An independent firm that evaluates companies on their financial and corporate-governance practices is warning endowment and pension-fund managers and other institutional investors that three major higher-education companies—the Apollo Group Inc., Corinthian Colleges Inc., and Education Management Corporation—"should be considered very high-risk holdings by investment fiduciaries.”
“These are not just poorly governed companies; these are companies that seem to have been run with little regard for sustainable value” and are based on a business model heavily dependent on the industry’s prior political ability to foster favorable government policies, said the firm, GMI, in a report released Thursday.
In its report, GMI said the three companies each received the lowest possible score, an F, in its ratings criteria for environmental, social, and governance practices. Only about 5 percent of the 4,200 companies that GMI rates on practices in those areas received that low a score.
GMI said the three companies also received some of the lowest-possible scores in its fiduciary ratings, which are based on such factors as accounting practices that suggest companies might be overstating revenues, self-dealing by board members, and high levels of insider trading.
Mark Brenner, a spokesman for the Apollo Group, the corporate parent of the University of Phoenix, called the statements about that company “baseless and unfounded.”
Ric Marshall, who is GMI’s chief analyst and the author of the report, said the ratings reflect the heightened political scrutiny and tightening regulatory environment facing the for-profit-college industry and GMI’s assessment that weaknesses in the corporate leadership of those companies is so great that it imperils their very existence.
“It is our view that the risk of outright failure for all three of these companies has reached a critical level, and is likely to rise even further,” he wrote in the report.
Each of the companies has recently taken steps to reform their student-recruiting practices and reduce their dependence on federal student-aid funds. Mr. Marshall, in an interview, dismissed those moves as mostly “window dressing” that don’t deal with deeper challenges. “We don’t think the reforms are going to work,” he said. “The culture within these companies is not changing.”
Board independence is a key part of the corporate-governance factors in the firm’s ratings on environmental, social, and governance practices.
Mr. Marshall said a fourth for-profit higher-education company it examined, the Washington Post Company, parent of Kaplan Inc., passed that test, but the three others didn’t. (The report also took note of recent corporate upheavals at Career Education Corporation, but Mr. Marshall said those were too recent to be dealt with in depth in this report.)
Questionable Practices
At the largest of the companies, Apollo, for example, he noted that the board seemed all too willing to approve transactions like the leasing of airplanes from a company owned by its executive chairman, founder, and controlling stockholder, John G. Sperling, and the purchase of art from a gallery owned by Mr. Sperling’s ex-wife (who is the mother of the board vice chairman, Peter V. Sperling). “It’s the same sensibility” as found in high-profile instances of questionable corporate spending, said Mr. Marshall, and “the majority of companies do not engage in those kind of practices.”
In a report last month, GMI also named Apollo one of 10 companies on its new “Risk List,” designed to highlight individual companies and specific patterns of risk of which investors should be aware. “Investors outside the founding family have little power to influence the company’s course, and an analysis of its financial statements suggests it may be inappropriately capitalizing assets and smoothing earnings,” GMI said of Apollo in that report. “Moreover, there have recently been a number of significant insider sales.”
Mr. Brenner, Apollo’s spokesman, said the company remains “committed to sound principles of corporate governance and financial reporting.” He added, “GMI seek news headlines by saying sensational things in the hope that someone would pay them for their opinions.”
GMI is the successor company formed from the merger in 2010 of three predecessor firms, the Corporate Library, GovernanceMetrics International, and Audit Integrity. Its ratings have recently gained attention in the wake of a high-profile bankruptcy of a major brokerage firm, MF Global, which Audit Integrity began highlighting as a risky investment in 2008 for its aggressive accounting practices.
GMI rates about 18,000 companies globally on their accounting practices, with ratings of “very aggressive,” “aggressive,” “average,” or “conservative,” based on a 1 to 100 score. Apollo and Corinthian are both rated “very aggressive” with a score of 10 or below. Education Management Corporation fell into the “aggressive” category with a score of 18. Companies with scores of 35 to 85 fall into the average rating.
