To Dr. Dell’Omo and the Board of Trustees:
As you know, we wish for Westminster Choir College to prosper for the very long term, continuing its outstanding work with students and contributions to the community and the world beyond. Certain issues pertinent to and impacting its long-term survival are raised by your recent note to the Rider community about the college’s potential acquirer and I want to raise them here for you to consider. I believe it is important for you to address each openly and fully as they most certainly relate to the announced criteria to be applied in considering a new partner for the college.
The issue of vision and mission
Organizations operate with visions and missions, articulated or not. What is the vision and mission of Beijing Kaiwen Education Technology Co., Ltd. for Westminster and the Westminster campus? Why has it elected to purchase this expensive property — to what ends? On the surface there appears to be little overlap in the historic and current mission of Westminster and that of its potential acquirer.
The differing DNA of for-profits and a not-for-profit university
A for-profit company may own Westminster. The purpose of a for-profit is different than that of a nonprofit educational institution. The failure of a for-profit to earn its owners a sufficient return on investment will likely lead to the closing of facilities and the sale of assets. A not-for-profit educational institution does not require a particular rate of return and will strive to weather and persist in difficult times, attempting to maintain its programs and continue its work of preparing students for life and careers. In difficult times it is helped by the interest earned on endowment; its savings, donations and loans; and by cost control.
The uncertainty of Chinese government controls over the for-profit education sector
In November 2016, China adopted an amendment to the Law of Promoting the Privately-run Schools (sic), which would take effect September 2017. The amendment permits for-profit schools in China for pre-kindergarten and grades 10 through 12. For-profits are precluded from providing education for grades 1 through 9, the grade levels of compulsory education in China.
The amendment permits for-profit schools to distribute any surplus from a school’s operations, after appropriate taxes and fees, to investors in the form of dividends. The crucial issue of how much investors will be permitted to receive, and thus the attractiveness of for-profit education, remains unclear, but it is clear that the matter will be monitored closely by the Chinese government. Chinese authorities, through pricing bureaus, will retain some degree of supervision and control over Chinese for-profit schools. The tuition standards of not-for-profit private schools in China remain subject to the regulations of local Chinese governments.
Also, should China-U.S. relations worsen, Chinese students and schools in the U.S., which bolster sagging finances of universities and communities, may become a lever either side uses in retaliation.
The issue of for-profit ownership
It is important for Rider to be knowledgeable about and highly confident in Beijing Kaiwen’s ownership structure, the sources of owner investment funds and the investors’ agendas. Discovering the real owners of a Chinese for-profit is often difficult, even for financial experts, but is necessary to carry out due diligence. Inadequate work here threatens contractual relationships.
One Swiss-based expert said about China, “You never know who is really behind a company — an individual or government — or sometimes the government using individuals.”
Chinese companies practice extreme secrecy to protect the privacy of investors and this is complicated by the practice of guanaxi, the cultivation of relationships and unwritten favors. This secrecy is important to certain investors who wish to move money overseas without the government’s knowledge. A firm is at risk if this is discovered, or if it is learned that investment funds have been acquired through corruption, fraud or other illegal means.
On Feb. 16, the Securities and Exchange Commission (SEC) unanimously rejected a bid by little-known Chinese investors to purchase the Chicago Stock Exchange, a private corporation as well as a regulator. The complicated web of relationships among investors and the absence of their independence was a factor, as was the departure of two investors who were required to provide the SEC with more information about the source of their cash.
A second issue concerning transparency
Current and potential employees and investors, suppliers and contractors have the benefit of easily accessing the regular and required SEC filings for any publicly traded, for-profit American company. A company’s 10-K in particular is a rich source of information. As Chinese companies are not required to file a 10-K with the SEC, it is important that the above groups plus students be directed to similarly vital and revealing information about Beijing Kaiwen.
A U.S. 10-K describes a company’s business in some detail; contains financial reports; identifies significant legal actions in which a company is involved; identifies the uncertainties and risks facing the business going forward; lists the company’s owners and key executives; and, for the latter, reports on their compensation and compensation packages.
Assuming a continued inflow of Chinese students to high schools in the U.S.
It is assumed that Beijing Kaiwen will require and rely upon a strong stream of Chinese and perhaps other high school-age students enrolling on the Westminster campus, willing to pay full cost for their education, room and board. High school in the U. S. can cost families $30,000 to $40,000 a year, according to some reports. However, the last two years have seen a sharp decline in enrollment growth of Chinese high school students studying abroad, and the number of high school-age youth in China is declining.
In the U. S., the annual growth rate of F-1 visa, high school diploma-seeking students was 8 percent from fall 2013 to fall 2014, followed by 3 percent growth in fall 2015 and 1 percent growth in fall 2016. This decline in the growth rate is blamed on the cooling of the Chinese economy, a stronger U.S. dollar making education in the U.S. more expensive; increasing competition from schools in Australia and elsewhere, the U.S. domestic political climate; and parental concern for the safety of their children. Some report that in the past two years Chinese parents have shown more interest in Canadian schools that are less costly and perceived as safer.
Early in 2017, the University of Southern Maine (USM) in Portland announced plans to open International Academy on its campus, a high school for students recruited from China. Eleventh and 12 graders would take two full years of USM classes, earning up to 60 university credits while also receiving a high school diploma. The high schoolers would be added to regular sections of 100- and 200-level USM courses — something that Rider faculty and students would likely have opposed, the faculty on pedagogical grounds. The goal was to recruit about 50 students for fall 2018, with each student paying $36,500 for tuition, room and board. In October 2017, the plan was abandoned as USM failed to generate sufficient interest among Chinese students and their families. USM administrators pointed to many of the factors listed above as reasons for their decision.
— Gerald D. Klein
Professor of organizational behavior
and management emeritus
Printed in the 2/28/18 issue.