Responsible Governance and Financial Accountability: International Perspectives for the New Era
Edinburgh Business School, Heriot-Watt University, Edinburgh, United Kingdom
Abstract
This chapter provides an empirical and practical approach to governance, financial accountability, governmental rules, and organizational culture through management control systems in nonprofit publicly funded higher education institutions. More specifically, this chapter focuses on the overlaps and gaps between the themes of changes in the external and internal strategic environment of the higher education industry (i.e., external and internal strategic analysis) and formal versus informal management control systems, which are related to financial accountability systems from the government and political parties in power as well as the organizational culture within higher education institutions in Western Canada (i.e., case study).
Keywords: Financial Accountability, Management Control System, Governance, Higher Education.
Management control systems have been well documented over decades of research. Despite the significant body of descriptive empirical and theoretical data in the field, there remains a paucity of case studies describing and explaining the interrelationships between changes in the external and internal strategic environment and management control systems with a case study design.
The aim of this chapter is to explain and describe these interrelationships in the context of the higher education industry in Western Canada and to provide speculative recommendations for policy makers and executives in the industry.
Background
This chapter focuses on nonprofit publicly funded higher education institutions in Western Canada. The Western Canadian higher education institutions discussed in this chapter include all nonprofit and publicly funded academies, universities, colleges, and other collegiate-level institutions that award academic degrees, diplomas, and/or professional certifications in Western Canada (Boyko and Jones 2010). Although the geographical denomination of Western Canada is very broad, it refers to the provinces of Alberta and British Columbia (i.e., BC) in this chapter. In Canada, higher education is governed by provinces and territories as opposed to the federal government (i.e., British North America Act 1867; Constitution Act 1867). This characteristic leads to major differences and incompatibilities in terms of the systems in place between provinces and territories. However, Alberta and BC have memorandums of agreements (e.g., Alberta BC memorandums 2007) aiming at offering systems that are comparable and aligned with each other. Indeed, Alberta BC memorandums (2007) involve a series of agreements on the following:
• protocols for a collaborative strategic approach;
• protocols for cooperation and development in acquisition and learning resources;
• protocols for credit transfers between Alberta and BC;
• protocols for a partnership in support of assistive technology and other specialized services to students with special needs;
• protocols for cooperation in research development and innovation; and
• protocols for cooperation between Alberta and BC presidents.
In 2007, Roles and Mandates were developed in response to recommendations from the auditor general and consultations with stakeholders. The Roles and Mandates outlined key directions for the higher education industry in Western Canada to improve its financial accountability and compliance with regulatory requirements from the government.
Responsible Governance in Western Canadian Higher Education
Management control systems, in this chapter, refer to ways control is exercised over authority delegated to higher education institutions by the government (Whittington and Pany 2012). Therefore, management control systems in the higher education in Western Canada are related to specific levels of governance with the level of the board of governors and the level of the executive leaders (e.g., president and top management team).
First, higher education institutions have a governing body (e.g., board of governors) responsible for the assets of the institution (i.e., as per Roles and Mandates) and for strategic direction. The governing body is constrained by the status of the higher education institution, its jurisdiction (e.g., national, provincial, and local regulations), and the conditions under which it may receive public and/or private funding. The governing body’s formal status entails auditing and reporting obligations to the government (e.g., management control systems).
Secondly, higher education institutions have an academic body (e.g., academic board with the deans, vice-president academic, and president). The academic body’s authority is formally delegated from the governing body, and its authority is exercised over all academic matters, such as admission of students, discipline of students, academic awards, and conduct of teaching and research.
Thirdly, interactions between the two bodies exist in most higher education institutions, as they are operated through joint committees bringing together members of the governing body and the academic body. This phenomenon is described as “shared governance” and is regarded as good practice in the higher education industry. The top management team is expected to have a special responsibility within this shared governance model, since the academic head of the institution (i.e., president) generally is a member of the governing body and the chair of the academic body.
