B
y John S. Griswold, Jr.
As seen in January/February 2005 issue of AGB's Trusteeship
The bear market of 2000-02 demonstrated to colleges and universities that there is no insurance against significant—even injurious—declines in asset levels. Today, a new and different kind of bear is on the prowl. This time, the market is not for financial investments but for public trust and confidence.
College and university trustees have only to look over their shoulders to see the turmoil that has engulfed their brethren in other parts of the nonprofit world. Such pillars as the American Red Cross (controversial handling of funds in the wake of 9/11), the United Way (improper payments to executives), and the Nature Conservancy (conflicts of interest) have each received news coverage of the kind they didn’t want or need.
Last summer, the Senate Finance Committee held well-publicized hearings aimed at curbing financial abuses in the nonprofit world. The Internal Revenue Service announced a new enforcement effort to halt abuses by tax-exempt organizations that pay excessive compensation and benefits to their officers and other insiders.
The IRS also is considering changes to Form 990, which nonprofits (including private universities and colleges) must file to keep their tax-exempt status. Possible changes include requiring information about conflict-of-interest policies and reporting transactions or financial relationships with trustees.
The mood of the public is sour as well. The Brookings Institution recently issued a report based on a survey that showed public confidence in nonprofits fell drastically after September 11, 2001, and that confidence has yet to recover. It is clear that momentum is building among the public, the media, and elected officials to demand better management and governance of nonprofits.
Churning Public Opinion. Higher education is not exempt from the lingering crisis of confidence. We have seen running battles between several university presidents and their boards. Compensation and benefits packages for some presidents and chancellors have fueled resentments. Sweetheart deals awarded by boards to their members and other examples of self-dealing invariably find their way into the press. Perhaps the single greatest issue reflecting the public’s growing concern is the continuously rising rate of tuition.
Last October, the College Board announced that the class of 2008 at public universities had been greeted by a tuition increase of 10.5 percent —the second largest in more than a decade. For private universities and colleges, the figure was about 6 percent. These increases come at a time when inflation is averaging about 2.5 percent, and even the Higher Education Price Index has averaged about 3.5 percent over the past ten years. There may be very good reasons for these steep increases—certainly, reduced state support for public institutions —and a combination of grants and federal tax credits can cushion some of the blow. But many students and families must rely on loans that are becoming increasingly difficult to repay after graduation.
It’s no wonder that much of the public would like to see federal limits on tuition increases. Although a congressional trial balloon aimed at punishing colleges and universities that raise tuition too high too fast has been withdrawn, it sent a clear message to the nation’s campuses.
Curbing tuition increases is still likely to be a top priority in the upcoming reauthorization of the Higher Education Act, and there could be a reallocation of federal aid toward state and community colleges and away from “elite” private institutions. Further, some lawmakers want to create incentives to promote price constraints, including imposing a rigorous set of reports for institutions that exceed a defined affordability index.
An Opportunity to Lead. Despite these rumblings, the higher education community has been handed somewhat of a reprieve as the rest of the nonprofit world has come under increased scrutiny from the public and lawmakers. But it is risky to think that college and university boards won’t eventually find themselves at center stage, particularly if tuition increases remain high. Moreover, as mission-based, tax-exempt, public-benefit corporations, our institutions have an obligation to address important questions of accountability, fiduciary duty, and ethics.
Although the market for public trust and support is very different from the financial markets, the “prudent man” principle that guides fiduciaries is highly applicable, and boards should not wait until their institution’s stock of public trust is depleted. Instead, officials should develop a plan containing policy directives and marketing strategies to strengthen the institution’s portfolio of public trust. This way, the institution will benefit when the climate is benign and have reserves on which to draw when storms erupt. Fortunately, college and university boards can take a wide range of actions to improve governance both in substance and in perception.
One is to take a hard look at the federal Sarbanes-Oxley Act—the sweeping governance reform law enacted in 2002 to regulate publicly traded companies—and consider applying relevant principles to governance policies and practices and to executive and trustee responsibility. The National Association of College and University Business Officers (NACUBO) has published guidelines that show which sections of the law are appropriate for colleges and universities to adopt and which are not. (“NACUBO Advisory Report 2003–3” is available free at www.nacubo.org.)
The fact that the legislation was enacted in response to scandals in the corporate sector should not be lost on the nonprofit world. This fall, California enacted the “Nonprofit Integrity Act of 2004,” which incorporates many of the principles embodied in Sarbanes-Oxley, though it exempts education and health-care institutions. Although other efforts to extend relevant sections of Sarbanes-Oxley to nonprofits have foundered in New York and elsewhere, many college and university boards are reviewing their policies and practices to comply with the spirit of the law. Drexel University in Pennsylvania received widespread publicity for its early embrace of many of the law’s provisions. [See “Should Boards Alter Governance Practices in Response to the Federal Sarbanes-Oxley Law?” Trusteeship, November/December 2004.] A review of Sarbanes-Oxley may lead to changes that would bring your institution fundamentally into compliance with the spirit of the law—a voluntary act, not one mandated by regulators.
