Tuesday, November 01, 2011

Statesman Investigates: UT regents invest $10 million in startup with ties to ex-chancellor, governor

Follow-up to an earlier article titled, "UT president: School didn't seek MyEdu deal" also posted to this blog.


By Ralph K.M. Haurwitz and Eric Dexheimer | AMERICAN-STATESMAN STAFF
Updated: 10:36 p.m. Saturday, Oct. 29, 2011

The governing board of the University of Texas System invested $10 million in a privately held company with close ties to the system's former chancellor, the chancellor's son and associates of Gov. Rick Perry.

The allocation of proceeds from the Permanent University Fund, a public endowment, was extremely unusual, if not unprecedented, in that it was made directly by the Board of Regents rather than by money management firms chosen by the board's investment arm.

The regents voted unanimously at a public meeting Aug. 25 to invest in Austin-based MyEdu Corp. after a brief discussion with no debate and no public input.

The regents and senior UT System staff members did not disclose publicly — nor did some of those officials apparently know — that former Chancellor William Cunningham is an investor in MyEdu and that his son, John, is the company's senior vice president of information architecture and one of its founders.

The company's chairman and CEO, Michael Crosno, served on the governor's statewide re-election finance committee last year.

MyEdu adviser Bob Pearson, who holds a stake in the company, donated to the governor's re-election campaign and is a former Perry-appointed chairman of an advisory panel that recommends proposals for state funding through the Emerging Technology Fund.

Margaret Spellings, who was secretary of education under President George W. Bush, is also an adviser to MyEdu.

The company operates a website, myedu.com, where college students can plan course schedules, track credits, rate professors, calculate costs and exchange comments with professors and fellow students.

Along with its 22.5 percent stake in the company, the UT System will get customized website functions for each of its nine academic and six health campuses under an agreement with the company concerning such "private-label services."

Crosno said that neither Cunningham nor Pearson had any involvement in negotiating the deal with UT System officials and that neither knew anything about the arrangement until it was completed — an account echoed separately by both men.

Gene Powell, chairman of the regents, and Francisco Cigarroa, the system's chancellor, said they were unaware of the investment by the former chancellor but that, in any event, they were under no obligation to disclose it.

Powell, who co-chaired Perry's re-election finance committee, said he didn't know of Crosno's and Pearson's ties to the governor.

"I have no knowledge of that, either. Nor was it pertinent to this agreement. We felt comfortable with exactly how this agreement went forward," Cigarroa said, adding that it was thoroughly vetted by the system's general counsel.

Josh Havens, a spokesman for Perry, said the governor's office was not involved with the matter.

In 2000, Texas A&M University graduate John Cunningham started the online service with a partner as Pick-A-Prof, a site where students could rate and exchange information about their teachers.

Crosno said he started MyEdu in 2009 by purchasing Pick-A-Prof.

A veteran of several successful Internet startups, he said he saw huge potential in a one-stop online destination where students and their parents could lower college costs through better planning. Studies show that students are taking longer to earn degrees, causing families to waste thousands of dollars.

The solution, Crosno said, is treating students as informed consumers so they can more efficiently navigate their time in college.

"There's one way to save money in college," he said. "Take the right, exact number of courses to get a college degree, and do it in the least amount of time."

MyEdu doesn't offer users any information not already publicly available; the company collects details about individual schools and teachers through open records requests and by scraping schools' websites.

Many universities, including Texas, offer their own schedule- and career-planning tools and post summaries of student evaluations of faculty members.

But Crosno said MyEdu arranges and presents the information better, and in a single location. "We deliver the technology in a form that students accept," he said.

Cigarroa said MyEdu, with its customized approach for each campus in the system, would help advance his plan to improve graduation rates.

"Simply put, MyEdu is, as they advertise, the best way to manage college," Cigarroa said. "For many students, it is their virtual college adviser and a specialized forum for communicating with each other and giving input about all aspects of student life."

Powell agreed. "This is a product we are going to make available for free to students on 15 campuses," he said. "We don't believe there's any other product out there that comes close to doing this. We wanted to do it as quickly as possible" because improving graduation rates is an urgent priority.

"It was not an issue we felt was controversial or required public input," Powell said.

Steven Leslie, UT-Austin's executive vice president and provost, said the school looks forward to embracing MyEdu's features but anticipates some challenges in integrating the company's systems with those in the registrar's office.

Not everyone has been impressed.

Though students like the visual course scheduling feature that allows them to plan their semesters, MyEdu's "tools are not always the most accurate," said senior Carisa Nietsche, president of UT-Austin's Senate of College Councils, which represents students in academic affairs. "The university also already has a lot of the tools available on MyEdu."

Kim Krieg, assistant dean for advising at UT-Austin's College of Liberal Arts, said a committee of university advisers and administrators convened by the registrar's office last spring examined MyEdu, as well as schedule-planning sites at other universities, in an effort to see what improvements UT could make.

"It's fine, but it wasn't anything that blew anybody away," Krieg recalled.

The site also has been criticized for pandering to students interested primarily in using it to identify faculty members who reliably give high grades. A UT-Austin student survey conducted last year confirmed most students used the site to check professors' grade distributions.

"As an educator, I'm not sure that's what we want students to focus on," Krieg said.

Still, Crosno said, the company, which earns money from advertisers, such as textbook publishers and computer companies interested in tapping the student market, has grown quickly, thanks in part to recent cash infusions from a handful of private investors.

