Navigating the Storms

The COVID-19 pandemic is buffeting planning and magnifying financial pressures for every institution of higher education. Most institutions are now projecting severe threats to revenue from reduced enrollment (among both new and returning students), lower contributions and grants, and precipitous declines in everything from executive education to summer camps. Expense-side burdens include increased aid to support students with higher needs due to widespread employment disruption; the return of spring room and board funds; downward pressure on tuition; and higher costs for instructional design and technology, facilities cleaning and employee health insurance.

COVID both exacerbates and accelerates many challenges that private colleges were already facing while also creating new ones. As a result, the trustees of private colleges are being challenged as never before to be mission-driven, clear about institutional priorities, tough-minded in assessing their risks and available options, and open-minded to various forms of restructuring -- mergers, joint ventures, teach-out partnerships and even dissolutions.

Unfortunately, few private colleges have experience in dealing with these issues. However, as we at SeaChange describe in Navigating the Storms: A Primer for Private College Trustees, they can learn from the deeper experience of other types of nonprofits -- social service agencies, hospitals, cultural institutions -- that have faced similar issues. Although private nonprofit colleges seldom self-identify as nonprofits, they share fundamental features -- cost-minus funding, cost disease, zero-sum revenues and the ever-present danger of a run on the bank -- while being more complex in their uniquely competitive market, shared governance, alumni, deep connection to place and complex regulatory framework.

The worst practices that lead to distress and failure for colleges and nonprofits are also similar. Most important are an absence of explicit and realistic scenario planning, an insufficient level of background knowledge and context among trustees, a lack of timely and actionable information at the appropriate level of detail during a crisis, and the scourge of magical thinking. (The state attorney general letters with respect to Mount Ida College and the Cooper Union should be mandatory reading for all college trustees. For traditional nonprofits, fundraising dominates magical thinking; in the college context it’s enrollment, new programs and technology.)

Private colleges must also accept that even strong leadership and disciplined risk management do not guarantee survival. Restructurings and reorganizations -- consolidations, mergers and acquisitions, divestments, orderly teach-outs, wind-downs -- will be inevitable. But it is tragic when distress causes an institution to lose the capacity to make wise choices and the time to act on them. That can result in exposing current students to unacceptable risk. It can mean needless damage to small towns and rural communities where the sudden closure of even a small or struggling college does great damage to the social and economic fabric. It can create difficult moral dilemmas, as struggling institutions balance their need to attract new students with the possibility that they may not be able to serve those students through to graduation. It can expose trustees to personal liability. In bankruptcy, everybody loses as scarce charitable assets are squandered on legal and transaction costs.

Equally tragic are institutions that -- although limping along -- are too weak to offer effective or efficient educational programs and use whatever resources they can muster for mere survival. This can mean hollowing out student services, staffing, class size, the mix of programs or composition of the student body.

To avoid this fate, colleges wishing to explore various forms of restructuring in response to the COVID crisis should consider the elements of the exploration process that have proven successful for their nonprofit brethren.

• A foundation of shared understanding. A common understanding among trustees and leadership about institution’s mission, operating environment, strengths, weaknesses and business model.
• Proactive, empowered leadership. Trustees -- particularly those with for-profit merger and acquisition experience -- seldom appreciate how long the exploration process takes. Higher education institutions often start too late without even knowing it. Starting too late is the single greatest reason for failure.
• Mission alignment. Unless the mission-related benefits of a potential transaction are significant, mutually acknowledged and constantly communicated, the process is unlikely to reach a successful conclusion. The primacy of mission often allows an institution to quickly identify one or two preferred partners without exhaustive research. Most institutions already know their likely partners well.
• Cultural compatibility. A transaction that leaves people deeply demoralized will generally be unsuccessful. While staff are seldom enthusiastic, even when the status quo is dire, strong leadership in support of a mission-aligned transaction can usually bring them along provided that transaction has been well thought through and the institutions share similar cultures.
• Sensitivity around language. Language often becomes a source of confusion and needless friction. “Acquisition,” “takeover” and “merger” can be loaded terms. “Union,” “integration,” “combination,” “partnership” or “collaboration” should take their place and will do a lot to build trust. The legal structure of a transaction should not dictate the language used to describe it in nonlegal settings.
• Financial awareness, not single-mindedness. Financial considerations are, of course, important. The benefits often come from a reduction in identifiable redundancies in overhead functions, as well as in areas like real estate, insurance or technology. But they are generally not a sufficient reason to pursue a transaction in the absence of mission alignment.
• Outside support. Experienced practitioners can help provide legal, consulting, communication and facilitation services to help navigate the process. Many nonprofit-to-nonprofit discussions benefit greatly if the parties select and jointly retain a neutral facilitator.
• An appropriate pace. Protracted discussions can be exhausting for all parties and potentially destabilizing as word gets around that something is afoot. The passage of time also reduces degrees of freedom and resources if it turns out that the original transaction does not pan out.
• A commitment to celebration. The end point of a transaction should be celebrated. This might be through an event, a jointly signed letter, a webinar or a video. Even a transaction that could never be celebrated as success, given the circumstances, should be reconsidered positively in light of other options and alternatives.

Judging Success

Research about the overall success rate of nonprofit restructurings and reorganizations has been limited, although several books and articles have recently been published in the area of higher education. Generally speaking, taking such actions is viewed with deep suspicion. Perhaps that’s because of a visceral feeling among many people in academe that events like mergers (and the associated language) are part of the objectionable corporatization of the higher education sector -- and that any decision not to continue as is somehow reflects failure. That is ironic, given that those events are more often the sign of mission-driven governance by those who take their duty of obedience seriously in the face of objective circumstances.

Some commentators also suggest that an exploration that does not lead to a completed transaction is, by definition, a failure. But that is not true. Provided that the process is disciplined, the exploration of a transaction, even if it is not completed, can be a very efficient form of strategic planning and self-assessment.

In our experience, the vast majority of organizations that get the process right believe -- when asked two or more years after their reorganization has been completed -- that the transaction met or exceeded their expectations. There is no reason to believe that the situation in higher education should be any different.

The Will to Act

Fortunately, courageous, mission-driven trustees still have time to avoid letting the institutions they govern fall into distressed or zombie states. Higher education leaders have long promised students -- particularly first-generation and low-income students -- that college is important, an investment that will pay off and a ticket to the American dream. They owe it to those students to keep that promise front and center as they make tough decisions over the weeks, months and years ahead.