Sunday, February 9, 2014

When Not to Run a University Like a Business

A friend of mine recently explained over dinner with some friends that a university has to be run like a business, but not too much like a business. He's right, and the fiasco about Harvard misreporting employee earnings to the IRS is a perfect example.

The Globe ran the story on February 8. The university had long made available a certain benefit to employees, which the IRS considered taxable. So the value of the benefit would show as income on employees' W-2 forms. So far, nothing unusual. Through some combination of changes in tax regulations and changes in the benefit program, the benefit ceased to be taxable in the eyes of the IRS in 2009. But Harvard, mistakenly, continued report its value as income on employees' W-2s. Unfortunate, and costly to employees, because they had to pay taxes on what should have been nontaxable benefits. And now they have to amend their returns, perhaps several years of returns, if they want to get their money back from Uncle Sam.

So far this is a straight business story. The tax code is a labyrinth and it changes all the time, and somebody made a mistake. It was a kind of mistake that probably happens all the time in corporate America, though institutions that are trying to help their employees (or increase their competitiveness inhering and retention) by offering benefits may be more likely to make mistakes like this than organizations that offer the minimum. In any case, it's a shame, and somebody should get scolded for it, or worse--maybe not even someone within the University, could be an outside contractor or consultant on these technical matters. Just like in a normal business.

The place where Harvard shouldn't have acted like a normal business but did is in how it handled the affected employees. Its initial response was to send a letter to affected employees on January 21, 2014 -- about three months after the error was discovered. I have not seen the letter, only the reaction it drew from Harvard Law School professors Alvin Warren and Daniel Halperin. Here is their characterization of Harvard's letter.
The letter misstates the law.  It says that "IRS regulations do not allow the University to assist you in filing for a state or federal income tax refund."  There is no such regulation.  
The letter does not accurately present the scope of the problem.  It says that "For many people, the amount of the over-reported income was less that $200 per year."  That is true, but for some employees, the amount exceeds $10,000.  Nowhere is the total scope of the problem frankly presented.  We were told in our meeting that more than 11,000 current and former employees are affected, with the total amount of overreported income exceeding $20,000,000.  In our judgment, to mention in the letter only those employees for whom the amount involved is less than $200 per year is misleading as to the true extent of the problem. 
The letter fails to reveal all of the years for which there is a problem.  The letter only discusses 2011-13, but the overreporting also occurred in 2009 and 2010.  This fact is obscured by the vague expression in the first paragraph, which states that the problem involves "several years prior to 2014."  The full scope of the years involved is never disclosed.  The federal statute of limitations has run for 2009, so no refund can be claimed for that year unless an employee's tax return is still open due to, for example, an audit.  The federal statute of limitations for 2010 runs on April 15, 2014, but the administration does not believe it can provide corrected W-2 forms by then. 
Most grievously, the letter fails to accept Harvard's responsibility to make its employees whole for its monumental error.   Although 11,000 Harvard employees were victims of the administration's error, the only remedy presented in the letter is for each of the victims to file amended tax returns with the state and federal governments.  The only "resources" offered in the "Frequently Asked Questions" that accompanied the letter are a couple of links to federal (not state) government tax sites. 
The professors say that Harvard should pay interest on the money the employees should have had and should underwrite the cost of filing amended returns.
To do anything less … would indicate that the central administration does not believe that it has an obligation to take responsibility for its errors.  Nothing could be further from the core values of truth and honesty that infuse teaching and research at this University. 
The Globe reports that the University has agreed to do as the professors suggest, so things seem to be back on the right track.

The question is, why did it take these professors yelling for Harvard to do the right thing? I suspect the answer is, because folks in the Central Administration were trying to run Harvard like a business. In a normal business, it would be pretty simple -- somebody "checks with Legal," and "Legal" reports back what the business is required to do. Decisions get made on how they affect the bottom line and protect the company against risks. Human Resources gets a tip so they can be ready for whiny employees, but there really isn't much more they have to do beyond satisfying their legal requirements. Maybe someone suggests offering the affected employees some help with filing amended tax returns, but there's no budget for that, the quarter looks grim financially already, and Legal suggests that trying to help employees may be creating liability the company doesn't have. So the minimal letter goes out, the revised W-2s follow, and tough luck to anyone who doesn't like it. It's a free labor market, nobody has to work here, and everybody knows the amounts of money involved for any individual are not large enough to quit over.

