July 10, 2007

The Shamrock Principle

By Jonathan Brown

When I was an undergraduate, the saloon I frequented most often was called the Shamrock. The owner had a sign over the bar which read “We have an agreement with the bank, they don’t sell beer and we
don’t cash checks.” As someone who had then recently encountered Adam Smith’s arguments about division of labor, that seemed like a very fitting sentiment.

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In the last few months we’ve heard a lot of commentary about developing problems in the way that higher education dealt with student loans. Several public officials have made a point to describe all relationships where the campus receives a fee as inappropriate.

Indeed, some of the relationships that have been discovered relating to student loans were problematic. Individuals, in some instances, benefited inappropriately. But as often happens in these circumstances, some public officials, for their own narrow benefit, have tried to paint with too broad a brush.

Many of these preferred provider relationships were designed to benefit students both in the negotiated rates under the contracts and in the transfer of resources back to student aid. The worrisome thing to me about all this coverage is that some of the most ambitious public officials are beginning to question all financial relationships that colleges and universities have with outside providers.

It is time for higher education to take a deep breath and begin to respond to these calls from the public and our elected representatives in two ways.

First, it would be timely for us to think about the adoption of a broad based set of conflict of interest standards by which institutions could judge their behavior. In some cases we may have slipped from high standards, but in others the ground may be shifting. Either way, some careful review would be appropriate.

In this case we have a responsibility to restore trust by looking at how to respond to some of the pitfalls that have been discovered in the loan crisis. But higher education needs to take the responsibility for thinking about the issues rather than in just responding to the lead of lawmakers.

A base for those standards would be a prohibition on personal inurement for most financial relationships. It may well be appropriate for experts from a campus to benefit when others want to use their expertise, but the general rule should be to disclose these kinds of relationships in the same way that many state corporation codes require disclosure of self-dealing transactions. There are undoubtedly many instances where these kinds of activities are appropriate, but the sunshine standard should be the first step.

The second set of issues will require higher education leaders to be a bit more proactive than they have on the loan stories. We’ve allowed others to define us and we should not let that happen. Over the last two decades American businesses have spent a lot of time readjusting their organizational structures to improve efficiencies. They have, as Waterman and Peters suggested in the 1970s, practiced “sticking to the knitting” or focusing on core competencies. For the same reason colleges and universities have been moving areas they accumulated over the last several decades to outside providers.

Some in the political class are trying to get the public to believe that any financial transaction between an outside provider and a college or university is dirty. That is nonsense, and we should not let them get away with those outlandish claims.

When we discovered that we were not especially adept at retailing we found partners who could run our bookstores. When we found that our core competencies did not include running a restaurant, we found partners to run our food services. There is some evidence that our long term role as hoteliers will also be outsourced so that our dormitories may be run by outside operations.

It is timely to reexamine all of those contracts, but because it is timely to review the arrangements does not mean that we should be cowed by politicians whose standards of ethics routinely accept convoluted justifications for the acceptance of donations.

In most of the contracts to run campus functions two things happen. First, the outsourced service is better than the one that was run by campus personnel. At the same time, the outside provider pays a
contractual fee to the campus to run the operation. That revenue helps to subsidize other campus functions. Some politicians have tried to establish a prohibition on certain loan practices and have even begun to extend the logic to almost any arrangement where a college derives a payment from an outside provider.

At a minimum it would be timely, for those institutions that have not thought about it, to define the appropriate limits of relationships between vendors and the campus professionals who have responsibility for the areas where the vendors are working. It might also be timely to develop a reasonable standard of disclosure on the revenue arrangements.

But campuses, not the political process, should take the lead in examining and defining how these arrangements can continue to benefit the campus and students. Now is not the time to abdicate our responsibility to manage our institutions to the whims of the political process.

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