Colleges in Peril Can Be Rescued, but Only if Governing Boards Transform

Several higher-education observers in recent years have predicted the demise of large numbers of U.S. colleges and universities. Most notably, the late Clayton Christensen, the Harvard Business School professor and management guru, once said that half of American colleges would face bankruptcy by 2030. While other predictions haven’t been as dire, there is obvious cause for concern. Moody’s, for example, determined that even before the pandemic, 30 percent of all colleges were operating at a deficit. Higher education is clearly facing one of its greatest financial crises in modern times.

At particular risk are small, private, tuition-dependent colleges where, in the words of Alice Brown, former president of the Appalachian College Association, “having 10 fewer students than expected is a serious financial problem. Having 30 fewer is a disaster.” The headwinds facing higher education widely — unfavorable demographics, declining public attitudes, cost, debt, declining return on investment for students, and competition from mass-market alternatives — are especially challenging for small, private institutions whose value proposition has historically been founded on an expensive, traditional campus-based experience. Those colleges face a double whammy. Not only is the student market declining, but the fixed costs of predominantly residential, campus-based operations create structural challenges even if enrollments stay close to historical levels.

The situation may actually be worse than it appears. First, higher education was in a significantly weakened state before the Covid-19 crisis. Second, despite nine consecutive years of enrollment decline and large numbers of mergers and closures, the leadership of most colleges has failed to enact necessary foundational change. Third, and perhaps most important, institutional boards are ill-equipped structurally, behaviorally, and culturally to effectively exercise their governance responsibilities during a period of volatility.

Looking closely, in fact, it is clear that the failures of the past 10 years are in large part leadership failures of boards of trustees. If an institution is in decline over a period of time, it is the board of trustees that is ultimately to blame, because the board has final accountability for an institution’s finances and viability. Our research found that critical issues such as declining enrollments and revenue, liquidity problems, deficit spending, and deferred maintenance were repeatedly discussed in board meetings without the boards asserting their governance obligations, often until it was too late.

The very nature of college boards is largely to blame for the problems colleges are facing. Here are some common characteristics:

An ineffective board structure and membership-selection process. Private-college trustees are most often selected because of their wealth (as possible donors), career success, alumni affiliation, former institutional affiliation, and perceived influence. And they are all volunteers. As a result, trustees are generally supportive, if not passionate about the institution, but unlike corporate directors, trustees do not have a direct stake in the success of the entity they govern. Because they are not broadly selected for their expertise as it relates to the institution’s operational and strategic needs, the chief executive and executive teams do not benefit from needed input, nor are they actively challenged relative to planning, decision making, performance, prioritization, or strategy. Lastly, the typical college board is overwhelmingly large, with dozens of trustees, which can improve inclusion but hurts functionality and efficacy. And because a disproportionate number of the members are alumni, there tends to be a strong dose of inertia-inducing nostalgia for how things “used to be.”

A culture that values the status quo. Boards favor politeness, friendly relationships, political correctness, and respect for legacy and the status quo over transparency, healthy conflict, bold thinking, and transformative change. This culture has been nurtured over many decades of more or less stable operations, but it is detrimental in today’s more volatile operating environment.

Information asymmetry. Because their work is volunteer and part time, many board members’ awareness of what is going on at their campuses and in the broader landscape of higher education comes exclusively through reports and updates provided at quarterly (or less frequent) board meetings. In some cases, the asymmetry of information between the administration and the board is more intentional. Information may be withheld or kept at a superficial level so that presentations and decisions are made quickly, avoiding time-consuming due diligence and the related accountability that would come with such a process.

Problem blindness. Ruth Cowan, a college-turnaround consultant, has referred to boards that are either unaware or willfully ignorant as “problem blind.” Decline at a college can be more difficult to see than in a business. A college is mission oriented, whereas a business is profit focused. Colleges with broken business models can operate years after a similarly beleaguered business would have been sold or dissolved. When a higher-education institution announces a merger or closure, that reality was years in the making.

Overdeference to the president. The relative unawareness of boards to what is going on at their campus and in higher education more broadly is in sharp contrast to the highly informed administrators they work with, who are usually long-term academics. It is therefore only natural for board members to defer to the president. But being overly deferential can contribute to presidents engaging in wasteful, misguided, and risky pursuits. While the interdependence of the board and the president can be a strength, it can also lead to what Judge José Cabranes of the U.S. Appeals Court for the Second Circuit, a longtime college trustee, has described as “back him or sack him,” whereby trustees believe they should unequivocally support the president until he or she becomes objectively and obviously unfit for the position.

Optimism bias. The economist Daniel Kahneman calls optimism bias “the planning fallacy.” Decision makers tend to underestimate costs, completion times, and risks, while overestimating the benefits. The very nature of college governance is a breeding ground for optimism bias, due to the previously mentioned problems of deference, problem bias, and information asymmetry.

A potential saving grace of the current pandemic for today’s struggling institutions is that it may finally be what Robert Zemsky has termed a “dislodging event”— something so jarring that it forces change that was not possible before. There is modest evidence that some institutions are at least entertaining new ways of operating that were off limits before the pandemic. The boards of the institutions in our research that successfully reversed their declines and began to thrive all responded to a disorienting dilemma, usually a threat of foreclosure or loss of accreditation, by engaging in soul-searching followed by transformative actions to change the institution.

Interestingly, even for those institutions, the threat had to be literally existential in order for the boards to “wake up.” Although the institutions in question faced their moment of truth pre-Covid, it may be that the current crisis will provide a similarly motivating scenario to shake other boards out of their complacency — to prefer change, even change that alters the nature of the institution — rather than riding the status quo to a painful demise.

While there is no sure-fire formula, according to Terrence MacTaggart, a former college chancellor and specialist on turnarounds, “turnaround sagas are remarkable in that they are at once unique and yet much alike. Each change story exhibits strikingly particular features of locale, culture, mission, history, leadership, temperament, resources, and programs. At the same time, each story displays marked similarities.”

At the highest level, boards have to accept that problems are structural, not episodic; they have to hire the right leaders with the right profiles; and they have to quickly align expense with revenue. Even though budgets are normally the purview of the chief executive, in a crisis, board intervention to ensure solvency is critical to support the mid- and long-term objectives of surviving and ultimately thriving.

The characteristics of a board that is prepared to lead a turnaround or deal with an existential crisis are clear. Our research identified seven critical success factors that the board must demonstrate in order to successfully transform an at-risk college or university. It must 1) recognize that a crisis is imminent or looming; 2) accept that survival will require a departure from tradition; 3) ensure that it has a president suitable for leading a turnaround; 4) partner with the president to support change initiatives and actively work with the president to overcome resistance to change; 5) intentionally recruit and develop board members who will understand and support the turnaround; 6) work with and learn from outside advisers skilled and experienced in college and university turnarounds; and 7) use its authority to take action.

While any change related to a crisis presents significant challenges, higher education has historically been much better at preserving the status quo than embracing transformation, which creates an added cultural barrier to the kind of thinking and action that are necessary today. However, for boards that recognize the sacred charge of their trusteeship, and are therefore willing to have difficult, sometimes painful discussions; pursue accountability for executives and themselves; take action that will challenge tradition (and some constituencies); and, maybe most importantly, are willing to embrace the risk, there is not only a path to survival, but to a thriving future.