Governing Boards and University-Affiliated Organizations

Risks and Rewards

By John T. Casteen    //    Volume 22,  Number 6   //    November/December 2014

Does your institution have a medical center? Who appoints and supervises your foundation heads? How do you make sure that outside contractors—food service and so forth—provide the services you expect and charge fair and justified fees? How much does your football or basketball coach make from summer camps, sporting goods companies, commercial endorsements, TV or radio shows—everything? Who authorizes those agreements? Who protects the value of your institution’s name?

Relationships between institutional governing boards and affiliated organizations have evolved, becoming increasingly numerous and nuanced. Because the work done by affiliated entities generally falls outside the core academic mission, independence can come to seem natural, and responsible trustees and presidents may feel this independence lends itself to better or less-costly operations.

Yet when things go wrong, blame and responsibility come home to the governing board. As fiduciaries, governing boards and their officers need to know what their affiliates actually do for their institutions and how the governing board satisfies its basic duties, including care, loyalty, and obedience, with regard to them. AGB’s National Commission on College and University Board Governance, on which I served, tackled the issue of affiliated entities during its year-long study of higher education governance issues.

For the purposes of this article, an affiliated entity may be any office, agency, group, or other organization—and sometimes even a person—engaged in work generally geared toward the institution’s mission, or using the institution’s name, with or without the governing board’s approval, while remaining functionally separate, in part or in whole. Many affiliates have their own administrative or managerial structures, finances, and books, even internal governance, while operating under the institution’s name or for the institution’s perceived benefit.

The work of the commission distinguished four types of affiliates:

  • University medical centers, athletics foundations, and university foundations. Often large, resource-intensive, and burdened with potential risk, these can pose complex fiduciary challenges for governing boards.
  • Auxiliary units, revenue-generating units, and contracted service providers. These serve students and staff on the campus, often without direct competitors. Many are licensed by the governing board.
  • Partner organizations—local, state, and federal governments, private foundations, community groups, private corporations, and others. Often ad hoc, distinct accommodations to surrounding environments, these neighbors, physical or other, do great good but can also pose frequent challenges. Governing boards may have little control over them, and yet these entities may claim or expect a great deal in exchange for their benevolences.
  • Grassroots groups of students, alumni, or faculty; philanthropies; charitable service providers; and other supporters of university work. These are emergent groups whose members may feel strongly attached to the institution and empowered to act on its behalf, whether or not the board knows about them and their positions.

Medical Centers and Hospitals

A major medical center can represent half or more of the budget of a public university of middling size. Complex medical centers often employ the largest number of employees of any division. Even when the university has no hospital, health programs can make large claims. In addition to teaching, conducting research, and providing appropriate service, faculty members may be practitioners with practice plans, patients, and external teaching duties.

Governance of a teaching hospital is complex, as more than one entity generally wants to control it. Some health centers have advisory boards or partnership agreements that fall outside normal institutional governance. Partnerships and hybrids are commonplace. County or city hospitals may be in some sense run by a university. A community college may have a health campus and may be the teaching hospital’s competitor. Regardless of governance structures, essentially all teaching hospitals operate under federal and state regulations and have malpractice liability and financial and reputational exposure.

As an example, in Virginia, both the VCU Medical Center, which is the medical campus of Virginia Commonwealth University (VCU) in Richmond, and the University of Virginia’s (UVa) Charlottesville hospitals underwent governance transformations during the late 1990s to address perceived risks to the universities and to the public interest, and to contain costs. In 1997, VCU’s hospitals became the Medical Colleges of Virginia (MCV) Hospitals Authority with codified ties to the state and to VCU’s board. A year later, the state approved UVa’s Medical Center Operating Board, but as a governed subordinate of UVa’s board, not as an authority. Both structures work.

Athletics Foundations

Most discussions of athletics foundations invoke the debate over National Collegiate Athletic Association (NCAA) reforms during the 1980s. The decision to regulate these foundations followed recognition of flaws in institutional and financial controls and of lawlessness within the foundations themselves. Prior to NCAA clean-up and a few related efforts undertaken by governors, unregulated support organizations sometimes owned and operated campus services (for example, bookstores, food services, and the like), using their profits to finance scholarship funds and intercollegiate sports generally. In the most egregious instances, support organizations and their backers, deeply embedded within universities, independently recruited athletes; hired and fired coaches and other sports personnel; raised, managed, and spent philanthropic funds; paid star athletes; and generally took intercollegiate athletics outside institutional control.

