The Hoover Institution Corporate Governance Working Group aims to understand the governance of various institutions, including for-profit organizations, government entities, and nonprofits. At its inaugural conference, participants focused on university governance in a roundtable discussion. The goal was to explore major challenges in university governance, identify areas needing improvement, and draw lessons for the governance of organizations in general.
Universities vs. For-Profit Entities
A robust discussion emerged on the differences in governance between for-profit and nonprofit entities. It was noted that nonprofits, like universities, benefit from tax privileges and, lacking traditional owners and shareholders, must use surplus revenues to achieve its mission. This can result in managers, such as presidents or provosts, having weak incentives and being more susceptible to lobbying by various stakeholders, including donors, boards, faculty, staff, students, and the government. These governance issues are further complicated by recent shifts in power within universities, where the number of professional staff has surged, moving authority away from traditional academic leaders.
Recent Developments Affecting Governance: Funding Dynamics and Mission Creep
There was an active discussion on the role of market competition in governance, a crucial aspect in for-profit organizations. Participants noted that universities produce research, teaching services, and certification services, competing for federal funding, students, and faculty. American universities flourished after World War II in large part because of these competitive pressures and direct support from the federal government via grants and contracts. As government expenditure has decreased, colleges have increasingly relied on donations, leading to greater influence from donors and development staff.
At the same time, many—though not all—universities began to redefine their mission from producing research and instruction to being agents of social change. In doing so, they increased the number of stakeholders in university governance, which now includes undergraduate students, unionized graduate students, activist groups, and a rapidly growing professional staff.
The combined effect of these shifts has been to complicate university governance to the point that it is often difficult to know who is actually making decisions.
The Growth of Professional Staff at Universities
The discussion then turned to why universities have not identified and fixed these issues themselves and why so many crises have rocked universities simultaneously.
Participants noted that universities operate like businesses but are unique in many ways. Much of their income comes from public subsidies, as students borrow money from the federal government and donors receive tax deductions. Decision making is highly decentralized, often occurring at the department level but limited there to hiring and promotion of faculty and selection of PhD students.
In theory, all other decision making is handled by the president and provost. However, some roundtable participants commented that these roles have become ineffective; universities are increasingly run by professional staff, whose goals may focus more on organizational growth or political advocacy than on academic excellence. Several participants noted that while the number of faculty has remained stable over the past decades and the number of students has grown slightly, the number of staff has exploded, with universities hiring twenty staff members for every faculty member. Boards of trustees, who should be addressing this issue, often have only a limited understanding of the university's inner workings, largely because university leaders may prefer to keep them uninformed.
A Path Forward: Aligning Stakeholder Objectives
The overall discussion highlighted the tension in governing for any organization with multiple stakeholders. Unlike for-profit organizations, which aim to maximize shareholder value, nonprofit entities, like universities, face the challenging task of aligning diverse stakeholder interests for effective governance. Participants concluded that elite US universities face the daunting task of establishing governance structures that harmonize the interests of faculty, students, administrative staff, and external stakeholders. While the right approach remains an open question for future discussions, participants universally agreed that successfully navigating this complex terrain is essential for safeguarding the future vitality and excellence of universities.
About the Hoover Institution Corporate Governance Working Group
The Corporate Governance Working Group brings together scholars, industry practitioners, and policymakers to engage in constructive and open debate about the logical consistency, treatment of evidence, and policy implications of proposed reforms to the regulatory systems that impact corporations. The working group is chaired by senior fellows Stephen Haber and Amit Seru.
