School administrators and boards often sidestep funding obstacles via an affiliated third party. It’s a creative, expedient way to make things happen, but difficulties can arise down the road.
Higher Education: Five Ideas for Enhancing Transparency Through Better Communication With Third-Party Affiliates
by Jack Reagan
Politics, legal restrictions, shrinking budgets, and a sluggish economy are among the obstacles that stand in the way of colleges and universities having the resources to meet the growing demand for new programs and facilities. But that doesn’t stop some administrators and governing boards from getting things done. They are able to sidestep some of these barriers by seeking funding from affiliated organizations like foundations, associations, and other third-party entities. For example, a university-affiliated foundation may make a major financial contribution toward the construction of a new science center, and then lease the completed building back to the university.
Initially, these arrangements are a creative and expedient way to make things happen, and many governing boards are willing and even enthusiastic about entering into an agreement. But difficulties can arise when the university board receives little additional information on the project’s financial standing. While it may seem logical to have regular, detailed reporting requirements written into agreements, there is often no legal obligation for the affiliate to provide anything beyond the most basic financial statement.
Governing boards may do multiple transactions with an affiliate, but have no clear picture of the financial health of any of them. When board members express concern that they are not getting enough information about these deals, they are often met with resistance.
What they realize, though, is that they will be held accountable if the deal goes south.
Managing concerns through communication
In order to stay informed of the many complex relationships between institutions and their affiliates, board members should establish closer communication and proactively demand information on a regular basis. Many third-party affiliate relationships are very political in nature, so by suggesting policy changes, board members may face some pushback. But it has to start somewhere. Here are five ways that boards can improve communication and reduce some of the risk inherent in these relationships.
- Hold regular, recurring meetings. Invite affiliates to meet regularly with board members. Provide attendees with a briefing package in advance as if these special conferences were regular board meetings.
- Inform board members of other meetings. If other official meetings are held among the affiliate staff, especially if the meetings relate to proposed transactions, ensure that board members are informed of what is discussed.
- Obtain minutes from affiliate board meetings. Put a process in place to obtain agendas, board minutes, or other affiliate information that relates to the relationship. The board should consider requiring access as a condition for entering into the transaction.
- Make sure the affiliate has acceptable governance polices. This is especially important in related party transactions. Include a provision in the agreement requiring annual reporting of certain transactions.
- Require that the affiliate obtain an annual independent audit. Obtain and review copies of all deliverables from the audit engagement. Should there be significant findings, obtain a corrective action plan.
The demand for transparency and accountability is not new, but the institutional risk may actually be higher than in the past. Board members can do their part by making regular inquiries to third-party affiliates and documenting correspondence as evidence of due diligence efforts. In this era of intense public scrutiny, better communication and oversight may be exactly what is needed to address board member concerns.
Jack Reagan, Principal, Government Assurance
jack.reagan@CLAconnect.com or 571-227-9629