Difficult Days for Higher Ed

Is It Time to Short the Sector?

By Richard Chait    //    Volume 21,  Number 5   //    September/October 2013


Richard Chait: professor emeritus at Harvard Graduate School of Education, trustee emeritus at Wheaton College, and governance expert

The Panelists

N. Anthony Coles: board vice chair of Johns Hopkins University

Nancy L. Zimpher: chancellor of the State University of New York (SUNY)

Keith Krach: former board chair of Purdue University

Alecia A. DeCoudreaux: president of Mills College and former board chair of Wellesley College

These days, as boards try to govern in a dynamic environment that expects, if not demands, change, they can often end up in the public eye and under scrutiny—regardless of whether they act slowly or quickly. If they don’t effect change fast enough, their college or university can become the news. Conversely, if they push for too much change too rapidly and in the wrong direction, both they and their institution can also land in the headlines.

At AGB’s 2013 National Conference on Trusteeship, Richard Chait led a special panel of leaders who explored the myriad challenges confronting governing boards. They also offered some suggestions for how boards can most effectively lead their institutions in an increasingly complex and fast-paced world.

Chait: There is a widespread sense that colleges and universities are facing unprecedented challenges. Is higher education in big trouble? And if so, why?

Coles: We are at a crisis point. The global recession has undermined the state of higher education, whether your institution is primarily funded by a large endowment, tuition, or state dollars. Each one of those revenue sources has been compressed. And that means that the business model fundamentally has to change.

Chait: If the economy gets better, do our problems go away?

Coles: I don’t think so. What if there’s another global economic recession? The interconnection between different countries’ economies is only likely to increase with the rise of new superpowers.

Chait: So, when you go to board meetings, do you feel you’re standing on a burning platform?

Coles: Yes, and I’d add another funding component that also has come under fire with the sequester: federal support for academic research.

Chait: So is it time to short the sector?

Krach: I might short some institutions based on their not embracing change, but I would not short the sector. American colleges and universities are the envy of the world and will continue to be—from a technology standpoint, from a global perspective, and from people understanding that the future of this country is dependent on what happens in higher education. This is a time of opportunity.

Coles: And the opportunity probably exists at those institutions that recognize the need to change. Great organizations are driven by leaders who have the capacity to understand and appreciate the past but can also break free from it.

Chait: Are these the most trying times you’ve ever faced?

Zimpher: There’s a degree of complexity that I have not seen before. Also, the global economic crisis is forcing universities, public or private, to step up and say to the state: “We can be a partner; we are a part of the economic solution.” In addition, the way we deliver our services has changed tremendously.

Chait: We all were around when television, computers, and self-paced learning came in. Are the new technologies more disruptive?

Zimpher: It all feels pretty disruptive to me. When I walk across campus, I may see four students walking together, but three of them are on their iPhones.

Chait: And the fourth is on an iPad.

Zimpher: What’s happening now is a lot different than what occurred with the introduction of the telephone or television. Today we’re struggling as a sector with retaining the best of the best of a residential experience while massively expanding access through technology. So much of the world’s population is undereducated, and technology is one answer to that.

DeCoudreaux: We all face the challenges of technology and the rapid pace of change in an industry that is accustomed to a much more deliberative and inclusive process, one that demands the voices of a lot of people to make change. At the same time, we have to embrace and create change to provide the kind of education that our students need to be prepared for the future. All of us are struggling with that right now.

Chait: Do any of you see in today’s crisis a problem that money cannot solve?

DeCoudreaux: We are working in an environment where people want to do the right things, but it’s hard to know what those things are given the pace of change. Technology is advancing faster than any of us could ever have imagined. It’s difficult to predict what our students will need to know a decade from now and to prepare ourselves to be able to provide that.

Zimpher: What money won’t buy is the understanding that the challenges are so big that if we don’t figure out a way to work more effectively together, we are not going to solve them. We have built a postsecondary education system that relishes the distinctiveness of each campus, whether you’re in a large public system like SUNY or a small private institution. The only way to succeed is to find more-effective strategic alliances and develop a national strategy—not a federal strategy—to create a collective impact. We’ve got immense social challenges in this country and the world, and we need to work together.

Krach: If I could boil it down to one word, it would be leadership, and all the money in the world can’t buy great leadership. Leadership starts at the top with the board and the president. Leadership is thoughtfully framing the issues. It’s decisiveness. It’s clear, long-term, strategic thinking and aligning the organization in conjunction with that. You can have the greatest strategy in the world, but if you can’t execute it, you’ll fail every time.

