Friday, 5 July 2013

My name is Bond, University Bond!

The announcement yesterday of Manchester University's Bond issue (see http://www.manchester.ac.uk/aboutus/news/display/?id=10342) follows on the heals of Cambridge and De Montfort. No doubt others will follow. Even my own University may follow.

The selling of bonds is one way of raising finance for Universities. What is sold is a debt security where the issuer promises to pay interest on the amount purchased and the principal sum at the time of maturity of the bond. The Manchester bonds mature in 40 years time. Since Universities are long-established institutions (only established religions and nation states are older), the bond option appears a sensible move.

What does this mean in terms of the changes to public funding of education? Why haven't UK universities done this before?

As state-funded institutions, Universities received money from the government, which itself has issued bonds to raise money since the 17th century. In times of high interest rates, the sale of bonds is a typical response to financial crisis. In the current crisis, with low interest rates, the reverse process has been going on: the purchasing of gilts (a form of bond) and other securities has formed an important part of the Bank of England's monetary policy as a way of increasing the liquidity of banks and other financial institutions in the hope this might stimulate lending. Behind the need for all this, however, is the need to cut public expenditure - and part of that is the cut to university funding.

So the sale of sovereign debts that might have paid for Universities by central government has now become the sale of University debt with guarantees of the security of Universities as long-existing institutions.

The security is obviously crucial. Riskier enterprises like companies would instead offer shares in the company. These give the purchaser a stake in ownership, with a say in how the company is run. University Bond purchasers have no vote in the governance of Universities. They are reliant on established methods of governance within those institutions: the senate, the governors, etc.

But the march of Universities in becoming more like corporations, and VCs becoming more like CEOs, raises a question as to the nature of the university, and particularly the idea of the university as corporation as a secure and stable social entity. It really depends on the quality and effectiveness of institutional governance. If governance within a university is tampered with (VC-friendly governors, bureaucratic senate with no teeth, etc) and if there is no means of holding the management to account, then there would be some concern about the long-term stability of the institution.

On the other hand, if Universities sold shares rather than bonds, then purchasers would have voting rights, and this itself would fundamentally change the governance of the institutions. VCs really would be CEOs, answerable to shareholders. The University would pursue policies which were driven by delivering shareholder value.

However, even with bondholders, one measure of accountability is inescapable: the credit-rating agencies. These organisations, which have caused so much havoc during the financial crisis, have become the arbiters of confidence in investments. Rutgers University in New Jersey recently had its bond issue downgraded by Standard and Poor (http://www.northjersey.com/news/Standard__Poors_downgrades_ratings_for_Rutgers_University_bonds.html): a fate whose effects on confidence not just in the value of bonds, but in the worthiness of the institution are as yet unknown.

As with any move in the financial system, what is produced are new risks: risks to purchasers, risks to sellers. One of the risks to the sellers is the increased power they hand over to credit rating agencies. In the corporate world, for at least 30 years now, the pursuance of shareholder value has been the driving force behind corporate activity. With bond issues in institutions like universities, the pursuance of credit rating agency values could have a transformative effect of governance in the university: particularly in the absence of any other controls of accountability within institutions.

The deep problem is that the University's role is to be critical. It is to stand above the world and ask questions. Universities are social regulators. Their role is complementary to government, not subservient to it.  Being subservient to the money markets is clearly dangerous. In a world where Universities will worry about the credit worthiness of the bonds they have sold to keep themselves going, which questions become unaskable?


1 comment:

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