of performance.
Facilitated discussions about the mission and vision of the institution enable trustees and university leaders to articulate their implicit feelings about risk appetite, which are not always consistent between trustees and management or even among trustees. The facilitated discussions can therefore serve to develop a shared understanding of the institutional risk appetite, which provides a platform for university leaders to develop a risk appetite statement that reflects a combined understanding of risk appetite. Additional discussions related to strategies and objectives enable management to prioritize strategies in light of the associated risk appetite expressed by the governing board, and equip trustees to have productive discussions with management about the pursuit of particular strategies, again with reference to the articulated risk appetite. Lastly, the analysis of performance involves the use of modeling and data to test, retest, and validate the risk appetite, which empowers trustees and management to refine risk appetite as circumstances change and evolve.
Understanding and developing risk appetite, however, is only the first step for governing boards in this regard. Trustees also have a continuing obligation with respect to risk appetite because risk appetite should evolve and change as the circumstances change. In a VUCA environment, change is rapid so the institution’s risk appetite must be equally responsive, which means risk appetite should be a standing item for the governing board.
Create a Culture of Innovation
Culture shapes attitudes and behaviors whereas cultural norms determine what is encouraged or discouraged, accepted, or rejected. Culture is important because the right institutional culture will ensure the new risk paradigm sustains over time. According to the AGB Board of Directors’ Statement on Innovation in Higher Education (2017), governing boards have a significant responsibility to foster, engage, and support a culture of innovation. As previously mentioned, risk is inherent in business and essential to the innovation necessary for higher education institutions to overcome the systemic and existential challenges they face. An institutional culture that embraces risks and accepts failure has the potential to light the spark of innovation that could bring prosperity to that institution.
The Harvard Business Review (January/February 2018) article “The Leader’s Guide to Corporate Culture” identifies four levers for evolving a culture: (1) articulate the aspiration, (2) select and develop leaders who align with the target culture, (3) use organizational conversations to underscore the importance of change, and (4) reinforce the desired change through organizational design. Trustees must take every opportunity to articulate the aspirational culture, which the AGB Board of Directors’ Statement on Innovation in Higher Education describes as a culture that motivates continued development of new ideas, supports visionary ideas, rewards failure when appropriate and embraces risk. Governing boards and presidents/chancellors, in particular, must select and develop leaders who align with a culture of innovation, because leaders at every level of the institution are important catalysts for culture change. The use of organizational conversations to support culture change is perhaps most consistent with higher education norms, as it is in keeping with the principle of shared governance. Governing boards and university leaders can leverage existing opportunities and practices to articulate and advocate for a culture of innovation. Lastly, governing boards and university leaders can reinforce the culture of innovation by aligning structures, systems, and processes—like tenure and promotion—to support innovation and by extension risk-taking.
Closing Thoughts
It remains to be determined how higher education will emerge from this VUCA environment, but it is undeniable that the landscape is already dramatically different. Higher education institutions, because of the critical role they play in a democratic society, must rise to the occasion. Governing boards face a daunting task, one that not many could have anticipated a few years prior. However, a new risk paradigm can light the way to transformation by sparking an age of innovation on college and university campuses. Trustees have a critical role to play in adopting this new risk paradigm. To be successful, trustees must (1) fix their gaze on the distant future and lend their voice to creating a vision for the institution that embraces risk, (2) establish a shared understanding of risk appetite, and (3) foster a culture of innovation. There is great urgency in the current moment, but as fiduciaries, governing boards are accountable for the long-term future of institutions. Securing that future is worth the risk.
Steve K. Stoute, JD, serves as the vice president for strategic initiatives and chief of staff at DePaul University.
Takeaways
- Today’s higher education environment is one marked by volatility, uncertainty, complexity, and ambiguity—a concept commonly known as the VUCA environment. Governing boards must embrace a new risk paradigm to safely navigate the VUCA environment and secure a path to future prosperity.
- Risk is multidimensional—not simply negative issues that may impact an institution’s ability to achieve its goals. There is good risk and bad risk. Governing boards must reimagine good risk as the spark to innovation in higher education and continue to mitigate bad risk along the way.
- Trustees must develop a risk appetite to fully adopt the new risk paradigm. A risk appetite is the type and amount of risk a governing board is willing to accept to achieve institutional It is an essential element of governance, strategic planning, and decision-making.
- Trustees who effectively foster a culture of innovation acknowledge that risk is inherent in business and essential to achieving innovative solutions to the systemic and existential challenges in higher education. Ultimately, an institutional culture that embraces risks and accepts failure has the potential to create sustainable innovation.
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