Chait: American higher education is indeed the envy of the world. In worldwide rankings, we hold eight of the top 10 spots and 43 of the top 100. The institutions that each of you represents are more than 150 years old—they have been through civil wars, world wars, the Great Depression, the student unrest of the ’60s, the hyperinflation of the ’70s, numerous demographic shifts, and the recent explosion in technology. Still, with few exceptions, I cannot think of a notable college or university that has closed its doors, but I can think of scores of iconic American companies that have had to shut down: Bethlehem Steel, Lehman Brothers, Pan Am, Digital Equipment, Circuit City, Borders. So, here is the riddle: With all our faults, how do you explain our quality and durability?

Krach: That’s why I would never short this sector. We have a great product for which there’s a huge market. It’s one of the noblest causes in the world. We have passionate alumni, students, faculty, and administrators. Yes, we are at an inflection point, and we have to embrace change and lead that change, but this sector is not going away.

Zimpher: I want to argue the premise. We have 64 campuses in the State University of New York, and while I like the fact that we can have a campus 30 miles from every New Yorker, we should try to be more businesslike and consolidate and share services. Right now, every institution wants one of everything. We need the political will to be more disciplined and to economize in ways that will allow us to redistribute our revenues. Because we’re not going to get new revenues, which brings into question the durability of every one of these campuses across the state.

Coles: Higher education is one of the great equalizers in our society. You may have been born at the upper reaches of the socio-economic strata or the lowest reaches, but education opens up an opportunity for people to meet in the middle. That has created an enormous demand. I don’t think we can ignore the market forces as driving our institutions’ durability. And we have to consider where those market forces are taking us tomorrow.

Chait: The fact that the market has responded positively would suggest that we must have something people want, right? The question is, will that continue?

DeCoudreaux: We are going to have to operate more like businesses, paying attention to what our customers need and want. We have to listen to the parents and students who are saying, “We don’t understand the value that you’re providing.” We have an enormous amount of infrastructure, yet we have a declining number of students who are interested in what we have to offer.

Chait: Twenty-five years from today, what fraction of market share will traditional colleges and universities have vis-à-vis new entrants that bypass traditional institutions?

Krach: I’d say half.

Zimpher: We’re going to lose 30 percent.

Coles: We’ll lose 25 percent.

Chait: If we’re going to lose that much market share, somebody’s got to shut their doors, right?

Zimpher: We are undereducating America. For every 100 ninth graders, only 15 to 20 will make it to the postsecondary-degree finish line. So, the fact that our high-school demography is declining should not be a problem when 25- to 45-year-olds are undereducated and underprepared for the workforce. We may have to fundamentally change our business model and that could keep us in business for a long time.

Chait: Let’s talk about the business model: the mantra of the moment in higher education. I’m going to make each of you king or queen for a day, and you can make one change to the business model of your institution and it will be unilaterally adopted. What would you change?

Coles: I would offer non-classroom-based innovations. College students today want what they want how they want it and when they want it. They no longer sit down together and watch the evening news. At 1 am, they are each watching a different movie that was on last week. So we have to be able to meet the consumer of tomorrow wherever he or she is.

Krach: My number-one change would be to freeze tuition or reduce the cost. While that’s somewhat counterintuitive from a business perspective, student affordability is a noble cause—and one of the burning platforms in terms of the current crisis.

Chait: Would you freeze your prices if no other Big Ten university did?

Krach: We just announced that, for the first time in 37 years, Purdue will not increase tuition for the next two years.

DeCoudreaux: The big change I would make would be to engage in substantially more collaboration with other institutions so we can jointly deliver what our students need.

Zimpher: I talk to business leaders every day, and they are amazed at the limited number of tools I have as the CEO to manage the organization. As higher education leaders, we are not in a control-and-command environment; we’re in an influence-peddling environment. If I had more flexibility to incentivize and invest in experimentation, then my leadership team and I could do a lot more. Faculty will invest in a changed behavior for a limited amount of money. It doesn’t take millions; it just takes a little flexibility. That’s why philanthropy is so important.

Chait: Suppose you had complete freedom to incentivize. What behavior would you incentivize?

Zimpher: Right now, we don’t have a mechanism for building the capacity within our institutions that we need. It’s hard to get people to get out of their idiosyncratic roles into some kind of job-sharing or delivery-system sharing. Money would incentivize people to work together more productively and effectively—in my case, across 64 campuses.

