Tuesday, August 28, 2007

Agents vs. principals: the strange case of Dartmouth

The purpose of corporate governance is to control the incentive conflict between principals (shareholders) and their agents (managers): principals monitor agent behavior to make sure that agents are acting in the principals' best interests.

In non-profit universities, the Board of Trustees (the principals) typically exert less control over agents (administrators and faculty) which allows agents to follow their own goals ("shirk") rather than those of the principals.

Dartmouth is unusual in that its board has recently become more actively involved in exercising control over faculty and administration. The board has prevented the administration and faculty from implementing a speech code, and from moving away from the college's historical focus on undergraduate education (faculty want more graduate students) (article). Predictably, alumni giving has increased.

But if the alumni feel better about the school, the faculty and administration do not. ACTA, a good governance group, warned that the current President is trying to change the governance structure to make it more difficult for the board to exert control,
On the basis of our review of Dartmouth’s current practices, we believe both trustees and alumni should be concerned by the President’s deep involvement in the Governance Review—and, more generally, in his selecting those who are responsible for reviewing his performance.

3 comments:

  1. Here, Corporate Governance Resources you can find 600+ resources about boards and corporate governance. Anything from the best conferences or trainings to board movies! Enjoy!

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  2. In your statement that the trustees are the principals and the faculty and administrators are agents, you are confusing an argument about what should be with a fact about what is. Certainly you can *argue* that we should view the trustees as principals and the faculty as agents, but this is not some objective fact about universities that exists independently of our views about its desirability. Everyone in the modern university has voluntarily opted into a particular governance structure; all participants can be viewed as in some sense principals and in some sense agents. Stephen Cheung's famous example comes to mind: the Yangtse River boatmen who, when hauling boats upstream, would hire an overseer to whip the shirkers. Who's the principal and who's the agent here? You can't simply declare that one is the principal and one is the agent, and then proceed to analyze the situation. Real-world governance structures are a lot more complicated than that.

    For example, it seems to me that a group of faculty, wishing to found a university, could rationally decide that their interests would be maximized by setting up a governance structure that looked a lot like that of the modern university; they would maximize donations, good PR, and ultimately their own salaries and other perks by hiring some trustees and giving them a large degree of independent power. Simply declaring the faculty agents and the trustees principals on the basis of surface appearances would completely miss the interesting complexity of what was going on. I don't claim that this is how any particular university was actually founded, but one has to bear this hypothetical in mind in understanding why the interest groups involved in the modern university continue to be stay involved in the current dominant governance structure.

    Don

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  3. If you're going to draw conclusions about governance, you've got to at least start with accurate facts.

    Dartmouth's board is not known for exercising control over faculty and administration (which is one of trustee Zywicki's complaints about it); it has not exercised much more control recently; and it is not unusual in this relatively hands-off approach. This may be the norm.

    The board has not "prevented the administration and faculty from implementing a speech code." There is not and never has been a code regulating speech, or a proposal to adopt one at Dartmouth.

    From these facts you cannot "predict" that alumni giving has increased. You are talking about an incredibly short term (a year or less) and there are many other reasons giving has increased anyway.

    ACTA cannot plausibly be called "a good governance group." Its repeated protestations that it is "non-partisan" should be enough to tip off anyone that it is a partisan "watchdog" group with a strong ideological bias, in this case toward the right.

    The current President is not "trying to change the governance structure to make it more difficult for the board to exert control." At best, you are confusing the board with that fraction of the board that is nominated by corporate outsiders, in this case alumni. The board itself (not the president) recently added board-nominated seats, thereby reducing the proportion of seats connected with the president, the governor, and the alumni.

    Dartmouth might make a good case study. You should recommend that someone try it.

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