When school management companies fail: Righting educational wrongs

Journal of Law and Education, Jul 2002 by Conn, Kathleen

INTRODUCTION

Increasing disaffection with American public education has spurred the rise of for-profit school management corporations that are acquiring pieces of the public education pie in two major ways. First, state departments of education or public school districts, acting under various "empowerment acts," contract with them to take over the operation of failing districts, or, second, they either obtain charters to operate public charter schools or subcontract to provide educational services to nonprofit companies that obtain such charters. In both cases, public money supports the privately operated "public" schools and goes into the coffers of the for-profit school management corporations.

Oversight and monitoring the delivery of educational services in school districts handed over to private management companies or in public charter schools operated by such private companies is problematic. Several districts have revoked contracts with school management companies when student scores on standardized tests failed to demonstrate significant improvement over a period of two or three years. "Turning around" a failing school or school district, however, can be a slow process under the best management. Conversely, leaving an ineffective school management company in control for an extended period of time may deprive students of educational opportunities that they cannot recoup.

Merely revoking a contract does not remedy damages incurred under the contract. Although an extensive literature detailing the rise of public charter schools has developed, few commentators helpfully address the possible causes of action or the remedies available to students disadvantaged by attending schools managed by or subcontracted to for-profit school management corporations. Such remedies are the focus of this paper.

Part I reviews the traditional system of public education in the United States, with control of educational decision-making in the hands of the individual states, and discusses the rise of school management corporations and how they acquire control of schools and school districts. Since many state charter school laws grant charters exclusively to nonprofit corporations, Part II examines the differences between nonprofit and for-profit corporations, especially with regard to the fiduciary duties of their managers and the differences in accountability to those who subsidize the companies. A nonprofit school management corporation generally exercises control over a single community school with a specific educational mission; the directors of these nonprofit corporations typically work closely with parents of school students, and are, therefore, more visible and accountable to stakeholders than their counterparts in for-profit companies. For-profit school management corporations generally pursue wider operational scope in order to realize profitability from economies of scale; directors are more autonomous and may even be invisible to stakeholders. Even with nonprofit corporations nominally in control of charter schools, however, the potential for significant abuse still exists when they subcontract educational services to for-profit corporations. Part II also briefly examines the conflict between for-profit school management and the education of students inherent in the shareholder wealth maximization principle of traditional corporate governance, and reviews the failure of "other constituency" statutes to resolve the conflict.

Part III examines indicators of school performance and discusses the standards of accountability available for judging the performance of school management companies. Part III also offers an evaluation of the largest for-profit school management company, Edison Schools, Inc.

Part V concludes with a forecast of the future of school management cargo: rations in education.

I. THE PUBLIC SCHOOL SYSTEM OF EDUCATION

Education and corporate law share billing as two of the primary drivers of a society's economic productivity, according to an increasing number of legal scholars and economists.2 While the United States' law regulating the conduct and operation of business organizations has become a de facto world standard,' the United States system of K-12 public education has not.' Failing public schools and criticisms of school district accountability have led to the rise of school management corporations eager to exploit public tax dollars to fund their own education agendas.' Many of these are nonprofit corporations with idealistic leaders, but the largest and most successful in garnering the educational market share are publicly-traded, for-profit corporations promising financial returns to their shareholders, not to students.

A. States' Responsibility for Public Education

Public education is traditionally the province of the state.6 Although not recognized as a fundamental right triggering strict judicial scrutiny,' the Supreme Court acknowledged education as "one of the most important services performed by the state." States perform their educative role through state boards of education, but delegate day-to-day administrative authority to local school boards whose members are generally elected in democratic elections.9 States have a duty to support public schools, but they may not directly support nonpublic, i.e., sectarian, schools." They may, however, support fully or partially autonomous school entities created by a contract between the school's organizers and a sponsor identified in the enabling legislation." Such school entities are called public charter schools, and by the end of 2001, thirty-seven states, the District of Columbia and Puerto Rico had enacted charter school laws enabling the creation of such charter schools." By April 2002, over 2,300 charter schools were operating in thirty-four states and the District of Columbia, with over 575,000 students enrolled."3