Financial Accountability in the Western Canadian Higher Education
Management control systems are described by Berry, Broadbent, and Otley (2005, 3) as “the process of guiding organizations into viable patterns of activity in a changing environment.” In the higher education industry, management control systems are used to exercise control over authority delegated to others (e.g., government to higher education institutions). Such systems involve developing implementation plans and associated projections to monitor progress toward the accomplishment of the implementation plans. Financial forecasts, budgeting, accounting, and auditing systems are prime examples of management control systems, as they establish goals and evaluate actual performances with yearly reporting systems overseen by independent auditing bodies (Whittington and Pany 2012).
According to Berry, Broadbent, and Otley (2005, 13), however, an important distinction can be made between formal and informal management control systems, with: (1) formal management control systems promoting clear objectives and decision processes associated with quantitative measures of performance; and (2) informal management control systems promoting “vague” objectives and decisions processes associated with ill-defined qualitative measures of performance. Both accounting systems influence executives of higher education institutions and employees’ behaviors and consequently affect the degree to which strategic alignment can be achieved (Berry, Coad, Harris, Otley, and Stringer 2009).
In the higher education industry, there is relentless pressure by governments toward using productivity metrics in reporting and accounting practices (Broadbent and Laughlin 2005).
Productivity is a measure of outputs per unit of inputs and generally leads to the use of outputs/inputs ratios. Measuring productivity in the higher education industry is difficult, because outputs (i.e., success of students) are directly influenced by inputs (i.e., matriculating students) and students are vital actors who cannot be dissociated from the educational process (i.e., “associative good industry”; Broadbent 2007, 193–8). Problems in measuring inputs and outputs do not allow for straightforward outputs/inputs ratio measures and lead to the need to rely on indirect measures (Gate and Stone 1997).
As a consequence, indirect but workable definitions of productivity in the higher education industry focus on two dimensions: (1) effectiveness and (2) efficiency (Broadbent 2007; Gate and Stone 1997). Typically, effectiveness relates to the extent to which the higher education institution meets the needs and demands of stakeholders like students, faculty, local communities, governments, and industry (e.g., number of graduates or total full-time equivalent (FTE) students) (Gate and Stone 1997). Typically, efficiency relates to the level of effectiveness obtained from a given amount of resources (e.g., operating grant per FTE students) (Gate and Stone 1997).
Business indicators are used as means of measuring effectiveness in terms of programs offerings in the higher education industry. For example, typical business indicators are related to enrolments and retention-type measures, with higher education institutions reporting enrolments in terms of FTE students and percentages of students graduating in five years (i.e., outcomes related to attracting and retaining students).
Academic indicators are also used as means of measuring effectiveness in terms of research in the higher education industry. For example, typical academic indicators are related to professionalism or to the demonstration of a particular expert knowledge in a specific research area in terms of the number of peer-reviewed chapters published.
Financial indicators are used as means of measuring efficiency in the higher education industry (Broadbent and Laughlin 2005; Otley 1999). This perspective leads to the notion of “relative revenue ratio” (i.e., higher education institutions need to evaluate how research and teaching revenues compare to research and teaching costs to the government in order to guarantee their viability). For example, the consolidation of financial information is considered to be a valuable reporting and accounting tool by the government (Broadbent 2007; Broadbent and Laughlin 2005). The accounts of higher education institutions are presented according to standards and principles that are legally established (e.g., Auditor General’s reports on statements of financial position as per the Auditor General Act 1985). The consolidation of accounts displays information on the higher education institutions financial status, with changes and results of transactions carried out in a way that is regulated (e.g., consolidated statements of financial position, consolidated statements of operations, changes in net assets, cash flow, and Auditor General’s reports). The consolidation of accounts encourages more transparent and efficient management, since it facilitates a comparison of the financial status over time and across institutions (Broadbent 2007; Broadbent and Laughlin 2005).