One of the chief provisions of Sarbanes-Oxley focuses on the audit. Among other things, the act requires corporations to establish independent and competent audit committees. Today, many higher education boards have a finance committee charged with handling audit responsibilities. Creating a standalone audit committee and following other best practice audit guidelines as prescribed by Sarbanes-Oxley for corporations (such as written policies on document retention and barring personal loans to board and staff members) can only help colleges and universities improve their governance practices.
The national higher education associations, including AGB, the American Council on Education (ACE), and the Council for Advancement and Support of Education (CASE), are addressing Sarbanes-Oxley’s relevance to colleges and universities as well as to the foundations affiliated with public universities and systems. These national organizations are well positioned to document, disseminate, and promote model practices.
Perhaps these organizations’ individual efforts could become a joint effort that would include representatives from colleges and universities. They could take a cue from Independent Sector, which has created a national panel to make recommendations to Congress to improve nonprofits’ oversight and governance. The Panel on the Nonprofit Sector includes 25 nonprofit and philanthropic leaders from a wide spectrum of public charities and private foundations. While a higher education panel would not likely have recommendations to Congress as its objective, it certainly could develop and promulgate guidelines or principles for higher education institutions.
Active Governance. Many abuses that have snared nonprofits could have been avoided had board members been more diligent and active participants. The first line of defense against abuse is a board that understands and fulfills its fiduciary responsibilities. Certainly, this can be accomplished without new rules and regulations. Creating an independent audit committee is an important first step, and other good-governance practices can help boards be more effective and cohesive. For example, limiting the number of committees may help reduce the number of trustees who see their position as more or less honorary and increase the number of active board members recruited for their specific expertise.
Another opportunity to seize the initiative is in trustee education and training. Higher education institutions of every size and description should develop and implement a formal financial and governance orientation program and maintain it on a consistent basis. This is not simply indoctrinating new trustees as they join the board, but also requiring them to attend formal training developed by the institution or by other providers such as AGB. All trustees should know, understand, and appreciate the fiduciary’s duties of care and loyalty. Prospective trustees should be fully informed of the commitment they are about to make and what is expected of them.
Turning externally, colleges and universities can invest in their public-trust portfolios by doing a better job of communicating their cost pressures. It won’t turn public opinion 180 degrees, but it will ease the antagonism and head off Draconian proposals. Carol Christ, president of Smith College, summed it up well in a speech last summer to the CASE Annual Assembly: “We will all benefit from a more educated public. In order to develop such a public, we must communicate more openly about the issues of greatest public concern—cost, pricing, and value….This, in many cases, will not be easy. We are out of habit with candor, but it has never been more critical or urgent.”
Higher education institutions are not well served by a tendency to favor opacity over transparency. Our colleagues in the foundation world appear to have gotten the message. Dorothy S. Ridings, president and CEO of the Council on Foundations, said in an October address to the National Association of State Charity Officials, “Transparency has become part of philanthropy’s everyday language.” Today, she observed, “more and more grant makers are communicating to the public about what they do, and the public in turn has unprecedented access to an organization’s annual information return filed with the IRS. We have reached this stage bit by bit, working together.”
In this spirit, I would offer two thoughts for the higher education community to consider: One is to unite and cooperate. Getting the word out through a cooperative effort—to the public, lawmakers, regulators, and the media—can be more effective than going it alone. Second, communications is a two-way street, so true transparency would also welcome feedback from constituents that leads to improved practices.
A lesson learned over and over is that markets are fickle and unpredictable. They can take individuals, institutions, and entire sectors of our society from the heights to the depths and back again in short order. If the lesson applies to financial markets, it surely holds for the even more elusive market of public opinion. Boards would do well to refocus on the public-benefit aspect of their missions and take a candid look at their public-trust portfolio. To bolster public trust and confidence, such an examination would include evaluations of internal accountability, transparency, communications, self-governance, and adherence to best practices.
This portfolio approach to governance can help colleges and universities stay on the right side of public opinion and immunize them from potentially misguided actions of regulators and the law of unintended consequences.
John S. Griswold Jr. is Executive Director of the Commonfund Institute and Senior Vice President, marketing services and external relations, for Commonfund in Wilton, CT. A trustee of the Pomfret School in Connecticut and the Boys and Girls Club of America, he serves on several other nonprofit boards and investment committees.
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