Raising capital: the problem of philanthropy and funding in Australian universities

Australian universities should look to the American university model of philanthropic funding. Piggy bank image from www.shutterstock.com

In the last few weeks, we have seen a number of universities begin to push for extra funding from Australian philanthropists.

While this move to broaden the revenue base of universities is welcome, to be successful in changing their funding mix, universities will need to become both more transparent and accountable to those investing in their institutions.

University capital raising is not philanthropy: it is a way for individuals to co-invest in an asset that is valuable to both themselves and society. This is where Australian universities are missing the boat.

Looking overseas

If we compare the way Australian universities raise funds to those in the United States, we see a profound and fundamental difference. Of course, Australia is not the US but increasingly our universities are beginning to follow the US model — either in full or in a modified form.

In the US, individuals who come to the university are bound to the university for life. Their time at the university is not only time spent integrating into a community but also one in which there is a significant bonding between students and others at the institution.

The institution views you not as a consumer of a product but as someone in which the institution has co-invested. Indeed, it was telling when entrepreneur David Booth gave US$300 million to the Chicago’s Graduate School of Business – it was not a “gift”, according to Booth, but a return on Chicago’s investment in him. The alumni networks and other activities work to imbue this later in one’s life.

In Australia there is no such co-investment. For the most part the university treats the student as a purchaser of a product for which a service is delivered and once that service is delivered the transaction is effectively at an end. This spills over into all aspects of what the university does.

In the US system, most universities operate on a model known as “every tub on its own bottom” – this means the faculty keeps the revenues it generates minus a tax paid to the university on its program revenues (at Chicago this tax is approximately 10% of revenues). If the faculty earns a profit, it gets to retain the earnings in its capital account.

In the Australian system the allocation of faculty budgets is nebulous. In the case of business schools, most faculties are given a budget that is approximately 50% of the revenues they generate (a 50% tax rate). If the faculty manages to underspend its budget, the excess is returned to the central administration.

The perverse incentives this creates are clear. In the US deans are under very strong pressure to generate external funds and to facilitate relationships with alumni and the community. In the Australian system, the deans would be foolish to raise funds since anything raised over and above what the university chooses to give them will simply disappear.

Foolish gifts

In fact, you would need to be a fool to actually give money to an Australian university unless you knew exactly how that money was going to be used. This is why the vast majority of the funds raised by Australian universities have been for building projects.

In the US case, the majority of capital funds raised go to endowed professorships and student scholarships rather than building projects. Suppose that I am one of 10,000 alumni being asked to invest in my alma mater. How do I know what the university did with my investment?

In the US it is quite clear as each faculty publishes an annual report outlining who gave money and detail on the finances of each division of the university.

In the Australian case, very little if any information is provided as to the funding of the individual faculties. In the case of the business schools, we know that the universities in Australia take on the order of A$1 billion per year from these faculties to cross-subsidise other activities. So why would I bother to give the university my money when they are already taking millions of dollars from the faculty I want to support? The implication of this should be clear.

More transparency needed

Universities also need to change their governance structures to give investors a say in the management of the university. University councils are mixtures of political appointees and internally elected representatives that have little power to counter the university administrative structure.

You only need to look at the mixture of your local university council and compare it to the Board of Trustees at the University of Chicago (this group represents over US$1 billion of investment in the university, with more than 50% of the trustees being alumni). In most American institutions, all alumni receive a report on how funds are used. The Stanford report is even called Report to Investors.

My point is that there is a naive belief associated with external capital raising by universities that does not take into account that such an activity is only one small part of a larger open system of co-investment by the university, its faculty and staff, students, alumni, and interested external partners.

To be effective Australian universities will need to move from a transactional model of education to one of life-long relationships that require co-investment and engage the individual as an integral part of the university’s existence. This will require them to be open and transparent and give up administrative power to investors while also requiring that governments do the same.