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Legal Watch: Balancing Act—How Can Boards Effectively Work with University Administrators and Preserve Public Trust?

1/31/2013

 

By Ada Meloy

University governing boards have made plenty of news lately, in the wake of high-profile incidents at the University of Virginia, The Pennsylvania State University, and other campuses. One central challenge is the balance of power between the board of directors, the administration, and the faculty. Conflicts of interest and transparency are others. To be certain, these matters are exceedingly complex, but careful planning and clear policies can help your institution work better with your board.

Who Regulates the Board?

Private and public institutions of higher education in the United States generally use a “lay” board—that is, one composed of non-faculty members—to govern the college or university. Such boards ensure the institution will not be subject to excessive governmental control.

Generally speaking, lay governing boards are required and covered by state constitutional or statutory authority. State statutes regulate public boards very directly, usually prescribing how the board is selected and its responsibilities. In some states, public institutions are responsible for achieving certain policy goals regarding higher education. Public boards are often appointed by the governor, with advice from and consent of the state senate. In four states, public university board members are actually elected.1

Responsibility for the institution is then divided among the board, the administration, and the faculty. In many cases, the board oversees fiscal matters, hiring of the president, setting educational policy, and capital improvement projects. The board, not the state, has exclusive control over these matters. The president of the institution, then, is the executive manager of the college, accountable for implementing the policies of the board and reporting to the board. Conflict-of-interest and ethics standards are often set by statute for public boards as well.

Private college and university boards are also subject to various state nonprofit corporation laws. In 1952, a committee of the American Bar Association (ABA) adopted a Model Nonprofit Corporation Act. Today, every state, with the exception of Delaware and Kansas, has a nonprofit corporation act, generally following the ABA model, to which all private, not-for-profit corporations are subject, including colleges and universities.2 The board of trustees (or directors, or visitors, or rectors, depending on the state) is charged with proper operation of the institution, and is accountable for violations of the law. It is important to note that nonprofit corporation acts are distinct from laws related to for-profit boards. The acts normally divide the fiduciary obligations of board members into the duty of care and the duty of loyalty. While the duty of care standard for nonprofits is similar to that of directors of business corporations, the duty of loyalty imposed through these statutes stands in contrast to that of a profit-making business. Where corporate boards are motivated by maximizing profit for the company’s shareholders, nonprofit corporations organized for the public benefit are concerned with advancing the charitable purpose described in the mission of the institution. In addition, nonprofits do not distribute surplus profits to the institution’s leaders. Conflict-of-interest prohibitions are usually very clear: nonprofits must not engage in self-dealing transactions that benefit themselves at the expense of the mission of the organization, or by approving or accepting excessive compensation. In the case of a private college or university, specific ethics and conflict rules may be set by the board itself, or derived from state statutes and regulations regarding gifts, insider relationships, and personal advantage. Finally, because nonprofits do not have stockholders, the attorney general intervenes to enforce the laws,3 rather than any shareholder.

In addition to the state nonprofit corporation statutes, most states have additional laws that apply directly to higher education. These include licensing statutes and are motivated by consumer protection principles. States license each institution operating within it to confer degrees; this establishes minimum standards that academic institutions must meet in order to comply. The purpose of the laws is to avoid “diploma mills.” Of course, state laws only go so far in guaranteeing quality—the statutes really focus on the minimum standards rather than increasing academic quality, which is more a task for the regional accreditation process.

Public Accountability and Transparency

Widespread public confidence in college and university boards is of the utmost importance. This is particularly true at public institutions, where the university is an arm of the state government. Decisions at many public institutions, including the choice of who should serve on the board, are very political. Trustees may be appointed because of their political activism or loyalty to a politician rather than their experience in or interest in higher education. At private and public institutions alike, public trust is imperative to maintaining financial viability, ensuring that donors and the local community continue to support the university and protecting the institution’s reputation.

