Monday, January 11, 2016
I called this one nine years ago.
This week the University of Phoenix announced that it’s considering “going private,” which means taking itself off the stock market. It would still exist, and still be for-profit, but would no longer be publicly traded.
The idea would be to shield it from shareholders expecting a quick return to profitability.
Or, as I put it in 2007,
If I were appointed czar of the University of Phoenix, my first move would be to upgrade the faculty (hire a significant cohort of full-timers) to handle students with limited skills/motivation/time. Until they improve their graduation rate, they're going to be in serious trouble. Yes, that would entail a short-term cost. But it's the right way to go. Obviously, that strategy would crash headlong into the stock market imperative of quarterly returns, but I'm increasingly convinced that private equity is the way for for-profit higher ed to go. Yes, all that public capital sloshing around can be great fun for a time, but it creates pressures that I don't think any institution has yet figured out how to handle. They need patient capital, which means private capital.
It’s hard to patiently restore quality when the markets impatiently demand profits.
Patient capital is almost always private capital, but private capital isn’t always patient capital. For UofP to restore its reputation, it will need autonomy not only from stockholders, but from the holding company that buys it. It was slapped on the wrist by HLC in 2013 for insufficient autonomy from its ownership; depending on who buys it, that danger could reassert itself.
In higher ed, the traditional model for buffering a college from the whims of funders, whether public or private, is the Board of Trustees. The Board is charged with taking the long view, and giving the administration the operational autonomy it needs to make the college succeed in its educational mission. In other words, the Board is supposed to enable and enact the separation of ownership from control that was characteristic of the mid-twentieth century corporate model.
That model came in for plenty of criticism at the time, although in retrospect, it didn’t get its due. In a twist of history, the alternative didn’t turn out to be democratic control by workers; it turned out to be subjection to a market red in tooth and claw. The managers -- administrators, if you prefer -- who had relative autonomy at midcentury gave rise to a distribution of wealth and income more egalitarian than any that had come before, or has come since. The subsequent moves to “unlock shareholder value” have led to multiple decades of increased income polarization. That’s not a coincidence.
The for-profit sector dispensed with buffers from the outset. It doesn’t derive income from philanthropy. It charges more than its cost of production. When times are good, that means it can expand very quickly, as it did in the 1990’s. In the public sector, growth can be experienced as a cost, so you get slow growth and waiting lists; in the for-profit sector, growth more than pays for itself, so it can happen quickly. But the same applies on the way down. The lack of restraints on growth plays as a lack of buffers on the way down. Stockholders don’t like to catch falling knives, so if the current management of Phoenix hopes to hold on, it will have to get rid of the stockholders.
What Hegel called the “cunning of history” is real. Phoenix grew quickly by dispensing with many of the restraints of traditional higher ed. Now, in freefall, it may remind us all of why we needed those restraints in the first place. For that, I thank Phoenix. The rest of us could use that reminder before we make the same mistakes.