When school management companies fail: Righting educational wrongs

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

A. Nonprofit versus For-profit School Management Companies

ing together to form selfless neighborhood nonprofit charter schools to deliver educational services to a group of students whom public education has failed is a reality. Many nonprofit public charter schools serve traditionally underserved communities or populations commendably.42 University-sponsored charter schools have pioneered exemplary educational reforms." However, when state charter school laws allow large for-profit corporations to manage schools, or when nonprofit managers contract with for-profit companies to provide educational services, the specter of for-profit companies misappropriating tax dollars is especially frightening.

Although forty-six states plus the District of Columbia have separate statutes governing corporations, whether nonprofit or for-profit," corporations overall bear more resemblance to each other than their different tax treatment might indicate.45 Economic forces motivate both,46 and one of the most powerful economic forces is the desire for a reputation that inspires future trade or association." Both nonprofits and for-profits want to be seen as "doing well."

makes the issue of control of a nonprofit of paramount importance. Nonprofit corporations may have members with rights to elect the board of directors, but most do not, and the board becomes self-perpetuating.SZ Moreover, private persons often lack standing to sue the directors of nonprofit corporations.53 Recent statutes have tended to enlarge the class of persons with the requisite standing, but findings of liability in the nonprofit sector hardly ever result in consequences more severe than admonishment or removal." Rather than punishment, reform of the corporation's conduct is generally the goal.55

B. Fiduciary Duties in Nonprofit and For-profit Corporations

mum profits to shareholders may force directors to choose the lowest cost alternatives in delivery of educational materials and services to students. 64

Under the Uniform Management of Institutional Funds Act, the standard of review applicable to directorial decisions in the nonprofit setting is the business care rule,65 similar to the familiar business judgment rule applicable in the forprofit context except that directors retain the right to consider social and political conditions as investment criteria.16 No similar proviso exists in any of the three standards of review of decisions by directors of for-profit corporations. The three paradigmatic standards, enunciated by the Court of Chancery and the Supreme Court of Delaware in a series of decisions beginning in 1985, namely the business judgment rule, the entire fairness test, and the enhanced scrutiny review,67 oblige directors to make rational and selfless judgments that are in the best interests of the corporate entity and its shareholders in any given circumstances.68

ples present cautionary tales for the nonprofit school management context, but they are, on the whole, exceptions rather than the rule.