The business of dragging Oxford University kicking and screaming into the 21st century took a surprise turn this week. Dons young and old, traditionalist and reforming, hammered out a compromise over the university's future governance at a stormy debate in Congregation, the university parliament.

More than 1,000 academics shuffled past the bowler-hatted bulldogs at the doors of Wren's stately Sheldonian Theatre. Once inside, they sat on uncomfortable seats to hear the case for and against the proposed changes to the 900-year-old structure of Britain's oldest university.

The changes, proposed by the vice-chancellor, New Zealander Dr John Hood, appointed in 2004, have been the cause of increasingly rancorous debate, notably between the university itself and its colleges. Ostensibly, the point at issue was whether the university's present 26-member decision-making body, appointed by Congregation, should be replaced by a 15-strong supervisory council. What rankled with rebel dons was the fact that many members of such a council would be business experts brought in from outside the ancient university. The issue on Tuesday was who would form a majority on the decision-making body - dons, or outsiders? The compromise was that outside members would form a majority of 8-7 - but one of the 'outsiders', the university's chancellor, Lord Patten, is due to retire in five years time. At that time, dons would again be given the chance to replace him with one of their own. The amendment imposing that condition was carried by 652 votes to 507.

Now dons will have to return on November 28 to decide whether to accept the amendment or reject the entire bill. By then supporters of reform, nicknamed 'Hoodies' after their leader Dr Hood, hope to have persuaded reformers that a council containing "outsiders" would be no bad thing. One of the leading opponents of reform, Peter Johnson, tutorial fellow in management and finance bursar at Exeter College, dubbed the whole issue of outsiders and insiders a "red herring". He told The Oxford Times: "The main issue is to clarify exactly what the remit of the executive team - a sort of cabinet within the supervisory board - will be and to whom it will be accountable. This result just could not be better for a secretive clique gaining power." He believes that a group of academics could pull the wool over the supervisory council's eyes. "The actual money will be controlled by the executive team, with the supervisory council simply rubber-stamping their decisions on how it is spent."

He added: "Already £3.3m has been earmarked for the development office. Quite where that came from is unknown. And special salary deals have been cut with some people in some faculties."

As to future action, he said that there was talk of forcing a postal vote or even of taking legal action, though details of what form this might take remained hazy.

The long-simmering row, now boiled over into the public, if gracious, arena of the Sheldonian Theatre, has its roots in a decision from the Government in 2000 to pay funds to the university itself rather than to individual colleges. Some college bursars now mutter darkly that the resulting agreement with the university has been reneged upon.

Paradoxically, Mr Johnson reckons the new arrangements could lead to the richer colleges getting richer and the smaller ones ultimately being forced to hike fees for undergraduates.

He said: "The rich colleges will attract money because they can already afford to fund research - and research attracts money. But middle-size colleges like Exeter depend on teaching undrgraduates. In time the tutorial system could be threatened and fewer courses in more obscure subjects offered."

Mr Johnson said that the new system would not be participatory. Instead of being a system based on the Olympic symbol, or indeed the Audi symbol (vorsprung durch technik, or progress through technology) he sees the shape of things to come as an old-fashioned pyramid with the supervisory committee at its apex.

The problems at Oxford have come to light against a bitter-sweet background. Bitter thanks to the cracks becoming impossible to paper over; sweet because Oxford has obviously succeeded in remaining one of the only two universities outside the US (the other of course being Cambridge) to maintain its place as one of the world's top ten universities despite operating on a fraction of the money now powering its competitors. Oxford's endowment is just £3bn compared with Harvard's of £13bn. And even with new top-up fees its income is £8,000 per year per home student, compared with Harvard's £18,000.

Proponents of reform reckon that the university's existing council is becoming overburdened and that its members do not possess the business acumen necessary to meet future challenges - namely to obtain much more money from many more sources.

A leading supporter of the proposed change, professor of English and fellow of St Catherine's College, David Womersley, countered accusations of the university being governed by a secretive clique. He said: " As things stand, a proposal for academic change has to move up two parallel ladders of committees - a university ladder and a college ladder.

"Should either of those ladders suddenly become a snake as a result of unexpected opposition, the whole proposal has to begin all over again.

"So Oxford's present governance has a double deficit - an expertise deficit and a co-ordination deficit."

He countered the suggestion that external members of the supervisory committee would simply rubber-stamp a clique's decisions: "The notion that externals just rubber-stamp decisions is firstly insulting to them and secondly just not borne out by experience."

He added: "As for the question of salaries, an arrangement which long pre-dates John Hood is in place whereby in certain cases where difficulties are encountered, the vice-chancellor has the discretion to take particular salary decisions. Obviously, the actual salary details are kept confidential."

Oxford has weathered many a raucous row in the past. There was the time when Alice in Wonderland author Charled Dodgson reacted to a proposal from a pompous don that the "university should turn out leaders of Empire" by shouting: "Yes, turn them out. Turn them out." No doubt it will weather this one too.