Panetta and Morial are among our most distinguished public servants. Panetta earlier this year concluded a stint as secretary of Defense, one of a string of high-level government posts under Presidents Obama and Clinton, preceded by 16 years as a California congressman. Morial served two terms as mayor of New Orleans and is now chief executive of the National Urban League, a leading civil rights organization.
Corinthian is a troubled company in a troubled industry — the for-profit higher education business. The Santa Ana firm, which operates 113 colleges in the U.S. and Canada under such brand names as Everest and WyoTech, played a starring role in a congressional report last year that panned the entire industry for deceptive marketing and low graduation and job placement rates. The report also cited students' high default rates on federal education loans, from which Corinthian and its cousins obtain almost all their revenues.
Federal education officials have questioned Corinthian's financial accounting. (The company says its numbers are legitimate.) According to Corinthian's latest quarterly report for the period that ended March 31, its enrollment and financial aid practices were then under investigation by six states, including California. The company has lost money in each of its last two reported fiscal years. Enrollment was down by more than 6% in March compared with a year earlier.
You'd think that this record would make strange bedfellows out of Corinthian, Panetta and Morial. Yet a few weeks ago, Panetta and Morial agreed to join Corinthian's board of directors.
What's behind this curious alliance? Morial "shares our commitment to quality career education," Chairman and Chief Executive Jack D. Massimino said on announcing the appointments. He added that the company will "benefit tremendously from his counsel." A company spokesman says Panetta's "knowledge of public policy and education will help make us better."
I planned to ask Morial and Panetta what was in it for them to affiliate with a company facing so much official scrutiny over how well it serves students who are mostly disadvantaged. But neither agreed to talk. Morial's staff at the Urban League suggested I refer my question to Corinthian, which suggests they rather missed the point.
Both of the new directors have previous relationships with Corinthian. The company last year contributed $1 million to an Urban League program to help 200 students in Orlando and Pittsburgh pass the GED high school equivalency test; the donation was jointly announced last year by Massimino and Morial. Panetta served a previous one-year stint as a Corinthian director, resigning in 2009 when he was named CIA director.
As Corinthian directors they'll earn at least $60,000 cash plus deferred stock with a target value of $90,000.
That nice bit of bunce would be well earned if the directors were expected to do anything for their money other than meet a few times a year, say if they were serious about riding herd on a management that seems constantly to be embroiled in regulatory battles. But the sorry truth about too many corporate boards is that directors serve as fronts — rubber stamps for management, pretty faces symbolizing a firm's devotion to social diversity or civic or moral purity, or political ballast.
That's why it's not unusual for a board to be stocked with a CEO's cronies, current or former university presidents or deans, heads of respectable philanthropic organizations, or ex-government officials or political leaders. So it's a fair question whether Panetta and Morial, both of them mainstream Democratic figures, are being appointed to the board to contribute their public policy smarts to Corinthian or to provide political window dressing at a time when the firm faces questions from a Democratic administration's regulators and regulatory initiatives from a Democratic Senate. "It could be seen as potentially an attempt to curry favor with the government," observes Paul Hodgson, a veteran expert in corporate governance.
There's no question that for-profit higher education companies like Corinthian can serve a worthwhile purpose. They can serve a demand for vocational and technical training that public institutions can't meet, with flexibility that not even community colleges always offer. Corinthian schools offer courses for would-be paralegals, dental assistants, automotive technicians and accountants, among others.
But the fees of for-profit schools tend to be much higher than at public colleges, their regulation spotty, and marketing extremely aggressive. The result, critics say, is that the companies' financial prospects can far surpass their students' career prospects.
Corinthian's regulatory and financial issues are not new. In 2007, the firm agreed to pay $6.5 million to settle California state charges that it engaged in false advertising and overstated graduation rates and job placement records to attract students.
Most of its campuses in the state are currently barred from eligibility in the Cal Grant program, which provides taxpayer-funded assistance to post-secondary students. Cal Grant officials cite inordinately high loan default rates or low graduation rates at those campuses. That means Cal Grant recipients have to use their state assistance elsewhere.
The company says a bare minority of students at its campuses would be eligible for Cal Grants under any circumstances. But Corinthian is thoroughly dependent on government aid and loans awarded to its students, mostly from the federal government.
In fact, Corinthian's financial statements can give the impression that it's not an educational enterprise so much as a machine for converting publicly funded student aid into revenue and profit; pages and pages are devoted to its efforts to maintain eligibility for a host of federal programs. In fiscal 2012, some 85% of the firm's net revenue came from such federal programs as Stafford Loans. That's perilously close to the 90% threshold at which a for-profit institution loses its eligibility under federal rules to participate in the programs, so Corinthian assiduously monitors its financial ledgers to make sure that figure isn't breached.
Then there are student default rates on federal loans, which have been consistently and disturbingly high — indeed, according to a report last year by the Senate Committee on Health, Education, Labor and Pensions, Corinthian's rates were the highest of any major for-profit chain as recently as 2008.
Critics say defaults are high because the for-profit programs are generally priced too high, and their standards are too low. If graduates can't find work enabling them to pay off the federal loan, they're on the hook, not the school. In response to the problem, Congress ruled a few years ago that the eligibility of any institution with a two-year default rate over 25% — that is, 25% of students default within two years of graduation — would get special attention.
Unsurprisingly, Corinthian moved aggressively to reduce its student default rate. It says it spent millions to educate students about their responsibilities and options. This cut its reported two-year default rate from 21.5% in 2009 to 6.7% in 2010. That's an impressive achievement, but also a mite implausible. As it happens, the company says that for a "majority" of defaulting students, the improvement came from "forbearance" — that is, deferring repayment obligations so they don't show up as defaults within the two-year window.
The Senate committee looked especially askance at this potentially manipulative process, pointing out that because interest continued to pile up, it could make loans more expensive for the borrowers. Corinthian challenges that, saying that forbearance is a genuine effort to help graduates manage their debt. "It's not an effort just to kick the can down the road," says company spokesman Kent Jenkins. "Corinthian has a long-term interest in making sure our students get the benefit of their education."
That brings us back to the magnetic force binding together Corinthian on the one hand and Morial and Panetta on the other. There's no evidence that Corinthian expects them to intervene directly with government regulators or Capitol Hill legislators, but if Corinthian hopes to prevail against its adversaries in Washington their presence on the board can't hurt. Is that what it's all about? If Panetta and Morial wish to clarify their roles at Corinthian, they both have my phone number.
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at email@example.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.