In the last several weeks we have seen a number of universities beginning a significant push into the philanthropic space. Some of this has been pre-planned as part of a longer term strategy. For others it has been more of a reaction to the growing educational austerity of the Federal government. While this move to broaden the revenue and cash flow base of the universities is welcome, I would contend that it is based on a naive interpretation of what one is doing when seeking out “other people’s money” to support university endeavours. This naivete arises not in the sophistication or slickness of the campaigns being mounted but in terms of the fact that to be successful in altering the funding mix in the universities, these institutions will need to very significantly alter their organisational and governance structures to become both more transparent and more accountable to those investing in the institutions. Let me outline this in a bit of detail.
I recently heard a dean overseas note that the one thing about a university degree that is different from most other ‘products’ is that people who bought your product 15 years ago are still passionately worried about what the product is worth to them today. This is a telling point in that it highlights something that differentiates the raising of capital in universities and general fundraising and philanthropy. University capital raising — note that I am purposely not going to use the term fundraising or philanthropy — is not philanthropy nor is it fundraising. The Cancer Council fundraises. The Wesley Mission relies on philanthropy. Successful university capital raising is a means by which individuals can co-invest in an asset that is valuable to both themselves and society. This I believe is where Australian universities and the pundits are missing the boat when it comes to the model of university capital raising and the implications for their own organisations.
Let me note before someone jumps in to criticize that universities do take advantage of philanthropic tendencies in individuals and groups such as foundations. But this is not the logic that keeps universities in the US and elsewhere funded effectively. Arm’s length philanthropic activities do arise when cashed up individuals are looking for opportunities to enhance their image or provide unconstrained funds to specific institutions. We see this when people like Frank Lowy give money to UNSW for a cancer centre. However, one off investments in bricks and mortar or specific programs do not work to provide an effective, continuing and meaningful way to generate ongoing funds that allow universities to sustain themselves and grow. They are too sporadic and idiosyncratic to be the core of a meaningful capital funding strategy.
If I use my experience in the US — where I was a graduate of both Carnegie Mellon University and the University of Chicago but worked at other public and private institutions of note — we see a profound and fundamental difference between the university experience at these institutions versus my experience of 15 years in Australia. While many will say that “Australia is not the US”, I would point out that every indication is that while this is a true statement it is unlikely to matter since universities are acting as if the US model is the one they need to follow — either in full or in a modified form.
In the US, individuals who come to the university are bound to the university for life. Their time at the university is not only time spent integrating into a community but one in which there is a significant bonding between students and faculty as well as others at the institution. To this day, I am personal friends with people who were faculty and administrators at CMU as well as those at the University of Chicago. The institution views you not as a consumer of a product but as someone in which the institution has invested. The logic is very much one of a sharing relationship where you invest in the institution and the institution invests in you. Indeed, when David Booth gave $300 million dollars to the Chicago’s Graduate School of Business it was telling that said that he was not giving this so much as a ‘gift’ but as Chicago’s return in its investment in him. The alumni networks and other activities work to imbue this later in one’s life. Never once did I feel that an alumni event was anything other than a way of continuing the relationship with me. Whether I chose to invest in the institution was my choice but one that was hopefully based on the fact that I was returning something to an institution that gave me so much. In my case this was literally true as I was a National Merit scholarship holder at CMU and was funded throughout my MA, MBA and PhD programs at Chicago which not only covered tuition but granted me a stipend.
In Australia there is no such co-investment. For the most part the university treats the student as a purchaser of a product for which a service is delivered and once that service is delivered the transaction is effectively at an end. Speaking very generally based on my own experience and that of others that product is also generally not very flash. Depending on one’s program major the classes can be huge and taught by inexperienced faculty and tutors (certainly this is the case in Australian business schools) with the administration mostly concerned with its costs (hence the massive move to casual academics and outsourced grading). While the instructors work hard and can be extraordinarily diligent and committed, they are working in a structure that rewards transactions and not relationships, hence there is no reason to invest in the longer term welfare of the students or the institution. For overseas students the transaction is decidedly one sided as they are clearly there to fund the non-self sustaining parts of the university, capital works projects and underfunded domestic students. This transactional orientation spills over into all aspects of what the university does. It is fairly rare to see faculty in their offices on non-teaching days and almost never on a weekend or evening. The faculty come in, do their teaching and administration, and go home. The same is true of students, who are rarely near campus on anything but when their classes are in session (the exception being the overseas students who never seem to leave). In the US it would be expected that Deans and other senior administrators interact and interact informally with faculty and students. The Australian culture is one where senior administrators meet with senior administrators, leaving the day-to-day interactions with students and faculty to lower level administrators. In the last 6 years I have never once seen a senior administrator or dean sitting and casually chatting with students or going out of their way to visit a faculty member in their office. When I was in the US, this was not only routine but part of the culture.
My point on this is not to be overly critical of the Australian scene but to point out that what drives the effective capital raising of US institutions is the logic of the relationship rather than the logic of the transaction. If Australian universities are to be effective at raising capital the first thing they need to do is change the logic that drives their institutions. But this has very profound implications as to what has to follow.