It is important to note that reporting and accounting practices in terms of business, academic, and financial indicators can be fertile ground for motivated reasoning. Nonfinancial performance measures are more subjective and ambiguous to interpret than financial measures, but financial performance measures can still be affected by motivated-reasoning processes (Broadbent 2007). Any decrease in precision provides latitude for overinterpretation of evidence and motivated reasoning. Indeed, executives in search for preference-consistent information (i.e., information that confirms what executives wish to demonstrate) can find a reasonable amount of supportive data and stop searching or disregard disconfirming evidences. If reporting and accounting practices are ambiguous or complex enough to allow different assessments in terms of success for strategic initiatives, executives with different preferences tend to reach different conclusions (Broadbent 2007). This means that reporting and accounting practices might need to be relational as opposed to transactional, and to consider the context of the higher education industry (i.e., effectiveness and efficiency measures as opposed to productivity measures because the higher education industry is an “associative good industry”; Broadbent 2007, 193–8) or the culture of the higher education industry (i.e., deviance, resistance, and opportunistic behaviors) (Oakes and Berry 2009; Broadbent 2007).
The Case of the Western Canadian Higher Education
The case of the Western Canadian higher education institutions presented in this chapter explores the following:
• the external factors related to changes in governmental rules;
• the external factors related to changes in competitive markets; and
• the internal factors related to changes in organizational culture.
External Strategic Factors Related to Governmental Rules
As described earlier, the higher education institutions in this case study were publicly funded at various levels. In 2007, the Roles and Mandates for the publicly funded higher education institutions were developed in response to recommendations from the auditor general and consultations with all stakeholders (e.g., students, employers, publicly funded higher education institutions, etc.). The Roles and Mandates outlined key directions for higher education institutions to improve their financial accountability and compliance with regulatory requirements from the government since they were publicly funded. The Roles and Mandates principles were enshrined in a modified version of the Post-Secondary Learning Act (2004).
In theory, publicly funded higher education institutions in Western Canada were autonomous bodies with their own independent governance structures (i.e., as per the Financial Administration Act 1985, and the Post-Secondary Learning Act 2004). However, in practice, despite the fact that higher education institutions had different balances of funding streams, they were not autonomous in that their largest contributor of funds was the government (i.e., as per the British North America Act 1867, and the Constitution Act 1867). In order to receive funding and maintain their accredited status, higher education institutions in Western Canada had to fulfill a number of regulatory requirements (Auditor General 2013, 110):
In deciding which project it should fund the department assessed proposed projects against their program criteria and focused on whether the projects were feasible from a business and financing perspective and whether they met regulatory requirements.
These requirements included the Roles and Mandates and Letters of Expectation issued by the government (i.e., as per Roles and Mandates). First, higher education institutions in Western Canada were subject to inspection requirements related to quality standards for teaching and learning assessed by provincial quality assurance agencies (i.e., Campus Alberta Quality Council and Education Quality Assurance of British Columbia). Second, higher education institutions in Western Canada were required to submit annual reports with financial statements independently audited (i.e., auditor general or KPMG chartered accountants as per the Auditor General Act 1985).
A public debate arose when the auditor general (2013, 49) highlighted difficulties with higher education institutions on issues related to (1) strategic planning offered by the government; and (2) financial sustainability of higher education institutions funded by the government:
• “Institutions do not clearly understand what the Minister wants (. . .) to achieve or how to achieve it (. . .). Strategic planning is missing.”
• “The department and institutions have not identified sustainable funding sources for initiatives.”
As such, higher education institutions in Western Canada were organizational systems with strategies influenced by external strategic changes in societal functions and rules as defined by the government (Broadbent, Laughlin, and Alvani-Starr 2010). The government used steering media in terms of regulations and provisions of funding (i.e., steering media are societal key drivers for changes that imply the use of positional power and/or incentives to initiate actions and activities at an institutional level; Broadbent, Laughlin, and Alvani-Starr 2010) to achieve specific societal goals with higher education institutions within a principal–agent relationship where the payoff from the principal (i.e., government) depended on the actions taken by the agent (i.e., higher education institutions) (Broadbent, Dietrich, and Laughlin 1996). In other words, funding from higher education institutions in Western Canada was provided under a steering media of Roles and Mandates and Letters of Expectations in exchange for funding, with only limited discretion for higher education institutions to decide whether and how the funds may be used (Broadbent, Laughlin, and Alvani-Starr 2010). However, these steering media were observed to be ineffective and inefficient in terms of the level of strategic planning and the level of funding provided by the government (Auditor General 2013).