In this sense, running a university like a business doesn't work, either practically or ethically. It doesn't work practically because the whole university is a free speech zone -- and a free speech zone full of smart people who know a lot and are sometimes afflicted with idealism. Word gets around, people compare notes, and eventually someone blows the whistle. It sounds like that January 21 letter did not have a prayer of succeeding -- not when it went to 11,000 Harvard employees.

And it doesn't work ethically either, because universities pride themselves  in truth-telling, on treating people with respect and dignity, and so on. Our business product is the truth, and training in the art of the search for the truth. We teach lessons in everything we do every day, even in how we respond to incorrect W-2s. Our whole system is set up to ensure that educational and ethical values are pre-eminent. Our chief executive, for example, is a professor, not someone whose last job was being CEO of some other kind of business. 

I understand how the business departments of the university can become isolated from its educational mission. We want accountants who are trained in accounting, not in French literature. They don't sit around all day talking about the larger mission of the university. Their instincts quite properly may have been to help Harvard be run like a business.

But somewhere up the chain of command someone should have said, "This would work at Pepsi-Cola, but it's neither right nor workable at Harvard." Indeed, since 11,000 people got these letters, there must have been lots of people in lots of command chains to whom that thought must have occurred. Somewhere a decision was made to do the wrong (if lawful) thing, and I'll bet it was because that was thought to be the way you run a business. However it happened in detail (I haven't a clue), I'll bet it in some larger sense it happened because of the corporatization of Harvard, the sublimation of educational and moral values to demands to meet short-term budget goals and minimize certain risks. 

I am grateful to Professors Warren and Halperin for taking the time to explain the situation to the community, for going to the effort to sit down with University administrators and to get them to reconsider their original, shortsighted remedy. And I am grateful to Harvard for doing something it almost never does -- acknowledging, by its actions, that it made a mistake and needed to correct it.

9 comments:

  1. I'm going to disagree with you Harry. If the same situation happened at Pepsi they likely would have paid for their mistake as they know the value of happy employees. It's not that Harvard shouldn't have acted like a business in this case, it's that they should have.

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    1. I should not have picked on Pepsi, because I imagine different businesses would have handled the situation differently. But any business would have done some sort of a cost-benefit analysis, and I'm sure many would have come to the conclusion that the benefit was not worth the cost.

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    2. My experience matches Lance's -- businesses I've worked with do try to fix their mistakes as the value of the happy employee is important. I'll agree that probably there's a company that doesn't (cf. headlines in the past few days about corporate attempts to reduce 401K obligations), but this isn't a business vs. non-business story.

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    3. Whoops, somehow i came up as Unknown -- it's Craig Partridge.

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  2. The issue is not `like a business' vs `not like a business' . The issue is not even acting ethically or not ethically. The issue is not that Schools are free speech zones and businesses aren't (have you head of a concept called `gossip'?). The issue is competence. Lying to 11,000 employees is just incompetent. What could Harvard have possibly gained from it? (I actually want to know.)

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    1. I don't want to speculate on the specifics, but I am not inclined to be as harsh as you. I'd rather think that everyone was well intentioned, but an error in judgment was made somewhere along the line.

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  3. There is another point to be made here. To the extent that we believe that a University has a mission to educate citizens, as opposed to teaching skills, it should value responsibility and teach by example. There was a series of mistakes made (the initial error, the nonchalant response, etc.) In a moral environment "mistakes were made" is not an acceptable phrase. The institution (and very likely, some supervisor/dean/bean counter) should come forward, and own the mistake.
    I am not saying "heads should roll" -- but there should be institutional and personal responsibility that should ensure that something was learned. After all, Harvard IS an educational institution, even if at universities the folks hardest to teach are the administrators.

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  4. Thanks to the several who have correctly observed that good businesses don't run this way. But that speaks to the feeble understanding in universities of what it means to be "run like a business." I see a lot of going through the motions of being businesslike, without the forethought and vision of the big picture that characterize businesses that last.

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