For example, currently, what an Australian dean does within their own faculty can be only peripherally related to the budget allocated to that dean’s faculty. In the US system, most universities operate on a model known as “every tub on its own bottom”. What this means is that the faculty keeps the revenues it generates minus a tax paid to the university on its program revenues (at Chicago this tax is approximately 10% of revenues). However, if it wants to invest beyond its means (e.g., to build a building) it either has to “borrow” from the centre (and pay interest) or draw down its own reserves/capital. If the faculty earns a profit, it gets to retain the earnings in its capital account. If the dean raises external funds from alumni or others this money goes to accounts dedicated to that faculty for which a return is generated that is reserved for that faculty. In the Australian system the allocation of faculty budgets is nebulous. In the case of business schools, most faculties are given a budget that is approximately 50% of the revenues they generate (essentially a 50% tax rate that at some larger Australian universities amounts to over $100,000,000 per year!). If the faculty manages to underspend its budget, the excess is returned to the central administration. The perverse incentives this creates are clear. In the US deans are under very strong pressure to generate external funds and to facilitate relationships with alumni and the community. In the Australian system the dean’s would be foolish to raise funds since anything raised over and above what the university chooses to give them budgetarily will simply disappear. Indeed, most Australian deans are little more than internal middle managers; meaning that they spend most of their time interacting with senior university administrators and other deans and doing mundane administrative tasks rather than being involved with students, alumni, faculty and the external community. In essence, they raise almost no money since it makes no sense for them to even try except in cases where that is a KPI given to them by some higher level administrator. Why would they bring in money through one door only to have disappear from the budget out another? When I say this to some university administrators they say “no we protect those funds”. However, what they really mean is that they might preserve the capital but cash flows are fungible — how would one know that the dollar that is protect came from alumni or tuition?
A second implication is that you would need to be a fool to actually give money to an Australian university unless you knew exactly how that money was going to be used. This is why the vast majority of the funds raised by Australian universities have been for building projects. It is pretty clear where that money has gone since it is a big hulking structure the donor can be shown. In the US case, the majority of capital funds raised go to endowed professorships and student scholarships rather than building projects (note that Australia has virtually no funded professorships) . Hence if I am some Australian fat cat with $100M dollars the university wants from me to give to the business school (like David Booth at Chicago or David Tepper at CMU) perhaps something could be worked out with the university. But this is not where the real sustainable money comes from. Suppose, more realistically, that I am one of 10,000 alumni being asked to invest $1,000 each (or any number that adds up to $100M). How do I know what the university did with my investment? In the US it is quite clear how I know. Every year each faculty publishes an annual report outlining who gave what money but also giving detail on the finances of each division of the university (see Chicago’s Business School’s here and Stanford’s here). In the Australian case, no information at all is provided as to the funding of the individual faculties (when information is provided it removes the revenue figure and never indicates how much money is taken by the university centre). Indeed, this information is proactively hidden. In the case of the business schools, we know that the universities in Australia takes on the order of $1B per year from these faculties to cross-subsidize other activities. So why would I bother to give the university $1,000 of my money when they are already taking millions of dollars from the faculty I want to support? The implication of this should be clear. If Australian universities are interested in getting alumni and others involved in supporting them via co-investment they need to not just stop the rampant cross-subsidization but also publish transparent accounts that outline clearly where the funds are generated and allocated internally.
The third implication is that the universities need to change their governance structures. Currently, Australian universities are governed by councils that are little more than powerless appointees with no skin in the game or local hotshots or notables doing public service. If Australian universities are serious about people investing in them directly then they need to give those investors a say in the management of the university. Current university campaigns operate on a “we are doing good things you need to support so give us money and trust us to use it wisely” model. This is unworkable, particularly in a context in which most people view their incentive for doing this is simply to replace money lost via cuts in the allocation from the government. University councils are mixtures of political appointees and internally elected representatives that have little power to counter the university administrative structure and very little to gain by doing so (in some cases they may also pay a high price by doing so). As an example of this I suggest that the reader look at the mixture of their local university council and compare it to the Board of Trustees at the University of Chicago (this group represents over $1B of investment in the university plus significant international leaders with more than 50% of the Trustees being Alumni). In most US institutions case all alumni receive a report on how funds are used. The Stanford report is even called Report to Investors.
My point in this discussion is to outline that there is a naive belief associated with external capital raising by universities that does not take into account that such an activity is only one small part of a larger open system of co-investment by the university, its faculty and staff, students, alumni, and interesting external partners. To be effective in a sustainable way Australian universities will need to bite a very large bullet. One that requires them to move from a transactional model of education to one of life-long relationships that require co-investment and engage the individual as an integral part of the university’s existence. It will require them to be open and transparent and do away with rampant cross-subsidization that has turned some faculties into little more than cash generating machines with little intellectual value. Finally, it will require them to give up administrative power to investors while also requiring that governments do the same. The basic idea is that if you want to use other people’s money for your own purposes (even if they are very noble purposes) you must accept the fact that investors will demand rights in determining how that money is used and require that your fiduciary responsibilities move away from meeting regulatory requirements and government policy goals to meeting the strategic and moral goals of those providing the capital to make them happen.
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