It behooves institutions to preserve this trust by developing careful conflict-of-interest policies and promoting board transparency. Board members should always submit annual disclosures of their affiliations and actual or possible conflicts of interest. Similarly, institutions should take care to eliminate financial conflicts of interest with respect to faculty scholarship. Some funding agencies require that researchers disclose “significant financial interests” in entities whose financial interests may be affected by their research,4 but institutions may consider requiring researchers to disclose such relationships as part of a university-wide policy. The president should be subject to a periodic review procedure with respect to both compensation and performance. Decisions regarding admissions standards, hiring, and promotion should all be applied fairly and uniformly. To foster transparency, these policies should be written and university administrators should be held accountable for following them closely.

Balance of Powers

Perhaps the most delicate and difficult challenge confronting board members at colleges and universities is the balance of powers in practical terms. Many boards struggle with how to properly manage their fiduciary responsibility without meddling in day-to-day operations. The model of “shared governance” was outlined in a 1915 declaration by the American Association of University Professors (AAUP).5 The trustees and faculty hold essential but independent roles in university governance; faculty is primarily responsible for those questions that are “purely scientific and educational.” The idea behind this separation of powers is that it promotes genuine boldness and thoroughness of inquiry.

AAUP and ACE developed a Statement on Government of Colleges and Universities in 1966, which outlined key stakeholder responsibilities.6 According to that statement, the board and faculty frame and execute longer-term plans and decisions regarding physical resources, budgeting, and selecting the president of the institution. The board controls the endowment, capital and operating funds, and personnel policies. The faculty is primarily concerned with academic matters, curriculum, methods of instruction, research, faculty status, and student life considerations relating to the educational process. Of course, in practice, this balance can be difficult to strike. Presidents and boards should therefore only overrule faculty decisions about academic matters in exceptional circumstances, and for reasons communicated to the faculty.

Of course there are difficulties in the shared governance model. Board members may become overly involved in the operations of the university, or may take an overly hands-off approach. This can lead to mismanagement of funds or noncompliance with essential policies. Faculty senates, on the other hand, can be slow to act, and may not embrace change at the same rate as board members. Several issues have been highlighted in the news with respect to governance issues at higher education institutions, including  boards that have become too large in size to be effective,7 board failure to properly oversee the president and administration,8 boards operating in secrecy,9 and board failure to resist improper intervention by major donors.10

While state nonprofit corporation laws are only enforced in the most egregious of circumstances, the efficient operation of any higher education institution depends on a good working relationship among the board, faculty, and administration. College and university boards should work toward creating a culture of transparency and accountability, ensuring that ethical standards are met, stakeholders are well-represented, and public confidence is maintained.

 

Notes:

1 Colorado, Michigan, Nebraska, and Nevada all elect board members for public universities.

2 In Delaware and Kansas, nonprofit corporations are governed by the business corporation act of each state.

3 E.g., Stevens Institute of Technology case in 2010.

4 The National Institutes of Health requires this, for example.

5 Declaration of Principles on Academic Freedom and Academic Tenure, available at: http://www.aaup.org/NR/rdonlyres/A6520A9D-0A9A-47B3-B550-C006B5B224E7/0/1915Declaration.pdf.

6 Statement on Government of Colleges and Universities, available at: http://www.aaup.org/NR/rdonlyres/431ABA0A-019B-4ECD-B067-14EE81F37ABA/0/StatementonGovernmentofCollegesandUniversities.pdf.

7 http://chronicle.com/article/Shrink-My-Board-Please/133557/.

8 http://www.insidehighered.com/news/2012/07/13/penn-state-report-says-board-didnt-ask-toughquestions-administrators; http://www.washingtonpost.com/wp-dyn/content/article/2005/10/08/AR2005100801284.html.

9 http://chronicle.com/article/VirginiaPenn-State-Boards/133751.

10 http://www.chicagotribune.com/news/local/chi-u-of-i-clout-college-07-jul07,0,370456.story

Ada Meloy is general counsel of ACE. She acknowledges the contributions of Jessie Brown, associate general counsel at ACE, to the preparation of this article. 

 

 

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