Laureate Education will likely make history as the first publicly listed benefit corporation in the US.

Already the global leader in higher education with approximately 1,000,000 students enrolled in 88 institutions in 28 countries, Laureate also became a leader in corporate governance and business as a force for good in October when it re-domiciled as a Delaware public benefit corporation and filed an S-1 to go public.

Laureate just used the power of law to put its students first.  By embedding its chosen public benefit “to produce a positive effect for society and students by offering diverse education programs both online and from campuses around the globe” in its Certificate of Incorporation, Laureate put the  power of corporate law behind its ultimate purpose and social goals.  Under Delaware’s public benefit corporation law, Laureate’s directors have express liability safe harbors for the company’s socially responsible approach to business.

By opting out of business as usual, Laureate elevated its stated purpose “to prepare our students for success in their careers and lives” to the same legal status as the only legitimate corporate purpose under prevailing corporate law – maximizing stockholder welfare. Until its conversion into a benefit corporation, Laureate’s pursuit of social good put it at odds with the prevailing corporate law and subjected its directors to potential liability unless they could show that the social goals of the kind set forth in its charter were a direct means to the sole legitimate corporate purpose of maximizing stockholder welfare.

For Laureate, the benefit corporation is a natural fit for its vision of creating an enduring, mission-driven company that not only has strong prospects for long-term growth but also has the opportunity to help millions of people change their lives through education.  Fundamentally, Laureate believes that “the private sector can make a positive impact in a field that traditionally has been the province of the public sector”.

For the benefit corporation, which made its debut in Maryland in 2010, five years from novel corporate form to IPO beats Silicon Valley’s average path to liquidity by several years.

Some Legal Details

Delaware may have the leading benefit corporation law but it is not necessarily the best.  On the positive side, Leo Strine, the Chief Justice of the Delaware Supreme Court, has written several law review articles which legitimize the public benefit corporation and its liability protections for directors.  On the negative side, Delaware did not follow the Model Benefit Corporation Legislation that most of the 30 other states with benefit corporation statutes have used as the basis of their law.

The model legislation has three pillars: (i)  a general public purpose, namely the provision of a material positive impact on society and the environment from the operations of the corporation taken as a whole; (ii) accountability, namely measuring the provision of such impact against a third party standard; and (iii) transparency, namely reporting annually about such impact to stockholders and the public.  The model legislation also allows for the selection of specific public benefits.

Delaware’s law contains only one of the three pillars – transparency – and requires benefit corporations to report on the promotion of the chosen benefit(s) biennially. Instead of a general public purpose, Delaware requires benefit corporations to operate in a “responsible and sustainable manner” and to chose one or more public benefits.  Delaware permits but does not require that a benefit corporation measure its promotion of the public benefit(s) against a third party standard.  Many Delaware public benefit corporations have inserted the general public purpose language from the model legislation into their charters, opted to report annually to stockholders and the public about the promotion of the corporation’s public benefits and elected to measure the promotion of such benefits against a third party standard.

The flexibility inherent in Delaware’s law results in a wide range among Delaware public benefit corporations in the scope of their commitment to providing a public benefit.  One Delaware public benefit corporation could, for example, make the enterprise-wide commitment contemplated by the model legislation to provide a material positive impact on society and the environment while another public benefit corporation could make a narrow social commitment to provide a public playground in its local community.

This is an important distinction for impact investors: each Delaware public benefit corporation is unique in the scope of its commitment to promote a public benefit.  By not including the three pillars of the model legislation, Delaware’s law is vulnerable to so called “greenwashing”.  The devil is in the details.

Laureate elected to hold itself accountable and has chosen to have its social impact measured against B Lab’s Certified B Corporation assessment standard, which measures social and environmental impact.  Unfortunately, Laureate only chose a social benefit and not an environmental one.  Since its universities have over  200 campuses, Laureate has a large environmental footprint.  It will likely have an easier time passing the Certified B Corporation assessment if it also promotes an environmental public benefit such as operating its campuses in a manner that provides a material positive impact on the environment.  It would be relatively easy for Laureate to add such a benefit to its charter while it is still private.

Some Context

Laureate’s story began in 1989 when CEO Doug Becker founded the company as Sylvan Learning Systems, a provider of a broad array of supplemental and remedial educational services.  Along the way the company went public, re-invented itself as a provider of higher education and began acquiring universities.  In 2007, Laureate went private in a leveraged buy-out led by a consortium of private equity funds, including Kohlberg Kravis Roberts & Co. L.P., Point 72 Asset Management, Bregal Investments,  StepStone Group,  Sterling Partners,  and Snow Phipps Group.

Since the LBO, Laureate has acquired scores of institutions of higher learning and has the financial statements of a corporation that reflects such financial engineering with $4.4 billion of annual revenue, “substantial debt” of approximately $4.7 billion and ongoing operating losses. Representatives of the consortium hold 7 of 12 board seats and own super voting Class B Common Stock with ten votes per share that give it clear voting control of the company.  CEO Becker, two investment bankers – one a former CFO of the US Department of Treasury and the other a former President of the World Bank Group, a business executive and the President of the Rockefeller Foundation round out the board.

A Stamp of Approval

What inspired this group of titans of the financial establishment to vote to re-domicile Laureate as a Delaware public benefit corporation?

My best guess is that it started with CEO Becker’s tenacious dedication to Laureate and his belief that the benefit corporation was the best vehicle to balance the needs of stockholders with the needs of students, employees and the communities the company serves and deliver the best results to stockholders.  I suspect that he had a strong ally in director Dr. Judith Rodin, the President of the Rockefeller Foundation, former President of the University of Pennsylvania, former provost of Yale University and author of The Power of Impact Investing.   Laureate’s mission of expanding access to higher education at scale falls squarely within the Rockefeller Foundation’s mission of “promoting the well-being of humanity around the world.”

Whatever was the inspiration, Laureate and its board have delivered, as Dr. Rodin would say, a powerful “stamp of approval” for the benefit corporation and impact investing in general.  With Credit Suisse, Morgan Stanley and Barcley’s as lead underwriters, Wall Street is ready for the benefit corporation.  Most importantly, like a solid Russian icebreaker, Laureate will break the ice for other benefit corporations to follow into the public market.