Drawing a bright line between permissible and impermissible support, the NCAA and some governors targeted athletic foundations that were operating autonomously. Under the rules, presidents are responsible for the conduct of their athletics programs. Failures of presidential control are de facto failures of institutional control, which is to say failures of governance. As reconceived, properly regulated affiliated entities may raise money, promote sports, and in other ways benefit sports programs, but they cannot run them. They cannot hire or fire athletic directors (ADs) or coaches. They cannot recruit athletes, send down plays from the stands, or provide tangible benefits to players. They operate within executive authority just as corporate employees do, but conflicts do occur. Just as effective governing boards hold their presidents to account, they must not cave when booster clubs become cantankerous.

Institutionally Related Foundations

Ultimately, the governing board establishes the policy framework within which any well-ordered related foundation, no matter its purpose, must operate. In shaping those policies, the governing board should appropriately respect the commitments (time, wisdom, resources) of foundation volunteers and recognize the foundation’s value to the institution. University boards often designate appointees to foundation boards to be the governing board’s eyes and ears. Overlap between governing and foundation boards seems inevitable, not least because new governing board members often become trustees after serving on subordinate boards. We have found no intrinsic flaw in this double service, so long as it is clear which board governs and which is subordinate.

Yet governing boards and foundation boards sometimes differ, even when all believe that they are pursuing the same larger principles. The terms of the relationships can be blurred: Few boosters want to think of their interests as subordinate to larger institutional interests, perhaps especially when they (the boosters) are also donors to a favorite program, such as football. Effective boards and presidents will negotiate most of these potential conflicts. When they do not or cannot, the institutional interest generally suffers.

Auxiliary Units, Revenue Centers, and Contracted Services

Many colleges and universities nowadays contract out functions (residence halls, food service, cleaning, maintenance, and so on) that were previously college-run. The perceived cost to the institution or to students, or the belief that contractors could deliver better performance at lower prices, were often the catalyst for that change. Critics have argued that contracting out jeopardizes the rights of employees, who must choose whether to remain on institutional payrolls or become contractors’ employees. Implicitly, contractors act in place of the institution, as agents, an arrangement that exposes the institution to sometimes unanticipated claims—for alleged personal injuries or damages alleged to have been done by contractors, for example. More recently, the risks have come to include exposure to complaints that the institution uses contracts as a subterfuge to avoid paying either market or living wages to those who work for contractors but are really all-but-employees.

While few people would want to contract core academic entities, such as the English department or the library, presidents and boards routinely make policy distinctions that are not far removed. Might a four-year college contract out courses (say, freshman mathematics or psychology courses) to a neighboring community college? Or management of a performing-arts center to a neighboring public-facilities authority or to an events manager? Is it ethical or right to contract out labor-intensive functions when contractors generally pay lower wages? Can a contractor provide better and less costly healthcare for students, or psychological support services, or student recruitment, or financial aid?

Those decisions commonly force judgments as to values, in which economic purposes must be balanced with mission-driven acceptance of calculated risk. Effective governing boards very likely accept the duty to make these judgments as a cost of doing business. Such decisions may involve implicit changes in institutional missions, as when contracted services have previously come from core academic units. They challenge boards even as they suggest or promise benefits when boards make the right decisions.

Governments, Communities, and Private Partners

Governmental agencies, non-governmental organizations, private corporations, faculty members with inventions to sell, local businesses, and community groups may all have expectations of governing boards, providing services to the institution or requesting services from it. That has long been the case. The governing board or president may not always get to set the terms of the relationship. Either side may claim the right to end the relationship independently—and not necessarily in ways imagined when the relationship began.

A corporation may claim property rights, perhaps valuable ones, as outcomes or benefits of a research partnership, or a local government may want financial relief when game traffic or daily student parking drives up its cost of services. Governing boards now confront the relatively new task of assessing the cost of certain partnerships—notably joint ventures with non-institutional research sponsors involving intellectual property ownership claims and how they work for the institution. As compelling as new partnerships are, models of good institutional practice exist, and effective boards need to know and follow them.

Grassroots and Emergent Groups

Support groups come in all shapes and sizes: student clubs (formal or informal), alumni affinity groups, booster clubs for sports or the marching band or the campus museum, informal town-gown writing groups. All assert that their interests are the institution’s. They are emergent—they make new claims as they assert their interests. Even in harmonious circumstances, emergent groups will need attention at some point. Every president will likely know stories about the local alumni club forced to disband after some especially rowdy event. Every board sooner or later encounters the neighborhood group opposed to the proposed new parking garage, the group united for or against a professor at tenure time or a mascot or the founder or the presence or absence of some concept in the curriculum or phrase in the fight song.

What does one do with these groups? No board or president will satisfy every interested party and critic, nor should they. Good governance makes distinctions as to importance and merit and timeliness. The impulse to respond is natural, not because the issues or people are by nature wise or silly, urgent or irrelevant, but because they amount to human glue. They define the fabric of institutional links to surrounding communities of interest. Often they do this with remarkable tenacity and over long spans of time. People care—a lot. So do effective board members, but with discretion.