Chait: What’s the one thing you would keep in today’s business model for your institution because it’s so valuable, so much a core of your college or university?

DeCoudreaux: I wouldn’t change the faculty’s commitment to our students and the dedication that they demonstrate every day to helping our students learn as much as they can in the best way that they can, and to preparing them to be productive citizens.

Coles: I would not change the intense focus on delivering knowledge for our society, and as a result of that, transferring that knowledge to people who will become the leaders of tomorrow. That’s our legacy.

Krach: I would not change the focus on giving back to the community.

Chait: Are there some business practices that we in higher education should incorporate? For example, would you drop some programs as a function of profitability?

Zimpher: Absolutely. You have to look at the real cost of delivering instruction in certain areas and the capacity of campuses or departments to cover it. Our responsibility as a public institution is to look closely at the workforce demands of the state and shift and winnow in that direction. But that doesn’t mean we should drop philosophy. We have to keep the arts and humanities as a crucial part of knowledge generation.

Chait: And get out of some businesses? Cut product lines on the basis of profitability?

Coles: That might be a bit extreme. We need to support certain aspects of our society that we value and cherish. The arts and humanities are a great example.

Chait: Could you imagine some great research university that got out of the business of foreign languages?

Zimpher: We did reduce language majors at one of our institutions because we had few enrollees. But other SUNY campuses offered this language major, so as a system we are able to continue serving students interested in those majors.

Coles: Did you eliminate all language programs at that campus?

Zimpher: The major. But that doesn’t mean we dropped the introductory course or certain other courses. The business model is complicated. You can’t move language faculty over to teach nursing.

DeCoudreaux: Back to being queen for the day, I would be looking at the market more broadly. We teach only three languages at Mills College, but around us in the Bay Area, other institutions teach languages that we do not teach. I don’t believe that Mills has to teach every language that students want to learn. There could be tremendous power and opportunity if we were to collaborate and meet students’ demands in a different way.

Chait: Here is one business model: career-oriented standardized curriculum, replicated and offered nationally at convenient locations; a blend of online and in-person instructions; no tenured faculty; no shared governance; minimal investment in facilities or student amenities. Does that have any appeal?

Coles: There’s a lot to like about that.

Chait: I just described for you the University of Phoenix, a for-profit company that was once the darling of Wall Street. It had, in 2005, a market cap of $13.5 billion and an enrollment of 600,000. If I turned back the clock five or six years ago, every time today we say “MOOC,” the word then was Phoenix. How often did we hear that they are going to be the killer app of higher education? We were dazzled, and we were daunted.

At a recent close of the stock market, the University of Phoenix’s market cap was $1.8 billion. The company has closed 115 campuses, and its enrollment has plunged by 220,000 or 37 percent. The stock is among the five worst performers on NASDAQ over the last two years. And, from last fall to this fall, across the entire for-profit sector, enrollments are down 7 percent. I imagine that similar trends might lead to the dismissal of the dean of admissions at your institutions.

So are there any lessons nonprofits can learn both from what happened to the University of Phoenix and what we first thought about it?

DeCoudreaux: A for-profit institution that focuses on preparing students for a particular career or a small number of careers is shortsighted because many of those jobs will be gone five years from now. Whereas if we are helping people to learn skills that will prepare them for any career, as we do at many traditional institutions, our business model will probably be longer lasting.

Chait: If there is a rap on traditional American higher education, it is that we move painfully, glacially slowly, that we think in millennia. Can you provide an example when your institution paid a huge price for moving too slowly?

Zimpher: The situation of the states stepping away from the support of higher education was in part caused by our inability to see that our fate was linked to the fate of our states and our country.

Chait: The general tenor of the conversation is we’re in tough times, tough shape. Higher education appears to be in the midst of a crisis. If that’s true, to what extent are boards responsible for the mess we’re in?

Krach: Leadership starts at the top.

Chait: What have you guys been doing wrong?

Krach: I can tell you what we’re doing now that’s different. We never used to do a 10-year financial plan. Over the last two years, we began to lengthen our planning horizon. We never did a 360 review of our president or of the trustees. Now we have.

Coles: Governing boards are responsible and should be held accountable. We are operating at the highest levels of leadership, where there’s accountability. As board members, it’s our job to help identify some of these trends and help seek solutions and suggest new directions for the institution.

Chait: If you could change one thing about governing boards that would make life better, what would you change?

DeCoudreaux: I would educate our boards more. The best boards are those that, while they may not know what we inside the institution know, know enough about higher education and the environment in which it operates to help presidents and administrators make the best-informed decisions. I am pleased to say that we spent a fair amount of time in my first year educating me, the cabinet, and the board together.

