Monday, September 26, 2005

Corporate Governance at Corinthian Colleges

Corinthian Colleges, Inc., a for-profit, publicly-traded higher education company, has run into a bit of a rough spot in the cutthroat world of attracting an expanding number of students to its programs.  Among other things, in its recently filed 10-K report (here), the company noted a recently concluded Department of Education investigation:

As previously disclosed, the U.S. DOE conducted a program review at our Bryman College in San Jose, California in December 2003. Shortly thereafter, that school was placed on reimbursement status by the DOE. On September 22, 2004, the Company announced that the DOE had returned the campus to the advance system of funding. As required by the DOE, the Company delivered a written response to the program review on December 14, 2004. On May 12, 2005 the Company announced that it had received a Final Determination Letter from the DOE that resolved the program review. The Final Determination Letter required the return of a net amount of approximately $776,000 to the DOE, the Perkins Fund and Federal Family Education Loan program lenders. No fines or penalties were assessed, and the institution’s continued eligibility to receive Title IV student financial aid funds was not affected. The payment did not have a material adverse impact on the Company’s financial condition or results of operations.

Now, a member of the company's board of directors resigned and fired a shot across management's bow regarding the board's lack of control over how the company is run in his resignation letter.  Michael Barry's letter (here) discloses his view of problems besetting the company, including the following:

We are out of control on both the revenue and cost management side of our business, and it is attributable to several factors. Our past success was due to our acquisitive business model. Our present failure is due to the fact that we have not shown the ability to manage those acquired, multiple assets (schools) in our portfolio other than WyoTech. That is due to many factors, not the least of which is a very weak field organization.

I fear we are a company that has lost its focus on its core mission and equally importantly our people – including the students as demonstrated by shrinking enrollment and increasing attrition rates and our employees as demonstrated by the astronomical turnover rates of 80% according to my recollection in the four key positions in the schools. There is no field leadership leading and coaching these new leaders to be successful.

I am further bothered by the fact that despite poor operating results, our compensation policy is approaching a level where total compensation is not consistent with performance. Specifically the annual stock grants given out over the years to management at all levels as a percentage of outstanding shares are unacceptably high. Companies our size should not be giving grants of 50k – 75k shares to so many EVPs and SVPs year after year. This is one of the areas our compensation policy is out of control.

However, to vote against these grants is not possible, as the internal pressure is immense to continue with these grants, as well as with the total compensation proposed by management. These annual grants are just too high combined with the generous base salaries which are now at levels well above the 75% and approaching the 90% for most senior managers as we know from working with Michael Resnick. I have tried to modulate overall compensation, but in truth it will not happen with the board as presently constituted in my opinion. I do give you and Jack strong marks for not taking a bonus, as I think that was the right decision as leaders to both the company and the market.

This type of letter from a board member is rare, although Barry was not renominated to the board for another term, so there may be an element of sour grapes in his missive.  Nevertheless, a claim that the company is "out of control" and that compensation does not match performance, coupled with the board's inability to resist, is a sure indicator of the pressure on employees to produce results to justify the company's valuation and compensation policies . . . or else.  Keep an eye on Corinthian Colleges. (ph)

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