Can a For-Profit College Learn a Lesson?
By GRETCHEN MORGENSON
7 May
The New York Times
Copyright 2006 The New York Times Company. All Rights Reserved.
A KNOCK-DOWN, drag-out proxy fight, featuring dissident slates of directors, mudslinging and other amusements, has been a rarity this season. But such a skirmish is going on at the Career Education Corporation, a for-profit education company that will hold its annual shareholder meeting on May 18. And the fight exemplifies why disenfranchised shareholders need much more power in director elections today.
Career Education, which operates 86 campuses offering career-oriented programs in cooking, photography, health care and other fields, has had a spate of legal and regulatory problems in recent years. The company, which also has online courses, is being investigated by the Justice Department and is cooperating with inquiries from officials in Pennsylvania, relating to its recruitment practices, and in Texas, involving whether the academic needs of its students are being met.
Its American InterContinental University unit has been put on probation by the Southern Association of Colleges and Schools, and the company is a defendant in various lawsuits from former employees, students and shareholders. California regulators have said that some high-pressure sales representatives at one school misled students on potential job opportunities and career placement services.
All of this has wreaked havoc on Career Education's shareholders, who have watched the stock fall from its split-adjusted peak of around $70 in April to its close on Friday of $31.86.
Things seemed to be looking up for the company in early April this year, when it said the Securities and Exchange Commission had closed its investigation into allegations that the company had inflated attendance figures. A throng of Wall Street analysts recommended the stock, saying that Career Education's attempts to clean up its act were finally bearing fruit.
But on Wednesday, the company issued its first-quarter results. They showed a fall in enrollment and a reduction in forecasts for the rest of the year. Unhappy investors drove the stock down 14 percent for the week; the shares are 24 percent below where they were just before the company's announcement about the S.E.C.investigation.
Given that performance, Career Education shareholders just may be giving the three directors running on the dissident slate a closer look.
THE man rattling Career Education's cage is Steve Bostic, a former chief executive of American InterContinental University, an entity he sold to Career Education in 2001. He is now a private investor and owns about 1 percent of Career Education's shares.
'I'm concerned that without change there is a huge financial risk for shareholders, including myself, ' Mr. Bostic said in an interview.'We think we can work with the independent board members to do what's right for the company and do what's right for shareholders.'
But Mr. Bostic has been frustrated by Career Education before. Last year, three proposals he put forth — to require the company's directors to stand for election annually, to eliminate the company's poison pill and to allow shareholders with one-third of the company's stock to call a special meeting — each received approval from about two-thirds of the stock outstanding. And 62 percent of the company's stock outstanding was voted in opposition to the three directors standing for election.
In response, Career Education appointed two new independent directors, terminated its poison pill and instituted stock ownership guidelines for senior management and the company's directors. Still, Mr. Bostic noted, Career Education's top executive and all of its directors own fewer shares in total than he does.
Career Education officials are spending shareholders' money to castigate Mr. Bostic. The company has taken out full-page newspaper advertisements, and its chief executive, John M. Larson, sent a letter to shareholders last month urging them to reject Mr. Bostic's slate.'We do not believe it is in your best interest for our momentum to be interrupted — or worse, potentially permanently impaired — by distractions from Steve Bostic, a dissident who owns approximately 1 percent of CEC's stock and is choosing to become a perennial agitator against your company, management and board in order to forward his own self-serving agenda, ' the letter said.
Mr. Bostic — and anyone who is ringside for this match — is learning firsthand how hard it is for shareholders to hold directors accountable when the companies they are supposed to oversee go off track. On Friday, he said that by the time his campaign is over, the cost could approach $2 million. He estimated that Career Education was spending more than double that to defend against his director slate.
A company spokeswoman, Lynne Baker, said in a statement that if one-third of the stockholders could call a special meeting, it would be 'very disruptive' to the company's business.
As for the money the company is spending to battle Mr. Bostic, she said: 'The board and the company will utilize the company's resources to assure that the best interests of the company and its stockholders are fully protected.' She added that Mr. Bostic has said that if he wins, he will ask for reimbursement of his expenses.
Richard C. Ferlauto, director of pension and investment policy at the American Federation of State, County and Municipal Employees, said: 'One of the largest obstacles to director accountability is that shareholders have limited ability to challenge boards because the companies control the treasury.'
Mr. Ferlauto is the author of a proposal that would have forced companies to reimburse reasonable costs incurred when a shareholder contests the election of a director or group of directors. The proposal was voted down in recent weeks at three companies — American Express, Bank of New York and Citigroup — but Mr. Ferlauto said his organization would bring back a similar proposal next year.
In the face of Mr. Bostic's campaign, Career Education has proposed declassifying its board by 2008 — meaning that all directors must stand for election every year — and proposed allowing stockholders to call a special meeting with a two-thirds vote, far more than the one - third vote that a majority of shareholders favored last year. Career Education has also adopted a majority voting provision, requiring that directors receive support of more than 50 percent of votes cast to be re-elected, and has appointed another independent director.
'Negotiating concessions is not the same thing as respecting shareholder rights, ' said Gary Lutin, an investment banker at Lutin & Company and an adviser in corporate control contests.'When a company's board doesn't respond to a clear message, whether it's a shareholder vote or evidence of misconduct, it means that every single member either supports or tolerates irresponsibility. And if shareholders don't make use of their rights to replace all the irresponsible directors, then it's the shareholders themselves who are tolerating irresponsibility.'
SO where do those shareholders stand on this matter? Only time will tell. But last year, several institutional shareholders voted for the three directors from whom a majority of owners withheld support. Wellington Management, Northern Trust and Federated Investors were among those supporting the directors.
Wellington and Northern Trust do not comment on their proxy voting practices. Federated did not return a phone call seeking comment.
Mr. Bostic said: 'The problem is, the individual shareholder has got to take this on and it really shouldn't be that way. Most people don't have the passion and energy to do it. But major institutions do not pursue actions against a company. They vote with their feet and just leave, and that's bad for the rest of the shareholders.'
We shall see how they vote this year.
Chart: 'Focusing on Sales'
The number of recruiters at Career Education's schools has soared while the number of job placement advisers has not.
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