In this article, Sinclair Davidson contextualises and disseminates the findings of the IPA’s research on the decline of Australia’s universities.
Emeritus Professor Steven Schwartz argued in these pages that universities must be run like businesses. It is an appealing soundbite, but very misleading. Australian universities are incorporated as not-for-profit institutions. That is not a minor technicality – it is a deliberate choice. Universities are meant to break even, perhaps generate modest surpluses, and reinvest in teaching and research. They are not meant to make the same kinds of profit-driven decisions as corporations.
When non-profit organisations are managed as if they were for-profit firms, problems emerge. Economists have long warned of this. Robin Marris and William Baumol, writing in the 1960s, showed that managers in the absence of shareholder oversight often prioritise revenue maximisation or growth maximisation over profit. Similarly, Oliver Williamson explained how managers would pursue “perquisite maximisation” – in plain terms, bigger offices, larger staffs, and more prestige projects – even if these undermine efficiency. Without the disciplining force of owners demanding returns, bureaucracies take on a life of their own.
Universities today illustrate exactly this pattern. They increasingly resemble the conglomerates of the 1960s and 1970s – sprawling, diversified enterprises with little internal discipline. Each new research centre, campus initiative, or degree program comes wrapped in layers of administrivia; committees, compliance units, branding exercises, and reporting requirements. Rather than serving students or researchers, these expansions sustain an ever-growing army of administrative staff and external consultants whose main output is paperwork and meetings. The empire grows, but adds no value while diverting resources away from teaching and research, while piling up costs
Michael Jensen later sharpened this critique. His “excess free cash flow” theory pointed out that firms with excess resources and weak governance squander money on pet projects and inefficient expansions. Universities have far too much free cash flow and poor governance. Consider that business faculties often operate with profit margins of well over 50 per cent to 60 per cent, while many universities overall run deficits. The profits from teaching business students are siphoned off across the university, but without the oversight mechanisms that genuine businesses must answer to.
Universities invoke the rhetoric of business discipline, but they lack the governance structures that give that discipline bite
In Australia we are seeing the results of running universities like businesses without adequate governance: wage theft from staff, fee theft from students, and the academic equivalent of shrinkflation. Students pay more but get less. Face-to-face teaching is reduced, final exams are replaced by group assignments, and the bulk of teaching is done by poorly paid sessional staff on short-term contracts with no security or career path. This is not business efficiency; it is exploitation dressed up as managerial necessity.
Meanwhile, senior management itself lacks the kinds of incentives that would exist in genuine businesses. Many university leaders are on five-year contracts with no continuing role once their term is up. In the corporate world, executives would hold stock or be awarded options, giving them a direct stake in the long-term performance of the enterprise. In universities, by contrast, vice chancellors and deputy vice chancellors often move on before the costs of their decisions materialise. They capture the prestige of announcing grand initiatives but rarely face the consequences when those initiatives fail.
The net result is the worst of both worlds. Universities invoke the rhetoric of business discipline, but they lack the governance structures that give that discipline bite. They operate without the checks that private ownership provides, yet subject staff and students to the cost-cutting and efficiency drives that profit-maximising firms pursue. The result is waste at the top and insecurity at the bottom.
If universities were truly to be run like businesses, they would need genuine governance reform; ownership stakes, aligned incentives, and clear accountability for financial performance. But that is not what exists today, nor is it what Australians want. Universities are not airlines or hotels. They are public-serving institutions that educate, research, and train. They need to be managed responsibly, with budgets balanced and surpluses reinvested. But they should not be mistaken for corporations.
The danger of calling them businesses is that it justifies practices that corrode trust in the sector. Students see themselves charged more while receiving less. Staff see their work devalued and casualised. Taxpayers see universities behaving like conglomerates without the discipline of shareholders. And vice chancellors, free of ownership constraints, act more like temporary executives than institutional stewards.
Schwartz is almost right – universities cannot be run on the cheap, but pretending they are businesses is not the solution. It is the problem. Unless we recognise the difference between for-profit firms and not-for-profit institutions, the sector will continue down a path of waste, inefficiency, and erosion of confidence.
