Why did the University of Arkansas turn down the University of Phoenix deal? | Opinion

Editor’s note: This is the second in a two-part series about the University of Arkansas board’s vote against affiliating with the University of Phoenix. You can read the first part here.

Less than one month before Idaho State Board of Education members voted to create a nonprofit organization and purchase the University of Phoenix for $550 million, University of Arkansas board members had voted, 5-4, against a similar proposal for $535 million.

So why did the University of Arkansas shoot the deal down? Did they know something that Idaho board members don’t know?

As I wrote in the first part of this series, I feel much better about Idaho’s decision to purchase the University of Phoenix after I watched University of Arkansas’ deliberations. Board members were presented a number of strong arguments in favor of acquiring the online university.

But there were a couple of key concerns that killed the deal in Arkansas. Idaho’s deal is structured a little differently in a way that mitigates those concerns.

One of the main sticking points in the Arkansas deal was that the University of Arkansas system would have been able to appoint only a minority of members to the board of the nonprofit, Transformative Educational Services, that would run the University of Phoenix.

“My primary reason for voting against it had to do with the fact that the University of Arkansas System would not have control of the governance of that entity,” board member Kevin Crass told me in a phone interview. “And it wouldn’t have control of that entity’s governance because legally, we were told that having a majority of the board would deem it more than a mere affiliate and then it would impact the system’s credit rating.”

That minority control had a whole host of concerns for Crass and other members who voted against the deal, including the ability to negotiate revenue sharing, the ability to stop bad business practices and the ability to negotiate deals for the use of University of Phoenix technology.

In Idaho’s case, though, the University of Idaho Regents — which is the Idaho State Board of Education — would appoint all of the nonprofit’s board members and be able to remove any board members, according to Jodi Walker, University of Idaho spokesperson.

That would give the Idaho State Board of Education much more control over the actions of the nonprofit, Four Three Education Inc.

The University of Idaho would still be isolated from legal liability, according to Walker.

“After the closing, the University of Phoenix will operate through the new owner, Four Three Education, Inc., which is a separate legal entity from the University of Idaho and from the state of Idaho,” Walker wrote in an email. “Neither the University of Idaho nor the State of Idaho have liability arising from a suit for damages against Four Three Education, Inc.”

Crass was also concerned that, without majority control of the board, the University of Arkansas would have difficulty negotiating with the nonprofit board to determine any fees that the University of Arkansas would have to pay for services.

“In other words, if (the nonprofit) had something, whether it’s technology, or the capabilities to collect data, or the alumni relations or the corporate relations, … the UA system would have to negotiate to purchase that from (the nonprofit board),” Crass said.

In Idaho’s deal, the University of Idaho would not have to pay the nonprofit licensing fees for its proprietary technology, such as the back-end processes of delivering online courses, according to Walker.

“Appropriate arrangements for sharing of technology between the affiliated two entities will not require licensing fees,” according to Walker.

Revenue sharing

Another key difference between the two deals is revenue sharing.

Crass pointed out that the only guarantee in the Arkansas deal was a $20 million annual payment and nothing about sharing of future revenues.

Again, the fact that the University of Arkansas system board wouldn’t have majority control over the nonprofit board, such future decisions were out of the University of Arkansas’ hands.

In Idaho’s case, the annual payment would be a guaranteed $10 million, plus a share of revenues.

In all, 25-30% of remaining cash flow after debt service and other obligations would go to the University of Idaho, according to Brian Foisy, vice president for the division of finance and administration for the University of Idaho.

Based on University of Phoenix financial statements, those payments are expected to generate $150 million to $170 million between now and 2030, Foisy said.

Reputational risk

Aside from Crass’ legitimate concerns over governance and control, much of the other board members’ opposition had to do with being associated with the University of Phoenix name and reputation.

Board member Sheffield Nelson, former chairman, president and CEO of a natural gas company and former Republican nominee for governor, said he was most concerned with the University of Phoenix’s reputation.

“I think it’s a mess, and I think it’s a mess we don’t need to get our feet in,” Nelson said. “I think it’s a dog we should walk away from.”

Board chairman Morril Harriman, a lawyer and former state senator, said he shared Crass’ concerns about governance and future negotiations with the nonprofit board.

But he was mostly concerned with whether the University of Phoenix was a good “fit.”

“I guess my bottom line is I’m just not sure this fits with the University of Arkansas System,” he said. “Sometimes I think we’ve been trying to fit a square peg into a round hole.”

For Crass, that reputational risk is tied to the governance issue.

“There were some very smart people whom I respect that made a solid business case for it, but ultimately, I was concerned about the governance,” Crass told me. “And, you know, implicit in that is there were lots of people concerned about the potential reputational risk, and if you don’t control it, it seems to me you enhance the reputational risk.”

That’s a legitimate concern, and that’s one of the reasons I feel better about the University of Idaho deal, because the Idaho State Board of Education will be able to appoint and remove the members of the nonprofit board.

It will be vital that the State Board of Education appoint members to the nonprofit board who have the right background to govern the University of Phoenix with integrity and the intention of making sure the deal benefits the University of Idaho. These can’t be merely political appointees.

For sure, there are other risks, and there are still details that need to be worked out. But with a good board in place to tackle those issues, the University of Phoenix deal has tremendous potential to benefit the university — and taxpayers.

But it will be important to keep the public informed, practice open government and be open and honest about the challenges and mistakes along the way.

Keeping the public trust will be key to making this deal work.