Friday, August 10, 2007

Do we need Private Equity Funds to tackle X-inefficiency and organisational slack in fat-cat universities?

Harvard University has an endowment of about $ 30 bn. Yale follows with around $18 bn. Then Stanford with out $14 bn and Princeton with about $13 bn. Cambridge University (including the colleges) probably has an endowment of about $3 or $ 4 bn (a surprisingly large chunk of which is owned by Trinity College). Is this money well used? Does Harvard’s endowment produce eight to ten times more academic value added than Cambridge’s endowment? Whose money is it legally and who are the de facto 'beneficial owners'?

I’ll leave it to the lawyers to determine who the legal owner(s) is (are). It’s pretty clear who the principal beneficial owners are: current and future faculty. With future faculty selected by current faculty – we have a classic example of a self-perpetuating oligarchy.

The formal legal status of universities differs; I am considering here mainly those that have de-facto charitable status, like all the leading private American universities. In the UK, universities and Oxbridge colleges are charitable foundations.

Let’s characterise the official, mandated purpose of these institutions of higher learning as maximizing the present discounted value of teaching and scholarship (research) or PTR over an infinite horizon. As in most organisations, there is a principal-agent (or trustee/beneficiary) problem inherent in the way universities are run.

Universities like Harvard, Yale, Stanford, Princeton, Cambridge and many others, are basically run like worker-managed firms (the old Yugoslav model), with an infinite horizon (the workers cannot liquidate the business and divide the profits among themselves). These agents, even when they care about the mandate of the institution they manage and control (the maximisation of the PTR) have additional, and potentially conflicting, selfish objectives: status, creature comforts, power, prestige, income, etc. We know from the theoretical and empirical literature of worker-managed firms that they tend to pamper the incumbent workforce (paying them their average product rather than their marginal product, in the simplest example). If there is a seniority system, and the incumbents control the hiring process (and the firing of the non-tenured) , the pampering and privileges of the senior incumbents (the tenured faculty) can be massive.

Not only do universities provide significant rents and creature comforts to their beneficial owners, I would conjecture that in addition, even allowing for the complexity of their products and production processes, universities are woefully badly managed. It is still extremely difficult to bring in professional managers. Within universities, those who can, do research, those who cannot, teach and those who cannot even do that, do administration. Managing academics is like herding cats. Academics are not selected for their maturity, leadership capabilities and teamwork. Universities are a classic example of an under-performing industry.

There are some competitive spurs to efficiency in the university sector – there are new entrants, at home and abroad, and some universities (not enough, unfortunately) go broke and disappear - but the capacity for an outsider to come in, reorganise and restructure the assets of under-performing fat cat universities (UFCUs) is effectively non-existent, unless the institution is about to go broke. The weeding out of the woeful therefore proceeds far too slowly, especially when the woeful are the best but still not as good as they could and ought to be.

Assume that the leading private American universities are listed and traded on the ICP (the Intellectual Capital Market) and that what is priced and traded on this market are shares in the PTR. There is a large population of investors out there who value teaching and research. Assume also that, whatever happens to the individual academic institutions, the resources of the existing universities can only be used for the same purpose: the maximisation of the PTR.

It is my conjecture that before you could say ‘academic freedom’, private equity funds would have snapped up most of the UFCUs, fired most of the labour force, sold most of the assets, and started again with a quite different ownership and control structure.

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