He said MyEdu boasts 500,000 members who actively use the site's tools to plan their college education and an additional 3 million members who log in occasionally. Part of the company's growth has come through informal deals with student associations, some of which the company has donated money to in exchange for each new registered user.

It has forged partnerships with a handful of organizations and schools directly as well.

This past summer, the California Virtual Campus, a state-funded portal for nonresident college students, announced it was working with MyEdu to help students plan their schedules, although no money was exchanged, said Tim Calhoon, director of technology for the system.

'Shocking' invitation

Crosno said he wasn't actively looking to partner with any schools in a more formal way when MyEdu received an email in February from Art Martinez, the UT regents' director of board services, asking the company to come to UT and "present what we do."

At a meeting attended by a roomful of UT System officials, including a handful of regents, Crosno said, he made a "very challenging" presentation.

"I said the technology you offer students wasn't very well-used," he recalled. "I was shocked to hear everyone in the room say: 'This is cool. Let's have another meeting.'\u2009"

Following more gatherings over the next four months, Crosno said, the university in June asked if MyEdu would be interested in forming a partnership with the UT System.

"They said, 'We're willing to make an investment in you,' " he recalled.

Crosno said he resisted at first. "I said, 'We've got plenty of cash; I don't need your money.' " But, he added, "Cigarroa convinced me."

The result: The UT System's $10 million "unrestricted, unconditional" investment, which Crosno said will be used to build new platforms for MyEdu's tools, such as apps for tablets and cellphones.

Crosno said that he handled most of the negotiations with system officials himself, keeping only his four-member board of directors informed.

Cunningham, the former chancellor, who is also a former president of UT-Austin, said he is not a major shareholder in MyEdu and knew nothing about UT's investment until it was publicly announced.

Pearson, who said he advises the company on its social media strategy, said that's when he first learned of the partnership as well.

Barry Burgdorf, the UT System's vice chancellor and general counsel, said no law or regulation required public disclosure of the financial interest of Cunningham or his son. Nor did any general sense of ethics require such disclosure, he said.

Steve Hicks, a vice chairman of the regents who helped negotiate the MyEdu deal, said he wasn't informed of the Cunninghams' interest.

But "I do not feel it is a material matter," Hicks said. "It would not have influenced my vote."

Specialists in higher education governance, however, say transparency is always better than opacity.

"These things are often undertaken with positive purposes and good people, but when they're not fully disclosed, it really hurts them," said Aims McGuinness Jr., a senior associate with the National Center for Higher Education Management Systems, a nonprofit policy center in Boulder, Colo. "It's much better to be transparent about it, and then you don't run into conflict."

Transparency has been a running theme for the UT System and its governing board in recent years. For example, the system has posted voluminous data on each of its campuses on graduation rates and other measures of student success.

But the MyEdu deal was struck almost completely behind the scenes. Indeed, the first public clue came when the regents posted a one-sentence agenda item about a forthcoming recommendation for "a business arrangement" with MyEdu regarding online academic data.

A regent's initiative

The idea to partner with MyEdu came from Regent Alex Cranberg, who learned about the company through informal conversations with UT-Austin students, Cigarroa said.

Regent Brenda Pejovich credited Cranberg for bringing the idea to a task force on excellence and productivity of which she was chairwoman and he was a member. Task force meetings, including a July presentation by MyEdu officials, were closed to the public.

Impressed by the company and its website, Cigarroa approached Powell, who agreed that a partnership could benefit the system's more than 215,000 students.

"So everybody will know, we had another unofficial committee," Powell, the regents' chairman, said at the August meeting. "Regent (Wallace) Hall, Regent Cranberg and Vice Chairman Hicks formed an unofficial committee for the chairman several weeks ago and have met continuously with MyEdu and have done a very good job of helping Barry Burgdorf bring this to fruition."

Before the board's vote on MyEdu, Powell described the company as "one of the most transformational things that we saw as a board, and the board is, I think, unanimous."

Burgdorf said officials settled on a $10 million stake to ensure that projects benefiting UT System campuses would be a first priority. "We didn't want a controlling interest because it's not our business to run MyEdu," he said.

The regents' investment arm, the University of Texas Investment Management Co., conducted a "due diligence" review to ensure that MyEdu's "people were good and financials were as represented," Hicks said.

UTIMCO CEO Bruce Zimmerman said he met with MyEdu officials, examined the company's financial statements and found no evidence of fraud or "smoke and mirrors."

Zimmerman said he advised regents and system staff members that direct investments, particularly in Internet startups, are risky, with a reasonable probability that all of the money would be lost and a small chance that huge gains would be made.

Zimmerman said he knew about the Cunninghams' involvement in the company but couldn't recall whether he mentioned that in the course of his review, which did not result in any formal report.

The former chancellor, who teaches corporate governance at UT-Austin and sits on several corporate boards, said he has made three investments totaling $175,000 in MyEdu.

Asked whether his stake should have been disclosed publicly by the regents, Cunningham replied: "I don't think so. I'm not a major shareholder in the company. I have no administrative input. I don't think that's relevant, and obviously they didn't think it was relevant."

About this story

Ralph K.M. Haurwitz, who has covered higher education since 2004, and Eric Dexheimer, a Statesman investigative reporter since 2006, examined the University of Texas System's partnership with MyEdu Corp. as part of the newspaper's ongoing focus on transparency in dealings between taxpayer-funded entities and private businesses.

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