External Strategic Factors Related to Competitive Markets
As described earlier, the higher education institutions in this case study were nonprofit, but tended to be resources constrained (Auditor General 2013, 47):
With so many institutions, committees and entities involved and potential initiatives to undertake with limited resources, the ministry needs strategic planning and systems to carefully plan, implement, govern and sustain not only individual initiatives, but all initiatives collectively.
Funding from the government tended to be limited (e.g., in its latest 2013 budget, the government cut the operating grant to higher education institutions by an average of 6.8 percent instead of increasing it by 2 percent, which corresponded to a long-term trend for operating grants in Western Canada); hence, focus on funding from alternative and/or private sources was encouraged (e.g., summer rentals of on-campus parking and residences, corporate donations, ancillary fees, etc.). The higher education industry also sought to increase private–public partnerships (Broadbent and Laughlin 2005) (e.g., Canada-wide, Cenovus Energy’s $4.4 million of Canadian Dollars endowments to chairs of Environmental Engineering and 119.4 million of Canadian Dollars record levels of gifts to Faculties of Medicine and Dentistry in 2012–2013) to partially cover capital and operating expenses deficits. The government also required that higher education institutions follow governmental economic agendas (e.g., commercialization of university-led research programs and skilled-based training with “cooperation” programs for students to integrate the workforce more effectively) and explore international strategies to increase foreign students enrolments and enrollment fee revenues (e.g., memorandums of understanding with Chinese institutions and substantially higher enrollment fees for foreign students, or funding from the Chinese government in exchange for a Confucius Institute promoting Chinese culture and language on campus).
Recently, however, a public debate surfaced to recommend that Canadian Medicine and Dentistry schools restrict the influence of the pharmaceutical industry on educational resources and course contents (i.e., half of all Canadian Medicine and Dentistry schools policies regarding public–private partnerships with the pharmaceutical industry were judged too permissive). Another public debate arose when the scientific research community criticized their muzzling by the government whom had strategically cut funding to scientific research programs that did not support the government industrial or economic agenda (e.g., oil and gas reclamation and remediation research programs and/or environmental management research programs). A further public debate concerned skilled-based training and coop programs with a call for legislation to protect vulnerable students subjected to corporations in need of a “free” workforce to decrease the cost of labor and increase profits.
As such, higher education institutions in Western Canada were nonprofit organizational systems, but they had internal strategies influenced by external strategic changes with a focus on alternative sources of revenue, private–public partnerships, and competitive markets (Broadbent and Laughlin 2005). The government has treated higher education in Western Canada like a commodity, with a focus on industrial and/or economic agendas. However, this perception as a commodity was observed to be ineffective and inefficient, as a higher education institution should be viewed as a social enterprise that contributes to the development of society as opposed to a commodity.
Internal Strategic Factors Related to Organizational Culture
The Western Canadian higher education institutions had high turnovers and termination rates for executive leaders, staff, and faculty, as well as frequent programs of “adjustments” of faculty and staffing levels with early retirement programs and severance packages. The higher education industry in Western Canada was a labor-intensive industry (i.e., more than 75 percent of operating budgets spent on salaries and benefits). Because resources tended to be constrained (Auditor General 2013), any reduction in operating and capital budgets resulted in the suspension of programs, outsourcing of service departments, suspension of maintenance projects for infrastructure, and associated job cuts.
A public debate recently arose in relation to the fact that termination of executives of higher education institutions was not financially sustainable (i.e., severance packages for executives of higher education institutions at a vice-president level and above typically involved a cost of hundreds of thousands of Canadian Dollars to the institution). In addition, local unions or faculty and staff representatives disputed job cuts and/or reopenings of collective agreements to avoid mass layoffs, arguing that there were other ways for higher education institutions to be more efficient with their spending.