It’s important that, every single day, board members devote themselves to trying to learn something new and different. That they also try to put themselves in the shoes of some of the other stakeholders of the institution, and that they put aside what we all believe about our institutions: We’re good, we have great products, we have the best students, we have the best faculty, and so on. At some point, those of us involved in higher education need to ask the hard questions about what we’re not doing well.

Chait: What could board members of a public university do that would be especially helpful in light of the circumstances that you and your colleagues now face?

Zimpher: We’re all very concerned about the politicization of our boards and whether the executive leadership of our institutions will survive. These are difficult positions. And because most of the public boards of systems are gubernatorial appointments, it’s easy to understand why board members get caught up in the politics of the day. Not just the political whims of a highly fractionated political system, but also instances when they take on issues like immigration or diversity. These are hugely difficult decisions that are increasingly politicized, and I would want boards of public systems to feel they had the latitude to be free from politicization.

Chait: When you think about corporate boards and college boards, what’s most strikingly different?

Coles: By and large, public company boards are operating more at the strategy level and guiding the organization.

Chait: What drags college boards down?

Coles: I’m not sure anything drags them down. It’s just that boards don’t know to ask enough about the operations in ways that uncover the key issues.

Chait: But it doesn’t stop them from micromanaging?

Coles: That’s a problem with a board that hasn’t positioned itself well to ask the right strategy questions. When it comes to behavior, a public company board member can literally be fired by the shareholders. So there’s this constant threat that if you don’t contribute in a meaningful way, you can be axed.

Chait: That is not the case for a college or university. I am unaware of trustees being let go in mid-term for ineptitude.

Krach: I would say that a key difference between the two types of boards is accountability, metrics, ways to measure the business. In corporations you’ve got your quarterly earnings per share and all that. Are there similar metrics that we in higher education can adapt and use? We can also learn from the corporate model when it comes to compensation. At Purdue, we just put in place a variable compensation system to measure results, not activity, and to compensate for those results.

I would also say that probably the most important thing we do as board members is to frame the right questions.

DeCoudreaux: At least with respect to small, private colleges, many board members have a long-standing affiliation with the institution. Many are its alumnae or alumni, and they often come to the board table seeing the institution as it was when they were students. It’s difficult under those circumstances to envision the kind of changes that are needed. By contrast, at the corporate board table, you’re almost always looking ahead—driving forward to beat the competition.

Chait: To wrap up, can you each give some brief insights or takeaways based on your considerable experience?

Zimpher: We’ve spent too little time today talking about the undereducated population of our country. We’re an industry that brags more about whom we don’t select than whom we do. We could add hundreds of thousands of students and still not meet the demand to educate what is largely an undereducated, lower economic strata of Americans.

DeCoudreaux: One of the most important things for administrators and board members to do right now is to strengthen their partnership and engage one another in continuous learning, individually and collectively, for the benefit of the institution. The line between governance and management should be firmly drawn, but there is major value in having the wisdom that comes from a diverse group of trustees working in partnership with administrators. Truly engaging in such a close partnership is how institutions will be able to advance.

Krach: My key takeaway: Embrace these times and embrace the change. Embrace all this technology that’s coming our way. Embrace the shared-governance model, and embrace the accountability that goes with that. Everybody has to be open. Change is the most powerful word in the English language, and our institutions are going to be much better for all that we’re going through.

Coles: Recognize that three sectors in America drive global leadership for this country—high tech, biotechnology, and higher education—and are where we hold a distinct advantage over almost every other society around the world. Let’s not squander that in reconfiguring our education system in the wrong way.

Second, if education is a great equalizer, why can’t we provide the access and the affordability that will allow that to continue?

Chait: I have four takeaways. The first would be that the most seductive issues may not be the most consequential, and the most important problems that we face may not, in fact, be the most urgent. So, I would frontload governance and devote a lot more time to deciding what to decide.

Second, in the words of Philip Tetlock, a professor of leadership at the University of California, Berkeley, boards need to be much more “self-subversive.” We have to entertain seriously counter-arguments, counter-factuals, and the possibility of being mistaken. The more dire the circumstances we face, the more important open-mindedness becomes.

Third, we have to get the questions right. That means we have to be careful that we don’t develop the “right” solutions to misdiagnosed problems, which happens often in higher education.

And finally, and maybe most important, we’ve got to govern in good humor. Hard times are no time to be glum.

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