Can the stock market understand for-profit higher education?

The recent New York Times article concerning difficulties at the University of Phoenix and the earlier January 28, 2007 announcement that Laureate Education, Inc. was going to be taken private (for $3.8B)seem to share an important question for for-profit higher education: Is it possible to build a long-term viable, for-profit institution of higher education that is subject to the quarterly profit-growth demands of the stock market?

Simply making a good profit is insufficient for the market, which connects its rewards to steady, and significant, profit growth.  One can easily hypothesize that some of the problems of the University of Phoenix described in the NYT article arose because of efforts to sustain profit growth beyond some limits possible or acceptable in higher education. After all, higher education operates under some significant legal and ethical constraints, and producing consistent quality in such a human-intensive endeavor is not so readily scalable as some other enterprises.   

Laureate Education, on the other hand, is essentially inventing a new approach to globalization of higher education. One can imagine that there will times when creating academic sustainability of this new global educational enterprise will require more reinvestment and less profit than the growth-focused market can understand. In fact, Becker has stated," We have not taken dividends out of any of our universities around the world. They are free to build their excess revenues and to re-invest those funds in facilities or programs that benefit our students and grow our business."(p. 42)  It is certain that academic sustainability is not the same as financial sustainability, although the two are clearly tightly linked in the case of for-profit higher education. Could this be one of the drivers behind the Laureate decision to move out of the of the market with its very short time horizon?

So will Laureate (or would Phoenix, for that matter) be better off as a privately owned corporation?  It certainly will have escaped from the day to day annoyance of dealing with the market, and its leadership can turn their attention to managing in a sustainable way. However, it is being taken private by its CEO, Doug Becker and a number of very powerful capital investment groups.  Becker obviously believes that his new partners will be more sympathetic to a long term, rather than short term, perspective in building Laureate.  In the announcement, he stated, "I am very pleased to be joined by an outstanding group of investors, many of whom I have known and worked with in the past. These investors are known for partnering with management to help build and grow businesses with sustainable value - they possess extensive international experience, share a long-term view and are capable of investing substantial additional resources."  Only time will tell if their idea of a "long-term view" corresponds to his - and if he has misjudged, each of his new partners will have a lot more clout than the much more amorphous "market".

In the end, some group owns every for-profit higher education institution, and that group will be vigilant in demanding efficiencies and growth since those are key contributors to the desired profit.  In fact, Doug Becker has identified this demanding oversight as one of the advantages that for-profit higher education institutions have over their non-profit peers.  In his opinion, this oversight leads to lower costs, more focus on the learner, and greater institutional flexibility to meet change.  Of course, non-profit institutions of higher education are also "owned" by some group - trustees, regents, etc.  However, it is difficult to argue with Becker's implied assertion that the non-profit owners are much less effective than the for-profit owners in demanding efficiencies and institutional flexibility.   One can argue that this comparative lack of effectiveness on the part of the non-profit owners is ultimately primarily structural, since they have neither the measurement metrics nor the personal reward opportunities that would lead to demanding and ongoing oversight. As it becomes difficult to continually increase price of higher education faster than inflation(see e.g. Price and Cost in Higher Education, Jan. 11, 2007), this weaker oversight in the non-profit sector may turn into a big problem.

If one accepts that the for-profit higher education sector can benefit in some very important ways from the oversight of the market, the question then becomes whether these benefits are negated by the short term horizon of the market.   It would be an enormous loss if this were to be the case, because the for-profit sector is highly innovative and trying a lot of new approaches, some of which will ultimately benefit all of higher education.   This is an important question to keep in mind as this area evolves.

Comments

[Wade]

While I will stipulate that the market in the US tends to enforce a shorter-term horizon, I'm not sure that what we're seeing here is an issue with that horizon. Rather, it seems like Phoenix is failing to execute on a number of levels and is paying a high price for that short-term failure. That Phoenix's long-term plans are being discounted heavily based on current execution levels should be no surprise. A better question might be: can an institution with a marginal reputation, such as Phoenix, survive the swings in market value that most such marginal companies seem to suffer today?