As such, higher education institutions in Western Canada seemed to be organizational systems with strategies influencing internal changes in terms of their organizational culture, with less security of tenure and more fixed and/or short-term contracts, and with more focus on managerial practices (Broadbent, Dietrich, and Roberts 1997). However, this was observed to be ineffective and inefficient as the financial cost of turnover and termination was very high.
Summary
As described in this section, publicly funded higher education institutions in Western Canada were situated in a specific external and internal strategic environment in terms of governmental rules, competitive markets, and organizational culture.
This external and internal strategic environment of the higher education industry involved a shift from a collegial bottom-up model of the higher education industry toward a more administrative top-down model of the higher education industry (Broadbent, Dietrich, and Laughlin 1997) in Western Canada. This external and internal strategic environment also involved a shift from a collaborative model toward a model of principal–agent relationship and steering media. A principal–agent relationship of steering media means that the payoff from the principal (i.e., government) depended on the actions taken by the agent (i.e., higher education institutions) and that the agent only acted in ways that led to a maximum payoff in terms of operating and capital revenues (Broadbent, Dietrich, and Laughlin 1997).
This observation implied that there was a real impact of performance management systems (i.e., accounting and auditing systems) at both a societal and an institutional level (Broadbent 2011) in Western Canada, with (1) performance management systems as steering media; (2) structures of the government that controlled achievements in line with Role and Mandates and Letters of Expectations; and (3) financial stringencies (Broadbent 2011). This also meant that performance management systems (i.e., accounting and auditing systems) were powerful tools (Oakes and Berry 2009) in Western Canada, with an impact that involved instrumental obedience (i.e., with devious obedience to maximize payoff without any actual changes to interpretive schemes and actual behaviors of higher education institutions) (Oakes and Berry 2009).
The findings could be described and explained using the concepts of formal and informal management control systems (Berry, Broadbent, and Otley 2005, 13). Formal management control systems promoting clear objectives and control processes associated with specific measures of performance (e.g., governmental rules for accounting and auditing systems) were in place in the higher education industry in Western Canada. However, this top-down principal–agent model was prone to public debates, resistance, deviance, and opportunistic behavior at the informal management control systems level (i.e., resistance because of work ethics, management style, and organizational culture of executives, faculty, and staff within the higher education institutions).
Speculative Recommendations for Policy Makers
The case presented in this chapter focused on changes in the external and internal strategic environment of the higher education industry in Western Canada. This case was the basis for speculative recommendations to improve the relationship existing between policy makers and executives in the higher education institutions through formal and informal management control systems.
Regarding formal management control systems, the government needed to standardize the metrics used in the industry for most efficiency and effectiveness measures (i.e., business, academic, and financial indicators) to be identical across higher education institutions. Benchmarks already existed for some business, academic, and financial indicators in terms of efficiency and effectiveness (e.g., FTE students and operating grant per FTE student). However, most other business, academic, and financial indicators were inconsistent from one institution to the other, which made it difficult to compare institutions. Higher education institutions in Western Canada mostly reported efficiency and effectiveness indicators that “made them look good” (i.e., “devious compliance”).
Regarding formal management control systems, the government also needed to redefine the business, academic, and financial indicators used to measure effectiveness and efficiency in the higher education industry of Western Canada. This redefinition of the business, academic, and financial indicators was related to the question of the role of higher education within society and the type of performance indicators and models that were important to consider given the industry’s actual mission. The higher education industry was treated like a commodity with a focus on inputs (i.e., operating grants per FTE student) as opposed to outputs (e.g., “producing” employable citizens). This aspect of redefinition of the business, academic, and financial indicators was important because it was related to the position of the government in terms of the protection of the nonprofit model of higher education as opposed to its opening to the forces of the market (e.g., for-profit model).
