How educational management companies serve charter schools and their students

Journal of Law and Education, Apr 2003 by Walk, R David Jr

To most traditional school district administrators, the charter school movement is a slap in the face, because the underlying premise of the charter school movement is that existing public schools are inadequate. Charter schools also hit school districts in the wallet by taking taxpayer money that school district administrators believe is rightfully theirs.1 To make matters worse, about 10% to 12% of charter schools use educational management companies,2 which assert that they can run charter schools more efficiently than school district administrators run traditional public schools and still have enough money left over to turn a profit. Not surprisingly, many school districts have fought charter schools and management companies in state legislatures3 and in the courts.4 If they cannot defeat these threats outright, school districts have sought to impose obstacles that will either block charter schools or burden them with extensive regulatory requirements analogous to those imposed on traditional public schools.5

In the April 2002 issue, Kathleen Conn, an administrator with a Pennsylvania school district, argues that educational management companies, which she calls "for-profit school management corporations," should not be entrusted with the education of children because the directors of such companies have a fiduciary duty to maximize the wealth of shareholders.6 She argues that this fiduciary duty is the problem with allowing educational management companies a role in charter schools and other public schools.7 Conn contends that this fiduciary duty conflicts with the public's interest in education and that this supposed conflict has been ignored.8 She also asserts that the evidence shows that educational management companies have not delivered on their promises of educational reform.9 To remedy this conflict, she argues that legislatures should either pass laws requiring educational management companies to serve the interests of students or recognize new causes of action for educational malpractice against management companies.10

This article demonstrates that Conn is wrong that the for-profit status of management companies inevitably pits them against the interests of students and wrong that the most appropriate way to control companies is to tinker with the fiduciary duties of their directors. Management companies have an inherent interest in serving their students well; if they do not, parents will pull their students from a charter school and the company will lose its contract to manage the school. Far from ignoring the profit motive, states have authorized charter schools and given a role to for-profit companies because they want to harness that motive to improve education. These companies are not left free to squeeze profits out of helpless students, as Conn asserts; they are governed by their contracts and by state laws and regulations. The existing methods of controlling the behavior of companies are adequate and far superior to Conn's proposed solutions. Although the available data are preliminary and largely inconclusive, the preliminary results provide reason to believe that charter schools run by management companies are succeeding.

I. THE PROFIT MOTIVE

Conn spends the first part of her article analyzing at length the fiduciary duty of directors to demonstrate that they have a duty to maximize the wealth of their shareholders, a duty she asserts has been ignored in the debate about the role of management companies." This fiduciary duty is simply the legal duty imposed on directors that corresponds to the concept that for-profit corporations are seeking to make a profit, an idea that is well known to everyone involved in the school reform debate. Indeed, an underlying premise of the charter school movement is to use free market concepts to improve public education.12

Conn's claim that this profit motive inevitably pits management companies against the interests of students is overly simplistic. She posits that companies will squeeze a profit out of students by making cuts that will harm the education of students.13 The way that management companies can make a profit is more complicated and will serve the interests of students. Their profit-making strategy is to provide a better educaton than is provided by traditional public schools so that existing students will stay in their charter schools and new students will enroll.14 If a management company does not provide a better education, the students will return to traditional public schools or move to other charter schools. The management company also seeks to establish a track record of success so that more and more charter schools and school districts will hire the company.15 The management company's profit-making strategy relies on building volume,16 and volume is not built by short-changing the interests of students to obtain immediate profits.17

The assertion that charter schools should not hire for-profit companies is also contrary to the school districts' practice of contracting with for-profit companies for goods and services. School districts regularly purchase curriculum materials from for-profit providers instead of developing such materials themselves18 without being concerned that curriculum providers will deliver a substandard product because they are cutting corners to maximize profits. No one would blink if a school district or a charter school purchased curriculum materials from a for-profit company, obtained accounting services from a for-profit accounting firm, obtained building management services from another for-profit firm, and hired well-paid administrators, who presumably are rational economic actors interested in maximizing their own wealth. It should be no more objectionable to buy these goods and services as a package from an educational management company.