The First Public Benefit Corporation is... A For-Proft College?

This article, written by Kyle Westaway, was originally posted by Fast Company on February 10, 2017.

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On February 1, Douglas Becker made history when he rang the opening bell of the Nasdaq. His company, Laureate Education, Inc.—the world’s largest for-profit college network, with more than 1 million students enrolled at over 200 campuses in 28 countries—had just launched an initial public offering. IPO filings happen every day, but this is the first public benefit corporation to ever be publicly traded. Laureate is listed on the exchange as LAUR and raised $490 million by offering 35 million shares at a price of $14, slightly lower than expectations.

Benefit corporations are distinct from a traditional corporation. Rather than a singular focus on creating financial value, a benefit corporation is explicitly mandated to pursue positive social and environmental impact along with financial prosperity. The benefit corporation is designed to create flexibility for management to make decisions that aren’t driven solely to maximize shareholder value.

So, why would a publicly traded company choose to convert to a benefit corporation? By selecting the benefit corporation form, Laureate could be sending a signal that, even after it goes public, it will not compromise its educational mission in favor of the pursuit of quarterly profits.

In a letter accompanying the S-1 filing, Laureate’s Chairman and CEO Doug Becker notes that their stated public benefit is to "produce a positive effect for society and students by offering diverse education programs both online and from campuses around the globe." He writes that they have always run their company with the "’head’ of a business enterprise—scalable, efficient and accountable for measurable results—with the "heart" of a nonprofit organization—dedicated to improving lives and benefiting society."

Of course, there are lots of reasons to be very skeptical of the world of for-profit colleges: Publicly traded for-profit colleges performed well for shareholders for years, but in their single-minded pursuit of profit, they forgot their stated purpose: to provide high-quality education that would prepare students for a career. Instead, they loaded the students up with debt and failed to deliver high-quality education. And due to management’s short-term focus on quarterly profits, the shareholders lost out. According to Bloomberg, the For-Profit Education Index of 13 companies, including DeVry Education Group Inc. and Apollo Education Group Inc., has plunged 55% since its peak five years ago, amid recruiting abuses and student debt concerns, leading to a regulatory crackdown.

Because they lost sight of the purpose—to actually educate students—in pursuit of profit for their shareholders, they ended up running the business into the ground. Following the public outrage, their stock plummeted and two companies, Corinthian Colleges Inc. and Education Management Inc., have been delisted from the Nasdaq Stock Market, eventually destroying all the value that they had created for investors.

Laureate is no different: it's been derided for exporting a broken for-profit education system abroad. Eighty-two out of 86 of its schools operate internationally and out of the reach of U.S. regulators. It has faced sharp criticism in Latin America, where the majority of its schools are based. In Chile, one Laureate school was stripped of its accreditation when academic standards suffered as the school scaled up (it's now been restored, the company is eager not note).

In addition to the issues besetting for-profit education, there's also the question of how the market will respond to a benefit corporation. Critics are skeptical that a company pursuing both profit and purpose could perform well on the public markets. These critics assume that profit and purpose are in tension; that by focusing on the mission, investors will suffer. However, the for-profit college industry seems to be a case study proving the opposite point: that, at least in this industry, a narrow pursuit to maximize shareholder value actually ended up punishing the shareholders (and students).

Laureate’s conversion to a benefit corporation might be a reaction to the mistakes made by publicly traded for-profit colleges. Perhaps protecting the purpose will be the best way to ensure that Laureate is able to focus on creating long-term shareholder value and financially outperform the rest of the industry. This legal structure will allow them to focus on the student and the quality of experience, and resist investors who may want to turn Laureate into a diploma mill.

Conversely, Laureate’s conversion could simply be a public relations tactic to soften its image with the public and investors thereby differentiating itself from the rest of the for-profit education sector.

So, how will investors respond? "While still an acquired taste for many traditional investors, the concept of codifying social and environmental values is really gaining traction across asset classes and geographies," says Ron Cordes, co-founder of Impact Assets. This seems to be true for even the most established investors, both Citigroup Inc. and KKR are current shareholders of Laureate and have approved the conversion to a benefit corporation prior to the IPO filing.

Investors may be warming to the idea because, in certain instances, it can actually help drive long-term shareholder value by ensuring mission centrality. "The clarity created by a mission-aligned structure like the benefit corporation creates new opportunities to build long-term, durable value for all constituencies, including stockholders," says Jay Cohen Gilbert, founder of B Lab. (Laureate is also a B Corp, B Lab's separate accreditation that certifies sustainable businesses).

Only time will tell if Laureate is able to buck the trend of publicly traded for-profit colleges that have failed to deliver value to their shareholders or their students. Maybe converting to a benefit corporation will empower its management to navigate the public markets while keeping their purpose central.