Are college benefit corporations a new model for higher ed?
Three years ago, Laureate Education lifted an obscure new class of corporations into the mainstream when it became the first public benefit corporation to sell shares on the stock market.
Benefit corporations, as they are also called, are billed as being corporations with a conscience. Enshrined in their charters are a social mission and a commitment to the public’s well-being including the environment, workers and everything touched by the company’s operations. Since 2010, 34 states have authorized them and thousands of public benefits companies have sprouted nationwide.
In a company letter, Laureate Education affirmed that the company wants to conquer the global education market but, in doing so, the company says it pledges to be socially responsible.
“But we are not just a company. We are a company of educators,” wrote former CEO and founder Doug Becker. “We recognize that some investors in public companies are highly focused on short-term results, and we hope that it is very clear to them that this is not our approach.”
A new model for higher education?
More colleges have joined the club. Last year, Purdue University, made headlines for acquiring the for-profit Kaplan University and forming the college benefit corporation Purdue University Global. Before that, Alliant International University (AIU) was the first standalone not-for-profit college to convert into a college benefit. Rasmussen College, a Minnesota-based private for-profit college, announced it was doing so in 2014.
It’s a smart business decision for a higher education enterprise in which every institution is looking to separate itself from the pack. Being a benefit corporations signals to the world that a company is different and driven to do good in the world.
However, in a practical sense, the benefit corporation offers a different business model that could help colleges adapt to rapid changes and pressures being imposed on the sector. At a time when the higher education landscape is transforming, current college business models haven’t been able to adapt fast enough. Public benefit corporations could be a model that can combines the best of the for-profit and not-for-profit colleges.
In order to counter a changing student body and evolving needs of the workforce, traditional not-for-profit colleges need be innovative. But adjusting to change is slow for these institutions. Peter Smith, a former U.S. congressman who held top positions with public and private universities, including Kaplan University prior to landing at the University of Maryland University College, says that their organizational model makes change difficult.
"Universities and colleges are educational, organizational, aspirational models that reflect their histories and they have traditions, customs, and policies that have served them well. They're now surrounded by a world that takes almost all of those things and flips them upside down," said Smith.
He added, "How do you maintain your current business model which is the way you make money now, and at the same time, investigate alternatives that are based on fundamentally different assumptions about organizational structure, teaching, and learning."
Smith also argues that traditional institutions can’t singularly master all the diverse functions at play in students success. He says, "the pace of change and the cost of staying up to date are simply too great for any one institution to be good at everything. We’re used to having those things in a vertical stack called a university when they were all done by hand. That's just not possible anymore.”
Thriving in future, requires colleges to operate more like a private business who have the freedom to merge, adapt, and partner as sudden demands and opportunities arise. Right now, big opportunities exist with the army of non-higher education organizations operating in the marketplace with little oversight. Smith says traditional colleges could use their clout to bring these organizations into the fold but many haven't yet.
College benefit corporations are better positioned to take advantage of outside innovative and bind together a multitude of private and public activities, “The public benefit corporation is a way to collect divergent and diverse activities and diverse functions offered by different partners and to hold them accountable in a public way,” said Smith.
On-the-other-hand, for-profit colleges are good at adapting to change but now they operating in an environment with increased attention to student well-being and outcomes.
Unfortunately, the sector has earned a bad reputation. With the abrupt closures of ITT Tech and the Corinthian Colleges, affecting over 50,000 students, for-profit colleges have become the poster children of corporate irresponsibility. Even though many do well by their students, many fear that for-profit colleges will still prioritize earnings.
“Quarterly earnings calls give you too short a time frame to do the inventing you need to stay in business," said Smith. "If your primary responsibility is to convince investors every every three months that you're really a good deal then you're not investing for the future."
On paper, being a public benefit corporation gives for-profit organizations the legal wiggle room to place the interest of various stakeholders, like students, above its bottom line. Simultaneously, they can show students are a priority
“The advantage is having a corporate form that gives the directors and managers of the corporation more flexibility to manage in a sustainable and responsible fashion,” said Frederick Alexander, a lawyer at Morris, Nichols, Arsht, & Tunnell, LLP, who helped write Delaware’s public benefit legislation.
On the for-profit side, perhaps the biggest upside to being public benefit corporation is that it changes the definition of success. Christopher G. Myers is an assistant professor at the Johns Hopkins University Carey Business School. He recently co-authored a piece for the Harvard Business Review about the motivation behind companies that embrace social responsibilities.
“The traditional for profit corporation has been the dominant model for so long. When we think of a successful business what we often mean is a business that generates a lot of profit,” said Myers. “Identifying as a public benefit corporation would be a signal to the market that the organization is not going to take profit maximization as its only success metric.”
“It is sort of the best of both worlds in a situation like that, because you can raise capital in order to grow your business but at the same time you can assure your your stakeholders, like students and communities and staff, that you know you're not just in this to make a buck,” said Alexander.