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Core and Non-Core Functions, Boards of Trustees, Final Words on How to Consider
A-HEC: A key element of your work on partnerships is
that there are a core set of academic functions that an institution should focus on and control, and another set that are
non-core. What does this really mean and why is it important in the context of enabling institutions to be more entrepreneurial?
MG: I think the first question to answer is what are those core academic functions that cannot be relinquished.
Visualize an egg. Most of us see institutions in that form: a singular entity. However, crack the egg and there
is a very distinct yolk in the center, surrounded by the white. The yolk constitutes the “core academic functions”
which regulators, accreditors and academic tradition demand be kept under the control of the institution. Interestingly,
these core functions are relatively narrow:
- Appointment of the faculty and overall supervision of its performance.
- Establishing and adopting the curriculum through the appropriate faculty consultative process.
- Adopting specific courses through the same consultative process.
- Setting admission standards and ultimate say in the admission of students.
- Establishing of student academic performance standards and supervising the process of measuring such performance.
- Setting the criteria for the award of academic credentials, determining that students have met those criteria, and awarding
the credentials.
This is a litmus test. Indeed, in the Revenue Ruling I mentioned before a key reason the IRS blessed the activity
was precisely because the college kept control over the key academic functions.
What is left is a significant part of what we customarily see as “the institution,” and it is precisely these
areas where the commercial world not only has capital but also skills that very often exceed those of the institutions. In
essence, a for-profit provider (which might be the venture established by the institution and its financial or strategic partner)
can:
- Recruit prospective faculty and, subject to their meeting the criteria of the institution, employ them on behalf of the
institution.
- Develop a curriculum (and the necessary course materials and, as appropriate online content) and, again subject to adoption
by the institution, provide for its delivery.
- Market the program, recruit students and process applications for admission.
- Provide for the evaluation of student performance in accordance with institutional standards.
- Perform all the "back office" tasks, from providing facilities and services to managing finances and student aid.
The recent acquisition of control of Grand Canyon University and the wrapping around it of a for-profit “services”
corporation is one example of this division of labor; another much more venerable one is National Technological University,
now owned by Laureate. NTU created a for-profit subsidiary and contracted with that entity to provide all of its non-core
functions; then it sold a portion of the subsidiary to an investment group for about $30-million, which in turn provided the
capital necessary to grow and promote the program.
A-HEC: What type of reactions do Boards of Trustees typically have to innovative
partnership ideas?
MG: There is an old saying in higher education that men and women who are titans of industry and commerce
check their business sense at the door when they sit down as university trustees. I think that era is over: trustees
are interested in seeing their institutions find ways to leverage their value. While there is still a very firm commitment
to both institution integrity and the maintenance of quality, I am seeing a lot more willingness on the part of trustees to
consider new approaches.
The bottom line, however, is education. Explaining the hybrid concept to trustees is not easy. There remain
a lot of misconceptions, such as the loss of a colleges’ tax exempt status, if it goes near a for-profit venture.
As the recent Revenue Ruling points out, that risk is obviated by a properly structured and managed venture.
A-HEC: What steps should higher education leaders take if they desire to evaluate
a nonprofit/ for-profit hybrid? How long does it take to put a new legal entity together? What are the key legal issues?
MG: The first step has to be to determine what such a venture can do for
the institution. A for-profit venture adds nothing in and of itself: it is a means to an end, and the institution has
to have a clear understanding of the desired end. That often requires getting expert guidance, not just for putting
a deal together but for helping the institution evaluate the opportunity and then, if the prospect is attractive, helping
put it in the best bargaining position and while avoiding the land mines that still dot the road.
As for how long, the legal work is the easy part. A for-profit limited liability company or partnership can be
put together in a matter of days. It is the negotiating an agreement that can take much longer. It is not uncommon
in the commercial world for many weeks to go into negotiating joint venture agreements. Add to that the very different
decision process in a university makes for a really indeterminate timeline, from a few weeks to “as long as it takes.”
In the end, getting it right is far more important than getting it fast.
Finally, the legal issues fall into a few basic categories: what kinds of legal structures are allowable in the particular
jurisdiction, what are the tax consequences, how can the structure be shaped to both protect the institution and facilitate
its attaining its goals, how will the enterprise be governed, how is capital contributed and how are revenues and appreciated
value shared, and how can this all be done within the rigors of good academic practice and the regulatory requirements of
the states, the accreditors and the federal government. A lot of moving parts, but for the right institutions under
the right circumstances and with the right leadership, the opportunities to bring leverage to a traditionally leverage-deprived
community are very real.
At the end of the day, there are two questions that must be asked and answered: is the venture in the best economic
interest of the institution and is it consistent with and supportive of the institution’s academic mission. Success
is dependent on an affirmative answer to both.
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Summary of Core and Non-Core Institutional Functions:
Institutional responsibilities:
- Appoint faculty
- Establish curriculum
- Adopt courses
- Control admission decisions
- Establish student academic performance
- Award academic credentials
Potential partner responsibilities:
- Recruit prospective faculty
- Develop the course materials and provide for its delivery
- Market, recruit students and process applications
- Provide for the evaluation of student performance
- Perform "back office" tasks
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"The recent acquisition of control of Grand Canyon University and the wrapping around it of
a for-profit “services” corporation is one example of this division of labor"
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"NTU created a for-profit subsidiary and contracted with that entity to provide all of its non-core
functions; then it sold a portion of the subsidiary to an investment group for about $30-million, which in turn provided the
capital necessary to grow and promote the program."
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"While there is still a very firm commitment to both institution integrity and the maintenance
of quality, I am seeing a lot more willingness on the part of trustees to consider new approaches."
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"The first step has to be to determine what such a venture can do for the institution.
A for-profit venture adds nothing in and of itself: it is a means to an end . . ."
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Key legal issues to consider
- Allowable structures in the jurisdiction
- Tax consequences
- Best structure to achieve the goals
- Governance
- Form of capital contributions
- Sharing of revenues and capital appreciation
- Academic and regulatory processes
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"At the end of the day, there are two questions that must be asked and answered: is the
venture in the best economic interest of the institution and is it consistent with and supportive of the institution’s
academic mission."
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