The Higher Education Funding Council for England was denounced as "totalitarian" by vice-chancellors this week after it suggested that universities could earn autonomy by demonstrating good management.
The suggestion came after Hefce reviewed how the £330 million to recruit and retain staff and to modernise management, allocated in November 2000, had been spent.
Despite "significant improvements", it found that many institutions had to revise their human resource strategies to satisfy the funding council that they were fit to be funded. The review states: "The concept of 'earned autonomy' may be the key to the future."
The government is taking a close interest in university management. Chancellor Gordon Brown is reported to be "contemptuous" of it.
Education secretary Charles Clarke has said: "As the government considers how to increase university funding, we should consider what support we can offer to improve the management and governance of universities."
But vice-chancellors resent interference in the way they run their institutions. One said: "Hefce is a minority funder for many of us but totalitarian in terms of direction."
The Association of University Teachers has attacked the way in which the £330 million was "sidelined" into management systems and institutional initiatives rather than being spent tackling inequalities.
This week Hefce hit back. It argued that job evaluation was needed to ensure equal pay for work of equal value, and blamed the AUT for blocking it. It stated: "The AUT may have contributed to some institutions standing back from deciding which job evaluation scheme to use."