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University Governance

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Joined: 01 Jan 2006
Posts: 8
Location: Maryland

PostPosted: Fri Oct 05, 2007 9:55 pm    Post subject: University Governance Reply with quote

Tulane is not the only school being sued by its alumni. There is an interesting lawsuit going on at Dartmouth where the administration is somewhat aghast at the prospect of actual oversight by the Board. Below is an article written by Meir Kohn a professor at Dartmouth about corporate governance. Wonder what our own Dear Leader would have to say about this?

By Meir Kohn, Professor of Economics
Published on Wednesday, October 03, 2007
Editor’s Note: Professor Meir Kohn’s column is the first installment of ExtraCurricular, an occasional series of commentary by Dartmouth professors. Each column will approach a topic of the author’s choice, highlighting issues of faculty interest and opening them up to response from our readers.

Governance is not a problem peculiar to Dartmouth. All large organizations — business corporations and government agencies as well as nonprofits like Dartmouth — are run by managers or administrators. Human nature being what it is, these managers or administrators tend to use the power delegated to them for their own advantage. Instead of simply performing the functions with which they are charged, they divert their efforts and the organization’s resources to furthering their own interests. This is not because they are bad people; it is because they are perfectly normal people and so have difficulty resisting temptation. The problem of governance is the problem of limiting such undesirable behavior.

I am most familiar with governance in the context of business corporations — a standard topic in my finance class. The ownership of most large corporations is dispersed among millions of small investors. These many owners cannot possibly manage the companies themselves, nor are they interested in doing so. So professional managers are hired to do the job for them. But, of course, rather than doing what is best for the shareholders, these managers do what is best for themselves.

The board of directors is a mechanism of corporate governance, designed to monitor managers and to protect the interests of the shareholders. However, this mechanism works poorly. While formally the directors are elected by the shareholders, in practice they are chosen by the managers, so their loyalty is more to the latter than to the former. So corporate managers are largely free to inflate their own compensation, to build business empires to boost their own status (even when this is unprofitable), and to hang on to their jobs even when they are incompetent.

The governance problems of nonprofits are similar in general, but they also differ in some respects. Administrative misbehavior takes somewhat different forms. For example, since nonprofit administrators cannot award themselves huge salaries and lavish stock options, they tend to take more in perks (houses, private jets, generous pensions). They also find other ways to use the institution’s resources to their own benefit. For example, they promote political causes close to their own hearts even when these bear no relevance to the goals of the institution. These causes tend to be leftist, because most administrators are of the left. But conservative administrators would promote conservative causes. The issue is not one of politics but of governance.

A more important difference is the lack of external constraints on the misbehavior of nonprofit administrators. For corporations, SEC regulations require public disclosure of a great deal of information, making it easier to monitor managerial performance. Disclosure requirements for nonprofits (to the IRS) are much more modest. Not surprisingly, nonprofit administrators release as little information as they can to avoid having to account for their actions. Moreover, if corporate management performs badly enough, it faces the danger of being removed by a hostile takeover. But however bad things are at Harvard, its administrators need have no fear of a takeover by Yale.

It is in the context of the general problem of governance — and of the particular problems of nonprofit governance — that we should understand recent events at Dartmouth. It is not that administrative misbehavior is unusually bad at Dartmouth. What is unusual is the ability of Dartmouth alumni to elect to the board some trustees not hand-picked by the administration. This peculiarity offered a potential mechanism of governance, and a number of alumni were sufficiently public-spirited to try to turn this potential into reality. It is hardly surprising that the administration did not welcome this initiative. With remarkable brutality, the administration and its friends on the board have acted to neutralize it. Contrary to the pronouncements of the Ministry of Truth, the board did not vote to strengthen governance at Dartmouth: it voted to prevent it. With this avenue cut off, we remain without any effective mechanism of governance. There is therefore no constraint on the potential misbehavior of this or any future administration.

This is unfortunate for Dartmouth. But the impact is much wider than that. Had the alumni initiative succeeded here, it would have been imitated elsewhere, to the ultimate benefit of all institutions of higher education. That now seems unlikely."
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Joined: 11 Jan 2006
Posts: 54
Location: New Orleans, La

PostPosted: Sat Oct 06, 2007 10:03 am    Post subject: Dartmouth Reply with quote

This is great stuff, do you have a news link were I can get more information on the lawsuit?

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Joined: 01 Jan 2006
Posts: 8
Location: Maryland

PostPosted: Sun Oct 07, 2007 1:20 am    Post subject: Reply with quote

I pulled it off of a forum on College Confidential. You can try this link and it may take you to the exact thread:

If not shortent it up and lok for Parenys Cafe and look for a thread called "Dartmouth Sticks it to Alumni. Alumni Sue." It makes interesting reading. The fight going on between some alumni and the administration and its supporters has been getting a fair amount of coverage and I thought this article by an econ professor at Dartmouth was worth a read.

I have never been a fan of CEO's being on a governing board. I believe Cowen is the first Tulane president to also sit on the board and I can't see how there could not be a conflict of interest there.
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