When school management companies fail: Righting educational wrongs

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

In both Adelphi and United Way, government actors were the watchdogs that barked at directors' breaches of fiduciary duties. When directors of for-profit corporations breach fiduciary duties, disadvantaged shareholders must seek redress either in direct, derivative or class action suits. If state or local governments require that school management companies organize as nonprofit corporations, government entities, as well individuals, bear direct responsibility for monitoring their performance. Because of the favorable tax treatment nonprofits can claim, the Internal Revenue Service also closely monitors their financial returns."

C. Other Constituency Statutes

Many states have attempted to impose on directors of for-profit corporations fiduciary duties to constituencies other than their shareholders." Most of these "other constituency" statutes have failed to accomplish their goals,77 either because they are permissive statutes" or because they lack enforcement mechanisms.71 Pennsylvania, one of the first states to enact an "other constituency" statute, has had several challenges to the statute's constitutionality. The first occurred in a derivative action to enjoin the department store giant Strawbridge and Clothier from presenting to shareholders a stock reclassification plan that would have defeated a raider's tender offer." The court refused to grant the injunction, holding that Strawbridge directors rightly considered the potential effect a successful tender offer would have had on the company's employees, customers, and community." More recently, application of the Pennsylvania statute was upheld in a 1996 court decision in which Conrail sought a friendly merger with CSX Corporation, rejecting a more lucrative Norfolk Southern bid that cost shareholders $1.5 billion." Conrail argued, and the court accepted, that, under the Pennsylvania statute, corporations have the right to consider constituencies other than shareholders and shareholders' financial interests in making business decisions.83

ests in decision-making;86 but this statute, too, has failed to make an impact, because it lacks an enforcement mechanism."

In summary, case law and statutes, despite the movement to legitimize other-- constituency statutes, make clear that directors' duties of loyalty flow exclusively to shareholders. In the context of public education, the primacy of shareholder wealth maximization means the directors of a for-profit school-management corporation owe fiduciary duties of loyalty to one constituency only: shareholders. For students disadvantaged by for-profit school management corporations to have standing to sue corporate directors for breaches of fiduciary duties under state corporate law statutes, they must be shareholders. Even in nonprofit school management corporations, students still need protection.

III. MONITORING THE PERFORMANCE OF SCHOOL MANAGEMENT COMPANIES

A. Indicators of Educational Performance

viding quality education is so fraught with ambiguities that courts do not generally recognize causes of action for educational malpractice except in certain specific special education contexts.92