David Schwen for The Chronicle
“Doing well by doing good” is the business mantra of the for-profit-college industry.
But you don’t have to look far to find people who question the slogan’s sincerity or the very legitimacy of that model. And that was even before reports of some companies’ abusive student-recruiting practices and questionable educational standards fed a public sense that the billions in federal dollars flowing into these colleges may be benefiting their owners more than their students—much less taxpayers.
For-profit colleges aren’t going to disappear, not with a 13-percent share of all enrollments, and not while state support for public and nonprofit alternatives remains so anemic. Still, even more so than higher education as a whole, the colleges do have a credibility problem.
No law or policy can change a college hellbent on cutting corners to make a buck. But what if there were for-profit colleges organized as “benefit corporations” or “low-profit” limited-liability corporations? Enterprises that actually did place less emphasis on profits for the sake of their societal mission? If it works for the worlds of fleece jackets and Chunky Monkey, couldn’t the next University of Phoenix be the Patagonia or Ben & Jerry’s of higher education?
In a benefit corporation or an L3C, the owners would have fiduciary duties explicitly broader than fattening a bottom line. That means a company might be notably less profitable than its competitors because it chooses to spend more on academics. There would also be some additional layers of accountability. At a benefit corporation, for example, the investors can take legal action if the company falls short of its public mission.
In a benefit corporation or an L3C, the owners would have fiduciary duties explicitly broader than fattening a bottom line.
“It’s perfect for the for-profits,” says William H. Clark, Jr., a lawyer in Philadelphia who has championed the benefit corporation nationally. A company that “would owe the same fiduciary duties to the students and faculty as they would to the shareholders,” he says, would have a different approach “than a for-profit college where the directors are answerable principally to the shareholders.”
Some may ridicule the idea: Critics who see the industry as a tool for gaming the federal aid system may distrust a company’s move in the low-profit direction as amounting to lipstick on a pig. Those who work in the industry will say the colleges are already serving students well and satisfying outside standards set by the government and by their accreditors.
In practical terms, it’s hard to see how the giant, publicly traded companies that dominate the sector could even make the transition. And companies that insist that their investors already see the value of putting profits back into the enterprise will say that such organization is superfluous.
Even so, some industry observers say there is room for new models. That’s where the new corporations could come in.
Neither the benefit corporation nor the L3C model puts a limit on profits or guarantees corporate behavior. But they do influence it. Ultimately “the efficacy of a benefit corporation is going to depend on who’s running it,” says Robert A. Wexler, a lawyer who’s written on the topic. “It protects the owners who want to be good guys from shareholders who don’t want them to be.”
As the L3C gains acceptance beyond the nine states where it is formally allowed, colleges that commit to its principles could have a distinct advantage, says Robert Lang. He’s the creator of the L3C and founder of Americans for Community Development, an organization that advocates for its use.
He sees the designation as a useful tool for owners of small and family-run colleges who are “dedicated to the educational mission” and want to ensure that future owners carry on their standards after the sale of their companies.
Also, L3C’s are designed to receive program-related investments from foundations—the kind that come with below-market expectations of a return. Because of that, some for-profit-college advocates say it could be the ideal form for a company that might otherwise avoid the costs of serving a riskier student population.
For a standard for-profit, the costs of that extra student support “would eat into” the return on investment, says Steve Gunderson, president of the Association of Private Sector Colleges and Universities and formerly head of the Council on Foundations. But as an L3C, he says, a college company would have the added ability and incentive to take in those students, higher costs and all. While Mr. Gunderson says it’s for his members to decide if an L3C model is right for them, he believes that “it has incredible potential in this sector.”
Benefit corporations and L3C’s are so new that it is unclear how the government might treat them. But many observers say companies would flock to the idea if the model provided some regulatory relief from the feds (the very idea may already have some industry critics fuming).
Even without the formal designation, colleges structured as low-profits could have some appeal, particularly in the current political climate. “It would seem an accreditor would be slightly more inclined to favor one of these kinds of companies than a rapacious private-equity group,” says J. Mark Jopling, a banker with years of experience in deals to buy and sell colleges.
The iconoclastic Singularity University, a nonprofit institution created in 2008, is considering converting itself into a benefit corporation in California. And the first L3C colleges could well come from a group of architects in suburban Detroit, led by Shari Stein, who are looking to create a for-profit college built around the idea of low tuition and an experiential-education curriculum, and a separate venture in Massachusetts, possibly focused on environmental studies and the arts, that Mr. Lang and some colleagues just incorporated as Rockport University L3C.
Interest is growing. Next month Ms. Stein and her colleagues will head to Indianapolis, where Mr. Lang’s group will be part of the first-ever meeting on L3C’s in higher education. The influential Lumina Foundation is the host. Lumina officials say they find the concept “intriguing,” and while they aren’t endorsing the idea of L3C’s in higher education, the rest of the title for the conference—"The Time Has Come"—may be more than wishful thinking.
