The balance between innovation and fiduciary responsibility

By: | Issue: December, 2018
November 9, 2018

Public institutions are constantly attempting to re-define their core missions and at the same time, regain the public’s trust.  As such, there are a number of forces that have made the Higher Education landscape increasingly competitive. Exacerbating these forces are shifts in the high school population demographics and a continued under investment in public higher education. Although the Dow Jones and S&P 500 have witnessed record-breaking highs, investment in public higher still remains, or is at an all-time low.  Yet for those entering freshmen who do enroll, many are not adequately prepared to address the demands of a four year public education.

Against this backdrop, senior higher education leaders are constantly grappling with ways to strengthen their infrastructure and completely disrupt their business models. The traditional lines of public higher education revenues are not enough to offset the declines in direct aid. Also federal research dollars are increasingly earmarked for elite private, or public institutions, while the remaining non-branded institutions continue to be tuition dependent.

Innovative strategies

One strategy to address these ominous trends is to arm public institutions with a coterie of administrators that can coalesce around innovative strategies.  So the question inevitably becomes, can public institutions become the center of innovation and excellence, and at the same time, adhere to their historic missions? While presidents and senior administrators are armed with numerous strategic plans to create this innovative culture, they still need to be attentive to the inexorably rise in these negative headwinds, or face an increasingly circumspect board of trustees, who view these innovative strategies as nothing more than attempts to put public institution into deeper financial risk and adversely impact these institutions’ future. So the corollary question becomes, can public institutions be centers of innovation, and also respond to the inherent skepticism, where trustees have a fiduciary responsibility to ensure that institutional assets are not only deployed strategically in the short term, but also leaves the solid foundation for future generations of students and faculty.

The term Innovation has gained significant traction at public institutions to demonstrate their attempts at diversifying revenue streams while at the same time manage operational expenditures responsibly. But as institutions foray into the realm of innovation and move further away from the historic mission, these innovations come with inherent risks. For example, New Jersey City University initiated a massive real estate development project in an attempt to diversify its revenue streams and use those additional income to buttress its already declining operational revenues. Other institutions have commercialized auxiliary enterprises in an attempt to leverage the private sector’s expertise in generating additional income. Since public institutions are now becoming innovation centers and embracing a “Silicon Valley” approach of trying to find alternative sources of revenues, they must do so in a way that addresses a board’s fiduciary responsibility to ensure the public assets are invested wisely. There lies the intersections of risk and public stewardship, which creates an interesting dilemma for public institutions.  

Most public boards of trustees have private sector backgrounds and/or, are accustomed to risk mitigation strategies, and at the same time, look for new opportunities to expand their customer base. However, while boards at public institutions assume a more conservative fiscal role, can risk and public stewardship coexist, or complement each other.  In other words, will it be possible for these public institutions with competing forces and inherent barriers to become engines of innovation?

Since most public board members are not compensated for their civic and voluntary duties, what is their incentive to assume great risk? Therefore, senior administrators are caught between a rock and a hard place in trying to broaden their public mission by embracing innovative strategies, and at the same time, convince a reluctant board to support these new, risky ventures that can expose public institutions to greater financial peril.

Partnerships

One way to address these concerns, or reduce the risk tolerance gap between presidents and boards of trustees, is to create long-lasting partnerships and to ensure the board members are engaged in every phase of new and innovative paradigms. The board of trustees should partner with the institution to develop risk mitigation strategies that not only stress test innovative projects from concept to implementation, but sponsor and champion innovation as a core strategic goal.  Consequently, boards of trustees will evolve from passive practices of reviewing perfunctory and parliamentary documents to one of true partnership and innovation champions, which will also create an entrepreneurial culture.  

Additionally, seed money may be needed to invest in a portfolio, which can consist of an auxiliary corporation. The benefit of an auxiliary corporation is to ensure that if these projects are not successful, they do not contaminate, or metastasize any negative impacts from the project, to the institution. Also this strategy can limit any cross subsidies from public assets to these new innovative projects. As institutions evolve from traditional sources of revenue, into a culture where revenue can come from esoteric and complex transactions, the appropriate communication strategy should be developed and implemented so university constituents are aware of how public institutions, in an attempt to be mission driven, must now embrace innovative strategies to ensure their survival.

Aaron Aska is vice president for Administration and Finance at New Jersey City University