A Blueprint for University Governance

This is an Enron moment for university governance. In a Blueprint for University Governance (which we recently posted to SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4661313) we highlight the deficits of university governance and the need for reform.

We recognize that universities are different than for-profit corporations.  The governance model for corporations should not just be replicated whole-sale onto university boards. Similarly, as with for-profit companies, there is no “one-size fits all” corporate governance model that works for universities.

Nonetheless, the importance and basics of strong corporate governance principles apply in both situations.  However, the role of the board in this governance has historically been quite limited.  The board selects the President (through a committee often appointed by the Board, often with significant input from the outgoing President).  Presidents are appointed to a five-year term and expected to serve the full term with a renewal of another five years (unless they resign earlier).  Thereafter, once the President is selected board action is limited to periodic meetings which are more informational in nature.

The consequence of this governance structure is that the forces which influence university governance primarily come from the faculty.   Moreover, like local school boards faculty governance is typically expressed through those who wish to be most active in the faculty senate and administration.

We believe the recent travails of elite university presidents are, at least in part, driven by this fundamental governance problem.

The key to reforming this governance arrangement is to reform the University board into an effective force.  Adopting basic principles of good corporate governance will create an effective oversight and governance mechanism which can represent all university interests.  Consistent with this, there should be a more robust mechanism to hold University boards to account and make the decisions and actions of such boards more transparent.

In this regard, we believe that effective University boards should consider the principles we set forth in our blueprint.  These principles include:

• Election: Boards should have a nominating committee which should include independent directors.  All stakeholders in the University should have some opportunity for representation in the board.  Critically, boards should not simply be self-selecting.
• Committee structure: University boards should have nominating & governance committee and an audit & risk committee which meet on a regular basis to oversee critical governance and risk issues for the board.
• Selection of a lead independent director and regular meetings of independent directors:  Establishment of a lead independent director who chairs regular meetings of just the independent directors as part of each board meeting has been one of the most structurally significant corporate governance developments over the past half century.
• Annual reviews and disclosure:  As the CEO of the University, the President and the Provost must be held accountable for the success of the University.  This starts by having the board establish clear goals for the President and Provost and annually review the President’s and Provost’s progress on these goals both with the President and Provost and in executive session.
• Oversight: The board chair and board should be consulted on significant University decisions, policies and appointments, including the appointment of the Provost.
• Establishment of annual director reviews and director education: It is common for public company boards to have annual director reviews, and most public company directors routinely attend some type of director education programs.  These structural devices ensure that directors understand their responsibilities and are able to determine whether collectively and individually the board has the skillsets and qualities necessary to function at a high level.
• Terms and Term Limits: University trustees should have terms which suit the long-term interests of the university.  These terms should be lengthier than corporate board directors (e.g., three to five years).  In order to ensure regular replenishment and fresh ideas trustees should have term limits.
• Disclosure: Boards should disclose their policies, including a conflict of interest policy, significant decisions and annual self-review.

Our goal in annunciating governing principles for boards is not to usurp shared governance in the University.  A University should have a defined purpose – to create and study knowledge on non-ideological grounds.  The faculty is a core part of this, but it should come with governance from the board which ensures that this non-profit institution of higher education adheres to its mission and ensures the free ability to explore ideas and create knowledge.

Enron was a transformative moment in corporate governance, which demonstrated the need for significant reforms of governance practices within boards as well as the ethical cultures within the boardrooms of some of our largest and most prominent companies.  Enron reminded us of the critical importance of strong board oversight, and led to the adoption of many structures that allow boards today to spot “red flags” before they become crises.  In many ways Enron gave birth to many of the fiduciary guidelines, best practices and principles that have become common in corporate America today, to the benefit of all corporate stakeholders.

The events of the last several weeks have demonstrated a need for a similar reckoning with the governance of university boards.  Universities are a critical part of our nation and also chartered non-profits with a public purpose.  University boards need to engage in candid assessments about their oversight duties and obligations and adopt policies that will allow them to set an appropriate “tone at the top” of strong governance and ethical practices.  If done now then perhaps in the future this moment will be remembered for more than just the unfortunate soundbites coming from university presidents testifying before Congress.