For-Profit School Management Corporations: Serving the Wrong Master
Conn, Kathleen, Journal of Law and Education
In the latest attempt to revitalize K-12 public education, many state governments have passed enabling legislation for "public charter" schools, empowering individuals and organizations to establish private schools financed by public funds. Some state legislatures have even mandated state takeovers of egregiously non-performing school districts, turning the schools over to private school-- management companies. However, although public school districts have always been nonprofit entities, most states did not require that private school-management entities be nonprofit.
In the euphoria of "solving" America's educational woes, a basic inconsistency in the notion of private, for-profit corporations controlling public education escaped serious consideration. Private corporations are legal entities established within a paradigm of maximization of profits for those who provide the working capital of the organization, the shareholders. The directors of such corporations owe fiduciary duties of care and loyalty to the shareholders. They owe, under the law, no concomitant duties to other constituencies.
This paper addresses the conflict inherent in the shareholder-primacy paradigm and delivery of traditional K- 12 public education by for-profit school management corporations. Part I examines the fiduciary duties of corporate directors and the shareholder wealth maximization model. Part I also examines legislative attempts to expand the reach of fiduciary obligations; namely, permissive statutes that allow corporate directors' consideration of other constituencies besides shareholders. Part II discusses the degree to which for-profit school management companies have penetrated the public education market, briefly detailing how the two best-known for-profit school management companies originated and function. Part III examines whether for-profit school management companies actually deliver on their promises of educational reform or of profits for shareholders. Finally, Part IV argues that state legislatures have ignored the inherent conflict between the corporate objective of shareholder profit maximization and the public's interest in children's education when services are delivered by for-profit corporations. In the absence of stricter legislative governance, the courts must recognize new causes of action that safeguard the interests of children educated in schools run by for-profit corporations.
PART 1: Fiduciary Duties, Shareholders, and Other Constituencies
The Origin of Fiduciary Duties
Fiduciary duties are creatures of both statute and common law.2 The basic concept of fiduciary duty arises from the need to trust someone who purports to act on one's behalf.3 The contractarian model of the corporation4 posits fiduciary duties of corporate directors and managers as arising from the need to protect shareholders who risk their money for the corporation, but who cannot exercise control over the destiny of the company. Although variously expressed as duties of loyalty,5 care,6 good faith,7 disclosure,8 oversight,9 or candor,10 the
fundamental fiduciary duties in the corporate context comprise the dyad of loyalty and care. What exactly those duties compel depends on the factual context in which directors or managers contemplate action (or inaction).11 Fiduciary duties attach most "peremptorily and inexorably" in situations where directors and managers have the most to gain by disregarding those duties.12
Delaware statutes and case law occupy a preeminent position in corporate law,13 and their pronouncements on the duty of loyalty have shaped court decisions in all jurisdictions.14 The Delaware General Corporation Law (DGCL) does not specifically impose fiduciary duties on corporate directors and managers. Rather, the DGCL permits corporations to excuse directors from monetary liability for breaches of the duty of care, but not of the duty of loyalty,15 establishing by that distinction a hierarchy of fiduciary obligations. …