Effective boards and presidents publish policies to structure some of these relationships, and the board needs to know that the president and perhaps legal counsel are doing the right things, balancing whatever risk and benefit may come from engaging with entities not directly subordinate to the board, and at the same time gaining whatever benefit may appropriately come from listening well. That benefit may be intangible: good will.

Recommendations

Each of these subordinate organizations has its own potential value to the institution. By and large, they support institutional effectiveness, and colleges and universities benefit from them. Boards and presidents should publish thoughtful policy guidance, and direct working relationships should reflect principles of fidelity to appropriate roles. The guiding principles are as follows:

At the Full Board Level

  • The board should periodically assess its institutional assets to ensure that control over them resides in the appropriate hands.
  • Where possible, the institutional board should assert and defend its right to name at least one member to the board of each affiliated entity and to enable the president to name at least one other member. The governing board may elect to stipulate that the president serve ex officio on the board of any affiliated entity. If the governing board lacks the authority to make appointments to an affiliated external organization’s board, it should task the president with ensuring the institution’s interests are clearly and firmly communicated to the affiliated entity’s board.
  • The board should determine the purpose and name of each affiliated entity and memorialize its approval in its own minutes. When the institutional governing board does not hold legal control over its name, it should verify through the president and legal counsel that all necessary steps are taken to protect the institution’s name and reputation.
  • To the extent allowed by law, governing boards should require that copies of all affiliated-entity audits, management letters, tax filings, and similar documents be filed with the institutional governing board’s secretary. The board should periodically determine which of those documents it elects to receive directly and charge its audit committee to review and report on them.
  • The board should determine with the president which financial and other affiliated entities’ information will appear in the institution’s annual reports. The board should from time to time review its own, its affiliated entities’, and the president’s annual reports for compliance with institutional policy.

At the Committee Level

  • The board should approve each affiliated entity’s bylaws or other governing documents and require that up-to-date copies be kept in the board’s office. When the board lacks authority to demand those documents or equivalents, the board, generally through its audit committee, should task the president with making the necessary requests and filing the documents in the board’s office.
  • The board should require, perhaps through its secretary, that timely reports of relations with all affiliated entities be maintained in the board’s office, and it should from time to time receive summary reports for attachment to its minutes.
  • The board should know from its audit committee in periodic, recurring reports which affiliated-entity employees are institutional employees and which are not. It should task the president with periodically assessing the comparability of salaries and other compensation paid to employees in both categories. If the governing board approves split-funding salaries, it should create a process to assess potential conflicts of interest and abuses in split positions and assign this function to whichever of its committees customarily deals with its standards of employee accountability.
  • The governing board should periodically confer with board chairs from affiliated entities to review their missions and operations, supervision of their staffs, work plans, and similar matters. This can be done with the full board or the committees to which it delegates the task.

We have realized during the commission’s work that relations with affiliated entities can challenge boards even in otherwise effectively governed institutions. That the work done in these affiliated entities matters seems self-evident to us. That we must sometimes understand why they matter by way of the negative concept of risk has struck us as an ironic commentary on the complexity of the work that boards do. Even as getting these relationships right is to address risk, getting them wrong may be to overlook the winds of change. Few university medical centers could have made good use of finance corporations or semi-autonomous public authorities or codified autonomy 50 years ago. These innovations, and similar accommodations to the evolving economy of healthcare in teaching hospitals, represent responses to perceived needs that many boards and states have addressed in relative isolation.

Perhaps the same was true of the condition of athletics foundations when the NCAA began scrutinizing them. Few boosters will have begun by looking for ways to do wrong. Yet some did wrong, not least by inventing or taking advantage of structures (foundations, support committees, etc.) that took transactions away from the proper scrutiny of the governing board’s audit committee. What was perhaps at first easy—concealing activities that belong in the light of day—must have become eventually a bad and then an intolerable habit. Perhaps our most significant conclusion is that the self-aware and self-conscious board must be the institution’s best definer of its missions and its defense against misappropriation of its integrity.

A final conclusion: The effective governing board governs uses of the institution’s name. The name, like the reputation that gives it meaning, is a core institutional asset: It belongs to the institution. Boards may license uses of the name, appropriately and properly consistent with the institutional mission. They may in various ways convey or license uses of their brands.

But like effective corporate boards, they must count reputational risk dearly. They may do business in the historical context of prior misappropriations or thoughtless assignments of the rights to the institution’s name. They may have to struggle, perhaps for many years, to repossess a name that was let go in the world without conscious concern for contemporary conflicts or opportunities or risks. Sooner or later, the effective governing board addresses the most fundamental institutional possession: reputation. More often than not, repolishing a tarnished name proves harder than pursuing and protecting it before it suffers damage.

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