Thursday, 19 August 2010

UK Universities - Business Models

As I noted in an earlier blog posting (May 19th), who 'owns' UK universities is not entirely clear. More importantly, what sort of business model or business type should our universities adopt, in order to enable them to function best as universities? This is a surprisingly tricky question. For in practice quite a few business forms can be found across UK higher education, mostly the result of historical accident, statutory provision, and occasionally, private initiative.The result is a typically British, rather messy picture. Thus the varied landscape currently includes:

Private institutions, profit seeking

Private institutions, not for profit (e.g. University of Buckingham)

Companies limited by guarantee (e.g. London School of Economics)

Statutory corporations (with charter and statutes needing Privy Council approval for changes) (this covers most universities formed as a consequence of the Further and Higher Education Act 1992)

Chartered corporations (with charter and statutes needing Privy Council approval for changes) (this covers most pre-1992 universities)

Ancient universities, established neither by Act of Parliament nor by Royal Charter (Some changes need Privy Council approval) (Oxford and Cambridge Universities).

Unlike in some other countries, where universities are formally part of the public sector (and university staff are civil servants), UK universities are all legally independent bodies. They normally enjoy charitable status (which confers a variety of tax privileges upon them), and they each have a governing body responsible for all aspects of managing the institution, within the framework of whatever regulation and oversight is currently in force.

This is the background against which some new ideas need to be considered. Thus Nick Butler argued in yesterday's Financial Times that UK universities should be freed from much of the existing government regulation and control so that they can 'manage their own numbers, costs and charges' and hence be 'responsible for their own successes and failures'. This presumably would entail flexible fee setting, something that might come out of Lord Browne's on going review of university funding. And the resulting higher fees could be more manageable for the government, in principle, if the student loan book were also taken off the government's balance sheet and turned into a private sector fund. Thinking logically, too, an institution free to succeed is also free to fail, but I wonder how prepared our government would be to see one or more universities go under either as a result of generally tough financial conditions or as a result of particular bad (or unlucky) decisions. This is quite normal in the private sector, of course, but would this competitive mechanism be allowed to work in higher education? An interesting line of thought, though I have a feeling that actually doing it - making it happen - might be quite difficult.

Another idea was introduced by Simon Baker in the latest Times Higher Education. Instead of focusing on regulation, as the previous point did, this contribution makes proposals about university ownership. In particular, it suggests that the current UK government is contemplating new legislation that could result in universities being owned - wholly or partly - by their shareholders. This idea would turn universities, legally, into something like the familiar public limited company (plc). But why would we want to do that? The claim in Simon Baker's article is that transforming universities into shareholder-owned bodies would make it easier for them to raise money from investors. However, I'm not sure this is right, for several reasons:

(a) Why should anyone buy shares issued by a university unless they expect a decent return on them, namely a suitable mix of dividend payments and capital gains? Hence any university issuing shares will have to offer an attractive return to investors, but it can only do this by investing the funds so raised in sufficiently 'profitable' activities. Many universities might not be very comfortable at the idea of being pushed towards profit seeking in this way.

(b) A few universities have already issued bonds to fund some of their new developments, without any accompanying shift to a shareholding model of the university. It's not clear why this could not be extended without changing the basic 'model of the university', and I don't understand how adding shareholders would make such funding any easier.

(c) Most UK universities exist to deliver high quality teaching and research in a not-for-profit manner and this type of institutional goal sits quite uneasily, I think, beside shareholding and profit seeking.

Hence although there might well be room in the higher education landscape for some private, profit-seeking, shareholder-owned institutions delivering a variety of profitable, specialist courses, it's hard to see much of the existing sector moving in that direction. I fear that sitting and thinking in my office, which is what I like doing best, would not be greatly appreciated by shareholders seeking short-term profitability!

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