Idealism That May Leave Shareholders Wishing for Pragmatism
OCTOBER 13, 2015
By STEVEN DAVIDOFF SOLOMON
Can a company scorn profits and still be embraced by Wall Street? Laureate Education, the world’s largest for-profit higher education provider, is about to find out as it seeks to become a public benefit company with a purpose that includes global education and not just profit.
Laureate Education disclosed a potential $1 billion initial public offering last week, seeking to return to the public markets. Laureate was taken private in a $3.8 billion buyout led by the private equity firm Kohlberg Kravis Roberts back in 2007.
Since that time the company has greatly expanded its global reach and profile. It hired former President Bill Clinton as its honorary chancellor (he reportedly made a total of $16.5 million from 2010 to 2014) and bought campuses in Latin America and China.
And while the for-profit education market is in decline in the United States, with Corinthian Colleges filing for bankruptcy and other for-profit companies in retreat, Laureate is trying to cast itself as a bet on the global education market. Laureate gets only 16 percent of its revenue from the United States; its largest market is Brazil. A majority of its revenue comes from South America.
While it generates substantial cash, the company has lost about $227 million in the last two years, mainly because of high interest payments on its debt.
Still, with those losses and a volatile market, Laureate was always going to have an uphill battle to complete its I.P.O. That’s why it is a bit odd that the company also announced last week that it would be the first publicly traded public benefit corporation.
A public benefit corporation is a new form of company that is only quasi for-profit. The normal corporation is all about the money. But a public benefit corporation specifically allows the company’s board to balance a profit motive against a specific benefit for society at large or the company. In this case Laureate’s benefit is the “positive effect for society and students by offering diverse education programs both online and at campuses around the globe.”
This permits Laureate’s board to forgo profits in pursuit of this goal.
Laureate is stepping ahead of the trend. The public benefit corporation has a lot of buzz as the hipster alternative to today’s modern company, which is seen as voracious in its appetite for profits. The idea is that by opting out of the purely for-profit motive, a company can better serve its mission and do good.
Highlighting this trend, the 20-something favorites Patagonia and Warby Parker have elected to be public benefit corporations. But to date all of the public benefit companies have been private — even Etsy, which is certified as a sustainable business by B Corp, a nonprofit that supports these entities, did not elect to go public as a benefit corporation and instead is a regular for-profit company.
It all seems so fantastic — what could be wrong with a company with a social purpose? Don’t we all want to make the world a better place?
Well, the eye-grabbing do-gooding may mask deep, complicated issues.
First, in a public benefit corporation, the benefit can be hard to define. That appears to be true in the case of Laureate. I’m not particularly sure what creating a “positive effect” through “offering diverse education programs” actually means.
Given the vagueness here, instead of being a force for good, Laureate’s benefit may simply result in greenwashing, that is, use of a public-relations-enhancing social purpose to fritter away money without oversight. To be sure, a Delaware-based public benefit corporation is required to be audited every two years for compliance with its objective, and Laureate has picked B Corp as its auditor. Still, given the newness of this form, it is uncertain how rigorous this auditing is, or even can be, given the loose benefit here.
This vagueness might be fine in a private company with only a few owners who can do whatever they want with their company — like paying Bill Clinton millions — but Laureate will be public, with thousands of shareholders.
Most investors don’t invest for a social purpose; they invest for profit. In particular, most people invest through mutual funds, which in many cases have an explicit fiduciary duty to invest for profit. So the question is whether many of the big institutions will avoid investing in Laureate because of its status.
Even beyond that, there is the issue of governance. We just saw the ugly side of companies with multiple purposes in Teva Pharmaceutical Industries’ hostile bid for Mylan, a Dutch company that had reincorporated from Pennsylvania. When Teva arrived, Mylan appeared to discover suddenly that under Dutch law it was required to look after not just stockholders but all of its stakeholders, including not just employees but the world at large. Mylan used this broad standard to reject Teva’s bid. It worked for Mylan, but many of its shareholders seemed bewildered and frustrated that Mylan gave their desire for profits short shrift.
Historically, mutual funds and other investors have not focused on the governance of companies undergoing initial public offerings, but in Laureate’s case this may come back to haunt shareholders.
Laureate itself has a form of governance that is especially unfriendly to shareholders, which also raises questions about Laureate’s public benefit status. While Laureate is listing its stock as a public benefit corporation, it will also be going public with dual-class stock, which will maintain its current owners’ control over the company. This includes K.K.R. which will indirectly hold a greater than 10 percent interest in the company. This doesn’t make sense. K.K.R. is out to sell its stake at the highest price possible, not benefit other causes. So one has to wonder how strongly Laureate will even pay heed to this standard. As for K.K.R., is this all about public relations more than anything else?
That leads to a final criticism. Companies today, even for-profit entities, can do many things that are not immediately profitable. They make donations and support causes all the time. So the real question may be, what is this corporate form good for?
I don’t want to be too cynical. Perhaps Laureate will use this newfound purpose to do good, and do well. But before we celebrate, it might be better to see this as an experiment with many ideas to test, and one that investors may not be too happy about.
Correction: October 19, 2015
The Deal Professor column on Wednesday, about Laureate Education’s move to return to the public markets as a public benefit company misstated the relationship of Kohlberg Kravis Roberts, one of the private equity firms that took it private in 2007, to the company. While K.K.R. indirectly holds an interest in the company of more than 10 percent, it does not control Laureate. The column also referred incompletely to the company’s geographical reach. It has bought campuses in Latin America, not just South America. (It has holdings in Mexico).