Benefit corporations: no sure thing

Lots of progressives in Oregon are big on public affirmations of goodness. That’s why they love the idea of benefit corporations, such as Neil Kelly, Rogue Creamery, Metropolitan Group, Medolac and Good Clean Love.

But before Oregonians conclude that benefit corporations are by their nature more socially responsible businesses, think again, and do some rigorous research. The fact is, in some cases the designation is being used as little more than a way to add a patina of respectability to otherwise questionable firms.

For a truly inauthentic attempt at sincerity and goodness, look no further than Laureate Education, Inc. It announced plans earlier this year its plans to do a $1 billion initial public offering (IPO) that would make it the first publicly traded benefit corporation.

If you’ve heard of Laureate, it may be because of its connection to former president Bill Clinton. In 2010, he signed on to become an “Honorary Chancellor”, or paid shill to be more accurate, for Laureate. In return for serving as a front man for the privately held for-profit education company, Clinton collected $16.5 million between 2010 and 2014. Laureate also has donated between $1 million and $5 million to the Clinton Foundation.

In its IPO prospectus, Laureate says, “we may take actions that we believe will benefit our students and the surrounding communities, even if those actions do not maximize our short- or medium-term financial results.” There’s little in its history, however, that suggests such an approach is part of the company’s DNA.

“We recognized the enormous importance that society places on education as a public good,” said Douglas L. Becker, Founder, Chairman and CEO of Laureate. “This inspired us to create a culture that combines the ‘head’ of a business enterprise with the ‘heart’ of a non-profit organization. “

With one million students studying online and on campuses at 88 institutions in 28 countries, Laureate is currently a private company, but it plans to go public. The company grew out of the K-12 tutoring company, Sylvan Learning Systems, in 2004 when Sylvan was spun off.

Laureate was taken private in a $3.8 billion deal in 2007. Investors included KKR & Co., Soros Fund Management, Paul Allen’s Vulcan Capital, Steve Cohen’s SAC Capital Advisors, Citi Private Equity, Sterling Capital and others, all investors whose commitment to corporate citizenship and the public good is unclear.

Registration as a public benefit corporation is also no guarantee that the governance of a company will be friendly to shareholders.

Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, has pointed out that Laureate’s form of governance is especially unfriendly to shareholders. While Laureate is listing its stock as a public benefit corporation, it will also be going public with dual-class stock, which will maintain its current owners’ control over the company. This includes K.K.R. which will indirectly hold a greater than 10 percent interest in the company.

This doesn’t make sense, Solomon argues. K.K.R. is out to sell its stake at the highest price possible, not benefit other causes. So one has to wonder how strongly Laureate will even pay heed to the public benefit standard.

Then there’s the question of whether Laureate’s schools operate in the best interests of their students.

It’s 5 schools in the U.S. include: NewSchool of Architecture & Design, San Diego, CA; Santa Fe University of Art & Design, Santa Fe, NM; Kendall College, Chicago, Il; University of St. Augustine for Health Sciences, St. Augustine, FL; and the online-only Walden University, Minneapolis, MN.

newschool

Consider their records on the U.S. Department of Education’s College Scorecard, an online system designed to help students, parents and advisers make better college choices.

For example, according to the Scorecard:

  • The average annual net cost of attending NewSchool is about twice the national average, only 50 percent of students return after their first year and the graduation rate after six years is only 33 percent.
  • The average annual net cost of attending Kendall College is more than twice the national average, only 57 percent of students return after their first year and the graduation rate after six years is only 45 percent.
  • At the Santa Fe University of Art & Design, only 31 percent of the students graduate within six years and only about half of those graduates subsequently earned, on average, more than those with only a high school diploma.

Laureate also operated The National Hispanic University in East San Jose, CA, but it closed in August 23, 2015. The San Jose Mercury News attributed the closure to the U.S. Department of Education reducing financial aid and online opportunities for students enrolled in programs that did not offer good prospects for employment. Other media reported that the school also failed to meet its goals in enrollment for online coursework.

It will be interesting to see how this company, that has a history of questionable payments to Bill Clinton, is $4.7 billion in debt, is burdened with high interest payments, has lost money every year since 2010 and has a habit of saddling its students with debt and low graduation rates pulls off its public benefit corporation charade.

It may be a hard lesson for a lot of true believers in benefit corporations.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s