Oct. 5, 2005

Pay, Perks and Policies

By Roy J. Nirschel

It’s a familiar Washington story: an entrenched leader faces accusations of misappropriation of funds; charges and countercharges fly. This isn’t a partisan Capital feud, but the tale of American University President Ben Ladner and the university’s Board of Trustees.

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The controversy erupted with an anonymous letter to The Washington Post charging that President Ladner misused university funds to hire a personal chef and executive assistant for the first lady, imbibe hundred-dollar bottles of wine to court donors and buy holiday gifts for the kids, among other extravagances.

Although I have been in education 25 years and also am a college president, I know neither Ladner nor members of his board. Rather, as with most of us in academe, I have observed the unfolding scandal through news reports and the various Web-writers blasting various players in this tragedy.

What a shame to see American mired in such scandal. The university has worked very hard to improve its standing in the past decade, for which the board and chief executive are to be complimented, along with the faculty, staff and graduates.

And we should also recall that AU’s troubles aren’t the first of their kind to arise in higher education. A decade earlier, Adelphi University was assailed as a monument to bad management when the president of the Long Island institution filled the board with cronies who awarded him a fat salary package and paid for a $1.2 million Manhattan apartment for his use. This was at the time that Adelphi’s marketing campaign “Harvard: the Adelphi of Massachusetts,” evoked titters from administrators at other universities and as the institution’s enrollment, financial stability and faculty morale were plummeting. The situation deteriorated to such a point that the New York Board of Regents interceded and removed all but one of the board members. Subsequently, a new president was hired.

A few years later, the board and administration of Boston University were directed by the Massachusetts attorney general to change its governance structure and board composition following the revelation that a large percentage of the trustees were also contractors and vendors for the school. In addition, BU lost many millions of dollars investing in a company in which the president had a particular interest. I’m sure many of my colleagues recall how that same president had served on — and was removed from — Adelphi’s board.

I know of other small institutions riddled with similar conflicts: The chairman of one school’s board also served as its legal counsel (for a substantial hourly fee), as chairman of the executive compensation committee and as executor of the president’s estate. Talk about conflict of interest!

All these examples illustrate the importance of good governance in higher education. The situation at AU, in particular, demonstrates how the lack of role clarification for both boards and their presidents is a prescription for disaster. Trustees, increasingly volunteer leaders from business and industry, should know that they have both a legal and fiduciary responsibility for the organization. The president manages on a daily basis, subject to the authority granted him by the board; he should bear in mind that it is not part of a divine right of kings, but rather is delegated. While the partnership between trustees and presidents is clear and the expectation of civility and respect implicit, good trustees and good presidents understand the lines of authority and see that those borders are not crossed.

Yet, many of us leading institutions of higher education know isn’t easy to observe that line of separation: Trustees are held accountable to a high standard. Yet they are volunteers (at least most of them) and often have to rely on the administration, primarily the chief executive officer, for information and data upon which to make important decisions. This line becomes further blurred by the fact that trustees and presidents move in similar social circles and can end up becoming friends. Combine those conditions with the fact that many trustees come from business, where lavish executive pay packages and rich perks are customary; it is only natural that they would want the chief executive of “their” university, particularly if she or he is a personal friend, to enjoy the lifestyle of a CEO.

But, I would argue that while universities have many of the attributes of “for-profit” enterprises, they are different fundamentally.

Universities do not measure their success on returns to shareholders, but rather on value for stakeholders — parents paying high tuition, faculty and staff members who do the heavy lifting of the institution, and, students — the ultimate “customers.” Presidents of universities are not engaged in making widgets, creating new technology or producing consumable products or services. We are engaged in something even more special — the creation of knowledge, the transmission of that knowledge and (hopefully) the creation of educated, aware and engaged members of civil society.

For that there should be just compensation, but it is one of several factors that need to be considered in hiring and retaining a good chief executive. Those individuals who pursue higher education careers merely for the financial compensation are missing the more meaningful reward.

Besides maintaining a social distance from his trustees, a college president can avail himself of other common-sense remedies to avoid future cases like American University. The most obvious of these are standards issued by the Association of Governing Boards of Colleges and Universities. Those guidelines are clear, rigorous and constitute “best practices” in board governance that ensure that trustees and presidents uphold the highest possible ethical standards. For example, compensation should be reviewed and approved by all members of the board, not just one or two members. In the case of American, news reports hold that the President’s controversial spending arose from provisions of a second contract that some trustees had never seen — clearly not a desirable management model for any enterprise.

It is critical that all the board and its president share an absolute understanding about the presidential contract and the expectations, rights and responsibilities for the president and the presidential spouse. In the case of American University, the compensation for the president is simply out of line with the average compensation and terms for college presidents: the National Association of College and University Business Officers offers ample benchmark data that can serve as a reality check.

A president’s contract should be reviewed annually — and not just by the chairman of the board or other “insiders” but by a group of trustees. An experienced chief financial officer (in many of the cases I’ve cited, where was he or she?) should be hired and be a fiscal gatekeeper, without fear of retaliation. And an annual independent audit should be conducted.

For example, at my institution, when the auditors present their report, the chief financial officer leaves the meeting so the board can critique his work. Then, I also leave the room so the trustees and auditors can freely discuss executive fiscal responsibility in confidence.

Congress passed Sarbanes-Oxley to restrict certain business practices to avert even the appearance of conflict of interest. Higher education, which is becoming costlier and increasingly harder for middle-class families to afford, must maintain standards that are just as strict, if not even more so.

Whether President Ladner misused his office for personal gain remains to be seen. But as an educator, one thing I do know about the AU case: The faculty, staff, alumni and ultimately the students of American University are those suffering the most from this unfortunate and avoidable controversy.

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