The underachieving education business

By John S. Katzman

the founder and CEO of Noodle, a Web site that provides educational advice. He also founded The Princeton Review and 2U.

Capitalism has produced many high-quality products and services, from smartphones to high-speed transport and compelling entertainment. Yet the profit motive, essential in so many fields, seems to have disappointed in one crucial area: education.

In the United States, for-profit universities have a six-year graduation rate of 22%, far below the 60% achieved by not-for-profit institutions. The former spend 23% of their revenue on recruiting new students, compared with a mere 1% spent by non-profit institutions. At the primary and secondary levels, charter schools (publicly funded independent schools) run by for-profit companies are 20% less likely than non-profit institutions to meet proficiency standards, with some of the weakest results coming from the largest for-profit institutions. Even companies that provide textbooks, educational software, management systems, and student loans fail to achieve the level of excellence reached in other sectors.

For-profit education is not just a US phenomenon; it is part of a global trend. New for-profit universities are appearing wherever demand for higher education is strong. In developing Asia and Latin America, scores of new classroom and online English-language preparation programs are trying to meet demand, though it may be too early to judge their quality.

As the founder of several for-profit education companies and an adviser to many others, I have watched managers and investors (including my own) succumb to the temptation to place financial targets above academic goals. This should not be surprising - educational results take years to measure, but profits and bonuses for executives are calculated annually.

I would like to believe that strong financial performance and educational excellence are not mutually exclusive. After all, for-profits can hire high-quality staff, respond nimbly to changing conditions, and raise the capital required to scale up quickly. American Public University System and Renaissance Learning, for example, have demonstrated that one can "do well by doing good." One of my own companies brought together the capital, technology, and people needed to enable students worldwide to access America's leading graduate programs online. Unfortunately, such projects are exceptions.

The education sector must find a better balance between quality and financial returns. Fourteen US states have started to do that by authorizing so-called benefit corporations (or B Corps) - businesses that promise to consider more than shareholder value in their strategic decisions. Though B Corps are expected to act in the public interest, they cannot be forced to do so; if they look beyond the bottom line, they do so voluntarily.

One solution might be to create a variant of the B Corp - call it the E Corp - that could transform the for-profit education sector. An education company could attain E Corp status only if it became transparent about its values and outcomes. For example, E-Corp-owned colleges might be required to provide prospective students with the graduation rate, average student-debt levels, and the average starting salaries of students with similar academic records and educational goals. Furthermore, E-Corp colleges might be required to reveal their per student instructional, marketing, and executive-compensation costs, as well as their pre-tax profits.

Critics might counter that no one should care how much profit a company earns, so long as it provides a worthwhile service. Perhaps, but why not share the data and see how many students enroll in a school when they fully understand their odds of success and how their money will be used? E Corps should also analyze and publish their results (including disappointing ones), as this would motivate schools to improve service. Not all education can be free, but information about education should be.

Many companies might embrace such reforms simply to serve students better. But we should not underestimate the leverage of public spending. As confidence in the E-Corp metrics rises, we could make E-Corp status a condition for participating in government programs. In the US, that would include such coveted funding as Title I grants for primary and secondary education, and Title IV subsidized student loans for higher education. After all, why should companies benefit from taxpayer support if they are unwilling to put accountability and educational excellence at least on the same level as their targets for return on investment?

Even the most mission-driven companies can be tempted to trade educational quality for outsize commercial returns. An E-Corp designation would ensure that education leaders can continue to focus on the bottom line, but still rise to the top of the class.

Copyright: Project Syndicate, 2014.


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