Regarding informal management control systems, the process of standardizing and redefining the business, academic, and financial indicators for higher education needed to involve a process of open consultation, as the government ultimately was accountable to the tax payers, the same way higher education institutions were accountable to the government. The process of standardizing and redefining the business, academic, and financial indicators needed the introduction of feedback loops from the institutions to the government for “candid” communication between executives of higher education institutions and the government to be possible. Executives were key stakeholders that needed to be included in the process of standardizing and redefining business and financial indicators as the higher education industry was a complex industry to assess. The one way top-down process in place seemed to only result in some “devious compliance,” resistance, and public debates. The fact that executives of higher education institutions were required to “informally lobby” with their MLAs (Member of Legislative Assembly or elected members of the Assembly of Alberta or British Columbia) as a way to interact with the government, like any other citizen, was not considered effective. The reason this aspect was considered important was that executives of multimillion Canadian Dollars institutions needed direct communication with their minister and/or deputy minister (i.e., senior civil servant in the government) to be indeed accountable as opposed to “deviously compliant” and resistant to the Roles and Mandates. Executives of higher education institutions in Western Canada needed direct and informal communication with their minister and/or deputy minister to successfully (i.e., not “deviously”) implement strategy. Ministers and/or deputy ministers also needed direct and informal communication with executives of higher education institutions to understand how to measure performance in the industry appropriately.
Regarding informal management control systems, executives of higher education institutions in Western Canada also needed to be included in the strategic planning, strategy implementation, and strategy evaluation process that would be imposed on their institution via the Roles and Mandates. Indeed, if presidents were to be chief executive officers, more control over their institutions like any chief executive officer in a corporate environment, was advisable. When using formal management control systems in terms of strategic planning, strategy implementation, and strategic evaluation, the government needed to understand the value of executives’ involvement to reduce “devious compliance” at the level of informal management control systems. In Western Canadian higher education institutions, strategic planning was the task of external experts from the government. Once the strategy was identified and the Roles and Mandates were provided to higher education institutions, the task of the external experts from the government was finished (Alberta Advanced Education 2007). Then, executives within the institutions had to implement the strategy in line with the Roles and Mandates (Alberta Advanced Education 2007). However, strategic management is a continuous, intermittent, and flexible process that requires continuous involvement from executives. Because of countless contingencies, executive leaders in the higher education industry in Western Canada needed to be allowed to participate in the elaboration of the Roles and Mandates in order to have more flexibility in terms of strategic planning, strategy implementation, and strategy evaluation for their institution.
Conclusions
The case study highlighted a shift from a professional collegiate model of the higher education industry to an administrative top-down model of the higher education industry in Western Canada. This shift toward the “end of a professional collegiate model in higher education” was a relatively new phenomenon in Western Canada.
The case study helped reduce an existing theory–practice divide by providing speculative practical recommendations for policy makers and executives. Speculative recommendations were related to the need for a standardized and redefined management control system to be setup by the government (i.e., level of formal management control system) and for the involvement of executives of higher education institutions in the process (i.e., level of informal management control system). This implied a constant communication process between the government and executives in higher education institutions for the benefit of both parties (i.e., expected reduction of resistance, deviance, and opportunistic behavior of executives because of consultative and participative process) and ultimately for the benefit of the taxpayers.
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Study Questions
The research in this chapter is related to the academic debates concerning internal and external changes in the strategic environment of higher education in Western Canada and the role played by Management Control Systems in the strategic alignment of higher education institutions in Western Canada. Discuss
1. Whether and how changes in the external and internal strategic environment of the higher education industry in Western Canada can be described and explained in terms of changes in governmental rules, competitive markets, and organizational culture?
2. Whether and how the strategic stance of higher education institutions in Western Canada and accounting systems are strategically aligned with a mediating role played by management control systems?
3. What speculative recommendations can be offered to policy makers, executives, and human resources practitioners?
4. What recommendations can be offered for further research to establish the descriptive and explanatory range capability of the framework?
Authors Biographies
Dr. Carole Pomare has completed her doctorate at Herriot-Watt University with a focus on management control systems.
Dr. Tony Berry began his career as an aircraft designer working on the Anglo-French Concorde as well as a range of aircraft at Boeing in Seattle. He gained a PhD at Manchester Business School (Manchester Metropolitan University). He is a professor of Finance in the Manchester Business School and a researcher at the Research Institute for Business and Management (Centre for Professional Accounting and Financial Services). He specializes in financial accountability, management control systems, risks, and venture capital.