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From Wall Street to College Street, Part II

Corruption and corporatism pervade American campuses.

By Todd J. Zywicki

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December 16, 2012

(Editor’s note: This is the second of two articles based on a paper presented at a conference sponsored by the Fund for the Study of Spontaneous Orders and directed by John W. Sommer in February 2012.The first can be found here.)

One needn’t read a grand jury transcript to know what was animating Penn State’s leadership upon learning of a sexual predator at the heart of Joe Paterno’s football dynasty. It was: What impact will revelation of these misdeeds have on Penn State’s reputation and fundraising? 

The management of reputation and fundraising is the overarching goal of today’s universities—rather than the inculcation of character and educational values. During my four-year tenure on the Dartmouth board we never had a single board-level conversation about the Dartmouth curriculum, what Dartmouth students should learn while in school, or what professors should teach. Yet we discussed how to improve Dartmouth’s “brand” at virtually every meeting.

This focus on image management stems from several factors: (1) the educational emptiness of the modern university, (2) the changing composition of boards of trustees and board governance practices, (3) the rise of the CEO university president, and (4) the impact of rankings.  I will discuss each in turn.

1) Educational emptiness. The story begins with the hollowing out of the notion of a liberal arts education, creating a vacuum that is being filled by image management rather than a coherent educational vision.

Traditional liberal arts education had three basic goals. First, it was concerned with the formation of the sensibilities and character of the individual. That included helping young adults to form a meaningful philosophy of life and to refine one’s aesthetics to learn to distinguish the beautiful from the ugly and to appreciate those elements of life that uplift us. Second, it prepared students for their role as citizens in a free and democratic republic by teaching them our inherited history and preparing them to pass along that tradition to the next generation.

And, third, universities imparted technical knowledge of engineering, business, and other practical arts to improve economic productivity.

Over time, investment in education has come to be justified solely on the basis of just this third factor—will my degree get me a job and how much will it pay? Yet, ironically, universities arguably have a comparative advantage only with respect to the first two factors in educating their students. The whole social underpinning of higher education is built on the assumption that the first two factors are foremost responsibilities. For example, the tax-exempt nature of universities and government subsidies rests on the idea that they produce external benefits for society that otherwise would be underprovided, not merely because it helps graduates earn higher salaries, a largely private benefit.

The collapse of the traditional liberal arts vision started with the culture shock of the 1960s, which hit universities with a culture shock from which they never recovered. For a variety of reasons, universities lost the courage of their convictions as to what students should learn and the growing cultural alienation of the university from traditional American principles eroded support for educating good citizens. No longer was there a consensus as to what should be learned in college. This created a vacuum at the core of the university.

This force was exacerbated by the democratization of university attendance, beginning with the GI Bill. The opening of the universities to a new class of students could have served to uplift those students by enriching them as individuals and citizens. Instead universities increasingly cater to the demands for practical and utilitarian education, such as business.

Third, the government became entangled with the university, especially after the Sputnik crisis of 1957. As government increased its support for universities it aimed at expanding practical knowledge at the expense of other types of knowledge. Government grant-chasers became the reigning stars of the academy, and the emphasis of students and universities followed apace.

To the extent that any vision remains, it is one of practicality—to ensure that students get well-paying jobs when they graduate.

2) The changing composition of boards of trustees. Much has been written about the outsized role that high finance has assumed in the economy and American society generally.

Less noticed is the similarly-outsized role that investment bankers have come to assume at universities. With personal assets in the billions of dollars, investment bankers are among the nation’s largest philanthropists and have used their wealth to purchase an ever-increasing number of seats on boards of trustees. In so doing, however, they have brought with them to College Street the same crass and self-serving ethics that served many of them so well on Wall Street.

As exemplified by the Wall Street meltdown in 2008, a defining characteristic of the investment banking mindset is a lack of concern with the underlying substance of what is produced. The focus for some is on getting the deal done and passing along the downside risk to someone else—a sort of Ponzi scheme. What frequently matters is not whether the deal itself is sound but whether the deal appears to be. This narrow mindset latches easily on to the idea that the primary purpose of a university is image management and the financial success of its graduates rather than its educational substance.

A personal anecdote from my time on the Dartmouth board will illustrate the point.  When I joined the board it had three standing committees: Governance, Finance, and Buildings and Grounds. My first request when I joined the board was that we adopt a standing committee on Academic Affairs. I was informed that the board “has no expertise” in monitoring the academic operations of the college and so there was no reason for us to oversee that portion of the college’s operations. It was as if a director of General Motors was told that the members of its board has no expertise in building cars, so the board would not monitor its car production. More tellingly, it was evident that its members thought it was unnecessary to develop such expertise. Eventually, after three years of resistance the board finally relented.

Perhaps most menacing is the acceptance of the idea that universities are simply another forum for self-dealing. Massive university endowments have provided a rich target for investment bankers to enrich themselves at the college’s expense. In addition, a seat on the board of a prestigious university gives the lucky recipient access to a large number of wealthy potential investors. Pamela Joyner, an investment banker with whom I served on the Dartmouth board, put it bluntly, “Being a trustee should be a reward for your largesse.”

