• Confessions of a Community College Dean

    In which a veteran of cultural studies seminars in the 1990s moves into academic administration and finds himself a married suburban father of two. Foucault, plus lawn care.

Title

The Agency Problem

Getting incentives right.

September 15, 2020
 
 

When my wife and I had just gotten married and were about to start house hunting, my father-in-law took me aside to impart some wisdom. “Remember: the Realtor works for the seller, not for you.” He went on to elaborate in some detail, but the basic point stood. The more the buyer pays, the more the Realtor gets paid. While there’s nothing wrong with being cordial with the Realtor, remember their incentives.

What some economists call the agency problem comes when the incentives of someone hired to do a job conflict with the incentives of the person or company who hired them. For instance, during the “shareholder value” revolution of the 1980s, it became gospel that stockholders’ interests were often at odds with managers’ interests. Stockholders wanted higher profits and higher stock valuations, where managers wanted labor peace and relative stability. Technically, the stockholders owned the company for which the managers worked, but their interests weren’t necessarily aligned. When stockholders were able to aggregate their clout through institutional investors, and financiers figured out how to leverage buyouts, stockholders were often able to thwart the agency problem by getting rid of many of the agents, crushing unions and capturing the “liberated” value for themselves.

Put differently, the agency “problem” reflected a balance of power. The “problem” was solved by imposing a drastic imbalance of power. That trend accelerated when much C-level compensation got paid in stock options, further blurring the boundary between owner and agent.

Higher education in the U.S. is facing its own version of the agency problem.

For a long time, colleges mostly grew. During that period, presidents often measured success by how much growth occurred on their watch. When presidents retired, tributes to them typically referenced the buildings they added, the programs they added and the number of students they added over the years. The standard joke about the “edifice complex” spread because it captured something recognizable; presidents’ legacies were often defined by the new buildings they left behind.

Over the last decade, though, the overall enrollment trend has been downward. (That’s especially true in the Northeast and Midwest.) And even before the pandemic, the enrollment that has happened has been moving more online. That has meant drastically decreased demand for new buildings. The campus construction boom of the 2000s didn’t carry over into the last decade, and I don’t see it returning in the next one.

Suddenly, the task for many presidents involves managing shrinkage, rather than growth. But attitudes haven’t necessarily caught up to the new reality.

In the expansion years, presidents got credit -- fairly, unfairly or both -- for growth. That worked well for their reputations and careers. In the shrinking years, presidents get blame -- fairly, unfairly or both -- for cuts. That harms their reputations and careers, or it stands to, if they actually do it. The careerist incentive for denial or stalling is powerful.

The problem now is that the needs of the organization, and the needs of the people charged with doing the work of the organization, have fallen out of alignment. At a time when forthright leadership may involve some painful and difficult decisions, nearly every personal incentive aligns against it. In the short term, it’s much less painful to stall. After all, there’s always hope that this too shall pass. And even if it doesn’t, the temptation to let it be the next person’s problem is real. The catch is that from an organizational perspective, financial decline can snowball; the time spent denying it only allows it to get worse.

In K-12, the standard playbook for handling a situation like that is to bring in an interim superintendent as a hatchet person, cutting wildly and annoying everybody, so the next permanent one can settle in as a healer. That doesn’t work as well in higher ed, though. The issues here tend to be longer term and structural; they don’t necessarily lend themselves to renting a human chain saw for a year. Structural change takes time and requires consistent leadership. Ideally, it should involve broad consultation and discussion. When paychecks are on the line, that’s a tall order; as the old line goes, it’s hard to get someone to understand a situation when their livelihood depends on them not understanding it. Years of austerity, followed by crisis, mean that people aren’t always at their best. Rather than reflecting seriously on the long-term causes of a shortfall, it’s often easier to shoot the messenger.

It’s a mistake. A common one, and an understandable one, but a mistake.

When the situation is scary and confusing, and circumstances don’t seem likely to save a college from itself, a revolving door of leaders isn’t going to help. Trustees (or whoever hires presidents) need to find someone with values and vision, and then give them time to work. Without values, vision and time, they’ll be entirely at the mercy of circumstance. And circumstance isn’t cutting colleges many breaks these days.

The agency problem is solvable, but only if the people who create the incentives are capable of stepping back from impulsive reactions and looking at the big picture. It’s a big ask. But it’s a hell of a lot better than the alternative. Buying a house is one thing; saving a college is something else entirely.

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