Shareholder Engagement Update: Virtual children left behind

In June, Arjuna filed a shareholder proposal with K12 Inc., the nation’s largest for-profit, virtual-school operator. You probably haven’t heard of K12. Well, it’s time to sit up straight and pay attention.  Because, wherever you stand on the issue of charter vs. public schools, K12 offers a case study in what not to do—line the pockets of executives with taxpayer dollars, while children pay the price.

K12 is funded nearly 90% by taxpayer dollars—won through a lobbying campaign that has spanned a decade.  These public dollars put children as young as five years old in front of computer screens and assign them to overstretched virtual teachers, who are responsible for up to 250 students each.

It’s hard to see this as a recipe for success.  And, indeed, it isn’t.  K12 gets an F on all fronts.  Except if you are an executive.

K12’s key executives were paid a cool $16 million in 2016, up nearly 19% from the year before.  Not bad considering profits fell 12% over the same period.  But this comes as no surprise.  K12 has a history of overpaying management.  In fact, founder Ron Packard made the list of “highest-paid ‘government’ workers” by the Center for Media and Democracy in 2014.  They were, of course, being facetious.

K12 has been on a collision course with failure for the past 10 years—posting terrible student outcomes and investor returns.  But Trump’s election and Betsy DeVos’s nomination to Secretary of Education appear to signal a turn in luck, at least for shareholders. (DeVos is a supporter of virtual schools and was an early investor in K12.)  K12 stock has skyrocketed 45% since November 8th, as a move toward privatized education takes center stage.  This is cold comfort to K12’s initial investors whose stock remains down 36% since its 2007 IPO.

But even before the whims of politics came into play, shareholders were questioning K12’s failing report card.  The shareholder proposal we filed in June on behalf of a passionate client asked K12 for greater transparency and accountability.  Specifically, we asked whether K12’s multi-million-dollar state lobbying activities were in the best interests of two key stakeholder groups: students and investors.

K12’s stated mission is “to put students first and maximize their potential to learn and achieve.”  Yet the company targets vulnerable students, posts high dropout rates and low test scores, and is plagued by financial mismanagement.

A 2016 investigation into the K12-run California Virtual Academies found that fewer than half of the students graduate, less than half were proficient in reading, only a third were proficient in math, and almost none were qualified to attend the state’s public universities.

A 2013 National Education Policy Center study found similar results, with only 27% of K12’s online schools meeting Adequate Yearly Progress standards compared to 52% of public schools.

K12’s poor academic performance record comes with a corporate history of alleged cover-ups and scandals.   In 2016, the California Attorney General announced a $168.5 million settlement with K12 after allegations that California Virtual Academies published misleading advertisements about students’ academic progress, class sizes, and hidden costs.  This followed a 2012 federal lawsuit, settled for $6.8 million, alleging CEO Ron Packard and Chief Financial Officer Harry Hawks pumped up stock prices by misleading investors with false student-performance claims.

While K12 appears to be a class-A boondoggle built on the backs of students and taxpayers, investors do not know the full extent of the role lobbying has played in the story. That is, we don’t how much K12 has spent nor whose pockets have been lined.

What we do know is that over the last decade, virtual charter schools as a group have spent over $12 million to lobby states.  And in that effort, they joined forces with the highly controversial American Exchange Legislative Council (ALEC). ALEC has put forward model legislation and at least 139 specific legislative bills to promote private, for-profit education models since 2013.

At K12’s annual meeting this December, Arjuna’s proposal went to a vote.  And a remarkable 43% of votes cast were in favor of our request for greater transparency and accountability.  This is, in part, because the proposal garnered support from the nation’s top two proxy advisory firms—Institutional Shareholder Services (ISS) and Glass Lewis.  It will come as no surprise that ISS and Glass Lewis also recommended votes against management’s compensation packages.  The rationale? The “substantial disconnect between compensation and performance results.”

Just three months prior, in September, Trump was hosted by K12 founder and former CEO Ronald Packard in Ohio.  Ironically, the campaign stop was sited at a failing charter school, per the state’s performance records.  Regardless, Trump delivered his message loud and clear: “There is no failed policy more in need of urgent change than our government-run education monopoly.”  “Government-run education monopoly” is political speak for public education.

Yet when we look at this particular alternative, K12 Inc., failure is in its DNA. Academic outcomes are weak and investors have lost money.  As shareholders, we can seek to understand how K12 is using investor dollars to lobby for what appears to be a failing business model.  As citizens we should seek to understand who benefits most from taxpayer-funded private education—students or executives?

Natasha Lamb, Director of Equity Research & Shareholder Engagement


The opinions expressed herein are those of Arjuna Capital, LLC (“Arjuna Capital”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. Arjuna Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Arjuna Capital uses Institutional Shareholder Services (ISS) to vote proxies on behalf of its clients. Arjuna Capital is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Arjuna Capital including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. AJC-17-05

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