This issue came to a head during my time on the board of trustees in the form of conflicting interest transactions with members of the board of trustees. According to a series of investigative reports by journalist Rick Jurgens, the Tellus Foundation, and an investigation by the New Hampshire Attorney General, as much as 13.5 per cent of Dartmouth’s then-$4 billion endowment was invested in their various hedge funds and private equity firms. The large contributions that were their ticket on to the board were functionally a mere downpayment for the fees that they would later receive for managing half a billion dollars of Dartmouth’s endowment. I want to emphasize that I am not alleging that any of these investments were necessarily improper or unethical; instead, the point is that despite the obvious potential for self-dealing, these investments were made with the bare minimum not only of public disclosure and transparency but of internal board-level reporting as to the full amount and performance of these conflicting interest transactions relative to the endowment as a whole.

Even worse, this focus on funneling college funds into their own hands led to a dangerous overweighting in Dartmouth’s endowment in illiquid and highly risky investments: by 2009, exotic investments comprised a whopping 67.5 per cent of Dartmouth’s endowment investments. When the market collapse of 2008 came, Dartmouth’s endowment not only collapsed in value but was highly illiquid as well. This led Dartmouth to be forced to issue several hundred million dollars in bonds just to cover operating expenses (hence, not tax-free). This, combined with other elements of financial mismanagement, caused it to become so highly leveraged as to lead to a downgrade of Dartmouth’s credit rating—which led to paying several hundred thousand dollars a year annually to cover the increased interest rates caused by a lower credit rating.

The gap between modern university ethics and the real world is also illustrated by the response of the Dartmouth board of trustees to the so-called “Dartmouth insurgency” of which I was a part. By a contract signed in 1891 between the college and its alumni the Dartmouth alumni association was given the authority to elect half of the board’s trustees (leaving aside two ex officio trustees). I, and three others, were elected as “petition trustees,” gaining access to the ballot by petition from alumni at large rather than being hand-picked by the alumni nominating committee working in cahoots with the board. The other half of the board was self-perpetuating, as the board replicated itself by picking its successors.

The danger of a self-perpetuating system is that it leads to an insular and self-reinforcing board of trustees that can be prone to group-think. It is precisely for this reason that the Sarbanes-Oxley law, for example, pushed for an increased role for independent trustees in for-profit corporate governance and greater accountability in board governance. 

When confronted with the challenge offered by independent trustees, however, the Dartmouth board “packed” the board by breaching the traditional agreement to provide parity. It enlarged the board by 50 percent, with all new seats to be chosen by the board itself rather than the alumni. It also adopted electoral changes designed to make it more difficult for truly independent trustees to be elected.  And at the end of my first term on the board I was removed by a secret vote of the board without being provided an explanation. 

Increasingly, university boards are ceding control of the academic side of the institution to the professional academics who run it. Moreover, the prestige and self-enrichment that come from serving on a university board tend to reinforce an attitude of “don’t rock the boat” and to stay in good standing with other board colleagues and the president. In addition, given the absence of any clear qualifications to serve on a university board, there are a virtually limitless number of qualified candidates. As a result, board members are chosen primarily for their fund-raising potential and their willingness to “go along to get along” with other members of the board. This is a recipe for lazy and vacuous governance.

3) The Rise of the CEO President. The third factor that has characterized the modern university is the rise of the “CEO president.” College presidents in the past were often distinguished teachers and scholars known for their commitment to the college’s mission. Today, however, virtually every president is selected according to the same criteria: Will the president be a fund-raiser and how will he manage the school’s reputation?  The president is not a scholar or teacher, but an image manager who also manages the finances of the institution.

In profit-making businesses, shareholders and directors can effectively manage corporate CEOs through profit and loss statements and the impact of their actions on stock prices. But college presidents run nonprofit institutions; thus there is no measurement of their efficacy or insuring that they are managing in the best interest of the institution rather than pursuing their own narrow self-interest. In fact, as I have argued elsewhere, academic administrators have incentives much more akin to those of governmental bureaucrats rather than private corporations.

Following the work of the late William Niskanen, I argue that academic administrators engage in internal empire-building rather than increasing efficiency. The most striking development of higher education over the past two decades has been the rapid growth of expenditures on non-academic personnel, such as assistant deans, provosts, and presidential hangers-on, even as expenditures on academic personnel have remained constant. I was struck during my time on the Dartmouth board how many allies I and the other petition trustees had among the faculty for our agenda of greater financial discipline and transparency—not because they shared our politics, but because they shared our frustration at the rapid growth of the college’s administrative apparatus.

Rankings. It is with some hesitation that I point the finger at the final factor that has driven the corporatism of the modern university: rankings. Rankings can provide useful information to students shopping in an information-poor environment. But rankings today—most notably U. S. News and World Report—do not focus on substance but rather on reputation. Thus they reinforce the underlying dynamic to measure reputation rather than substance. In turn, boards and college presidents “teach to the test”—i.e., manage their institutions with an eye toward the impact on rankings. 

What Next?

In conclusion, I see several possible reforms.

First, we should rededicate ourselves to explaining the value of a liberal arts education and how college resources should be allocated to advance that vision. Second, boards should follow the principles of good corporate governance and become less insular and self-perpetuating and increase the representation of independent trustees selected for reasons other than their fund-raising prowess and willingness not to rock the boat. Third, we need stronger policies to police self-dealing by trustees and university officials. Fourth, it is time to try to enlist faculty to create checks and balances against the expanding empire of college presidents and other administrative personnel. Finally, we need a new generation of college presidents with the courage of their convictions to put academic values—free speech, academic rigor, and intellectual integrity—ahead of careerism and self-enrichment.

 


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