Congress Discovers: For-Profit Colleges Put Profits First

Democratic Members of the Committee on Oversight and Government Reform came out with a status update on executive pay at for-profit colleges on July 27, 2012. In December of last year, ranking House Member Elijah Cummings initiated an investigation of executive pay at for-profit educational institutions. The purpose of the investigation was to determine how these for-profit companies are using taxpayer funds and, specifically, whether they are linking compensation of their top executives to factors relating to student achievement; performance; and outcomes (loan defaults, graduations or job placement).

Cummings sent letters to 13 publicly traded, for-profit educational institutions requesting documents that indicate to what extent they base executive salaries, bonuses, and other compensation on their students’ performance. Not surprisingly, the for-profit predatory colleges and universities were less than transparent.

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Predatory Kaplan University, owned by the Washington Post, obfuscated as much as they could in their response. According to the oversight report:

“Kaplan Education stated, ‘executive compensation and incentive pay is tied directly to student success metrics,’ and ‘incentive compensation is determined based on student outcome targets such as job placement and improved graduate income levels.’ As a wholly owned subsidiary of the Washington Post Company, Kaplan is not required to disclose its executive pay to the SEC. Citing this rationale, Kaplan refused to comply with the request for information.”

I exposed the executive pay at for-profit colleges and, specifically, Jonathan Grayer’s resignation and his $76 million dollar pay package as chairman and CEO of Kaplan back in January of this year. I also noted back in January that according to Washington Post Company (WaPo) 10-K annual reports, WaPo paid Kaplan Incorporated executives $289 million dollars related to stock option payouts between 2003 and 2008.

The oversight and government report concluded that:

The single most significant measure for determining overall executive compensation is corporate profitability, including factors such as income and earnings, operating margins, net cash flow and revenue. Across the board, measures relating to corporate profitability dwarf those relating to student achievement.

Certain companies failed to demonstrate any link whatsoever between the compensation they pay their executives and factors relating to the success of their students, such as the rates of student loan default, graduation and post-graduate employment.

All true, but disturbing – if not surprising, as the report was prompted and initiated by Democrats who with Republicans have historically supported for-profit education and taken lobbyist money for doing so – part of the report is the following:

Although the for-profit education industry serves a laudable purpose in offering academic opportunities to millions of Americans, it has come under significant scrutiny recently for charging extremely high tuition, resulting in crippling debt for students with lower graduation rates and job placement records, while at the same time generating handsome profits for corporate shareholders and lavish compensation for company executives.

Unfortunately, it is this type of thinking that has created and enabled the Frankenstein monsters we now know as for-profit or drive-by colleges. They serve no “laudable purpose” whatsoever, for they have one basic fiduciary responsibility and it is not to students or to the general public. Their fiduciary responsibility is limited to accumulating more and more profits for their shareholders. They are corporations that sell products, in this case an “educational product” called “a for-profit college education and a diploma to go with it.” They have to sell more and more of this product and lower their costs as much as they can in order to accumulate profits.

Even the Committee on Oversight seemed to understand this, stating:

The single most significant measure for determining overall executive compensation is corporate profitability, including factors such as income and earnings, operating margins, net cash flow and revenue. Across the board, measures relating to corporate profitability dwarf those relating to student achievement.

This is all crucial to understand for it brings up the argument that to expect for-profit colleges to deliver anything like student achievement, performance, education outcomes or even job placement is irrational. Their marketing costs, their executive payouts, their cost-cutting efforts, their reduced labor costs, their one-size-fits-all curricula and their cost of doing business are all based on boosting profit margins – putting profits before students every time. Understanding this strikes down the argument that these disaster colleges and universities serve some social purpose or are “laudable,” in the words of the report. The fact is they serve shareholders, not students as the report concluded -and we shouldn’t be so naïve as to expect anything more.

Neoliberal, For-Profit Education

The transfer of public duties traditionally performed by government actors to private companies which assume complete responsibility for the public assets and answer only to their shareholders for how they choose to use those assets is called “privatization.” The government operates as a collection plate for these for-profit college swindlers, collecting tax monies and passing along the funds to the corporations that run these “schools” on federally backed student loans. In this scenario, the government is basically a bag man for the corporations. The students then legally contract, in writing, with the for-profit college or university, and the corporation is paid by the federal government. There is no provision in the contracts for student achievement, performance or outcome.

The Department of Education designed a regulation that stated that at least 35 percent of graduates from the for-profit colleges had to be paying back their student loans in order for a for-profit to continue to receive federal funds, but in a victory for for-profit corporations, the court recently struck the regulation down.

Even if one wanted to reduce colleges to simply little training workshops for low-paid, entry-level work, which the for-profit colleges do, how could one come up with a rational for any “gainful employment figures” in an economy that sheds jobs faster than the for-profit serpentines shed scales? This is the point: colleges and universities are not simply factories for the larger economy. They cannot guarantee jobs, income levels or opportunities, nor should they. This is the job of social policy, not institutions of higher education.

As educational author and attorney, Kathleen Conn wrote back in 2002:

Private corporations are legal entities established within a paradigm of maximization of profits for those who provide the working capital of the organization, the shareholders. The directors of such corporations owe fiduciary duties of care and loyalty to the shareholders. They owe, under the law, no concomitant duties to other constituencies.

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the non-distribution of profits among stockholders in order to devote them to other purposes. [Conn, Kathleen. “For-profit School Management Corporations: Serving the Wrong Master,” Journal of Law and Education, April 2002.]

It is clear to any beginning business student that any executives or directors of corporations have one fiduciary duty of loyalty and responsibility: to accumulate ever-greater profits for shareholders; this is the simple logic of the economics of corporations and a fundament of the capitalist system. That for-profit schools are not run for their students’ benefit as about as shocking as the gambling going on at Rick’s Place in the famous 20th century classic film, “Casablanca.” The answer to the problems that besiege students and the educational system as a whole is the lack of universal, free access to all levels of public education – a lack that creates the market for these for-profit colleges.

Let us take a lesson from this report and use it as a vehicle, a teachable moment, to educate the public and argue for universal, free, accessible education for all Americans. When we fully commit to and fund public education, we won’t need to spend millions of taxpayer funds policing for-profit predatory colleges with government oversight committees, government lawyers, federal investigations, General Accounting Office studies, qui tam or false claim law suits against bad actors in the for-profit college and university industry, whistleblowers, and the like – for they simply won’t exist. These for-profit schools can’t compete with a public community college or state university that offers a radiography degree for the total cost of $3,000 – $15,000, while for-profits like Kaplan University collect $42,000 for the same degree. This is pure gluttony.

The public has no shareholders to circle the wagons around in this fight, only the protection of the public commons and education as a human right, not a commodity. This is the lesson that must be drawn from Cumming’s oversight report: protection and expansion of the public commons and public education is the real issue.