Governance of university holding companies

IT is well established from a physiological standpoint that humans have two default responses to stressful situations – fight or flight. Similarly, organisations are constantly faced with a confluence of adverse situations, having to choose between fight or flight.

To this end, corporate history is littered with examples that show a fight may be the better option when confronted with challenges. The Covid-19 pandemic exemplified that adversities may have a long-tail but resilience and dynamism can carry an organisation through.

The role of university holding companies

Public universities find themselves at a very challenging crossroad amid the need to constantly innovate, democratise, and deliver high quality education while reducing reliance on government funding.

The recent Budget 2024 announcement by the Malaysia Madani government clearly underscored that students, especially those from underprivileged families, should not be categorically denied the right to enrol in university programmes or undergo examinations simply because they are unable to foot the fees.

To sustain themselves in such a setting, public universities would need to be self-endowed and consequently, identify alternative sources of income apart from government funding and student fees.

Given that universities are not corporate bodies and have an inherent focus on academia, the task of generating an added income stream, namely, business income, is invariably reposed on the university holding company, which acts as a corporate vehicle for its shareholder, the university.

It goes without saying that the corporate governance ecosystem is the bedrock for a university holding company to discharge its mandate of effectively monetising the resources of the university through business undertakings.

It is worth exploring the prevailing governance challenges that are beleaguering university holding companies, with a realisation of the multifaceted actions that are needed to overcome them.

The first challenge comes in the form of regulatory alignment.

To clarify, the Universities and University Colleges Act 1971 calls for the university to ensure the activities undertaken across the affiliated entities do not run astray from the mandate of the group.

By extension, this requires the university to play a more active role in monitoring the university holding company and its subsidiaries.

On the other hand, based on the interpretation of the Companies Act 2016, the university holding company is deemed as the ultimate holding company of its subsidiaries and therefore, the university is consigned to the sole role of a shareholder that should only exercise its right via voting on resolutions during the general meeting.

Simply put, flowing from this interpretation of the Companies Act 2016, the university is expected to play a less intervening role.

The divergent calls for action across the two legislations have appeared to cause ambiguity in matters reserved for the university as a shareholder of the university holding company and the university holding company as a holding company cum shareholder of its subsidiaries.

Given this ambiguity, there would be instances where approval of certain matters, which should be escalated by the subsidiaries of the university holding company, fall in no man’s land and thus, remain unattended.

Lack of mandate

Secondly, the lack of mandate may also hamper the effective governing ability of a university holding company over its subsidiaries.

In many instances, the university holding company may be tasked to oversee projects within the group, in which assets are owned by the university.

In the absence of power of attorney or other forms of control over the assets, it may be an uphill task for the university holding company to steer its subsidiaries on projects relating to the university’s assets.

It may result in the leap frogging phenomenon where the subsidiaries of the university holding company report directly to the source of the authority, namely, the university instead of the university holding company.

Legacy considerations

As a third challenge, it should be highlighted that legacy considerations have the potential to impact the governance environment in a university holding company.

It is not uncommon for subsidiaries of the university holding company to have existed prior to the parent and therefore, they may impulsively reflect past reporting lines which route them directly to the university.

Additionally, some of these subsidiaries may have their deep-seated organisational structures and ways of running the business, especially if they have gained the status of being the primary revenue contributor to the group.

These conditions would inevitably take the sting away from the university holding company and loosen the oversight rein that it holds over the subsidiaries.

Power-distance conundrum

Fourthly and rather unassumingly, the issue lies in the power-distance conundrum. The key actors from the policy makers are usually seated on the board of the university rather than the university holding company.

Notwithstanding the structural or by-the book requirements, the dynamics would lend itself to a situation where material decisions of the subsidiaries are socialised with the key actors of the university’s board before they are formally brought to the attention of the university holding company.

Such a scenario may entail a compromise in the rigour of the decision making and challenge process that was supposed to fall within the purview of the university holding company’s board.

Consequently, the ability of the university holding company’s directors to discharge their fiduciary duty is impeded.

Enhancing corporate governance ecosystems

As public universities operate in an increasingly complex environment with the need to self-sustain amidst a socioeconomic imperative, it is essential to model the corporate governance fixture and operational structures of the university holding company to overcome these challenges with a goal of supporting the university’s long term financial viability.

As we look ahead, it remains evident that the variables affecting the corporate governance ecosystem of university holding companies, such as philosophy, regulations, power and control as well as human dynamics, remain highly intricate.

Against this backdrop, a race to address the challenges through palliative measures may be counterproductive.

Instead, a concerted and iterative action plan involving key stakeholders and policymakers is needed to flesh out the nuances and systemic changes across the institutions governed by the Education Ministry.

After all, as the former Prime Minister of United Kingdom, Margaret Thatcher has put it, “you may have to fight your battle more than once to win it”.

Kasturi Nathan and Krishman Varges are executive director and director of Deloitte Malaysia. The views expressed here are the writers’ own.