"Take Me to Your
Leader" Who Will Control CETI?
Robert Daniels, Professor of Accounting,
San Francisco State University
The Chancellor's Office of the California State University
has finally posted for comment some of the core parts of its plan to privatize
the telephones and computers at the nation's largest university system.
The cat is out of the bag, and it is a mangy animal indeed. The manifest
inability of the CSU leaders to hold their own in negotiations, even with
the help of their expert consultant (a downsized former executive of the
Campbell Soup Company), adds one more concern to the host of questions
that surround the CETI scheme. ("CETI" is the acronym for "California Education
Technology Initiative". It is also the name of the mythical sea-monster
in Greek legend that threatened Andromeda before Perseus rescued her.)
From the start, the educrats at CSU headquarters have
tried to convince faculty, students, Trustees and legislators that CETI
was not just a tolerable business compromise, but a wonderful innovation.
Through the magic of partnership with the likes of Microsoft and GTE, the
CSU would gain a $300 million dollar telephone system at "no net cost",
and a river of money would then buy new computers for faculty and students.
With Fujitsu and Hughes on board, the miracle of satellite television would
keep the university from being overwhelmed by "Tidal Wave II" (children
of the baby boomers), and would carry the higher learning into offices
and prisons throughout California.
Well, folks, it's not going work quite like that. The
bad news is buried in the 72 pages of fine print that create the "Limited
Liability Company", the legal being that embodies the partnership of the
23 Cal State campuses with Corporate America. This "Operating Agreement"
is completely different from the CSU's official propaganda.
The CSU made control over CETI one of the Ten Principles
which would guide it in negotiations. The October 10, 1997 "SIP update"
stated Principle #4 very clearly: "CSU will have a majority role in the
partnership governance structure." That was echoed by an October 20 "Fact
Sheet", which said
"But as with any public-private partnership, it is important
that strong controls be put in place. This is especially true when the
partnership involves academia. In keeping with this philosophy, CSU will
maintain a controlling interest in the partnership so neither the system's
overall mission or program is in any way compromised."
Vice-Chancellor Thomas West wrote State Senator Hayden's
office on October 27th:
"In keeping with the CSU's culture, the university will
maintain a majority controlling interest in governing the partnership."
A minor waffle surfaced in the revised December 3rd
version of the CSU's "10 Principles", as posted on the CETI website. Item
5 now said "CSU will have a majority role** in the governance structure."
The (**) footnote explained the tripartite structure of CSU advisory commission,
puppet foundation and the CETI Limited Liability Company.
The actual proposed LLC Operating Agreement, released
on January 9th, 1998, tells a very different story. The CSU
(via its puppet foundation) and the four business corporations are "members"
of the LLC, and they vote in proportion to their ownership interests (Para
4.2, p. 15). The attachment stating ownership interests is still blank,
but it appears from the financial plan to be in the 25% range for the CSU.
The members vote on certain major business decisions, and a "majority in
interest" is sufficient for almost all actions (Para. 4.2). For example,
a combination of corporation partners who together own 51% of the capital
could, despite any CSU objections:
Have CETI enter into new lines of business, other then
CSU telecommunications and "non-CSU revenue producing products and services".
(para. 1.2)
Move the company offices anywhere. (para 1.3), and remove
a Director, with or without cause. (para 6.4(d))
Join with directors in demanding additional cash contributions
from members. (para 2.2) If CSU doesn't pay, it gets suspended and charged
interest, under para 2.5.
Allow other corporations to join as members on such terms
as they see fit. (para 2.6)
Choose the accountants and auditors, and member will
handle all dealings with the IRS. (paras 5.2 and 5.4). (The author doesn't
understand that a CPA can't both prepare and audit the financial records
-- that's not compatible with professional objectivity.)
Conclusively determine that a conflict of interest transaction
between CETI and another member (like GTE) is "fair and reasonable" for
CETI. (Para 6.9) This is very important -- if a "disinterested majority"
(such as GTE, Microsoft and Fujitsu) approves CETI's deal with Hughes as
being fair, the CSU apparently has no right to challenge.
A "majority in interest" can also amend anything except the
profit shares, the sections where unanimous vote is required, and section
1.2 "or any other provision involving the principles of the company" --
which are yet to be attached. (para. 11.7 (a)) However, since Section 1.2
allows a bare majority to undertake new lines of business, this limitation
has the strength of Kleenex. The supermajority requirements are:
A 2/3rds vote -- tho it appears CSU won't even get the
1/3 interest to have a blocking position -- to dissolve CETI (10.1-b),
to liquidate all its assets or to merge it with another LLC. (para 6.5(b))
A 75% vote can expel a member for "grievous action".
(para. 9.2(b)) Do note that it's 75% of the *other* members, not counting
the ousted one.
Unanimous votes? Only to merge with a corporation, or
to sign a Master Services Agreement with a "division" of the CSU. (para.
6.5(b)) I thought Universities had "campuses", but I guess they are "divisions"
now.
What are CSU's veto rights? It can prevent the four corporations
from luring CSU professors and staff to join them. (para 6.12 (c)) It can
bid on subcontracts, if it wants. (para. 7.5) It must give permission before
"CSU" can be used as a brand name. (para 7.8 (a)) It can withdraw "subject
to its fulfillment of all of its outstanding obligations and commitments."
(para. 9.2(a)) Finally, the three directors it selects have somewhat ambiguous
veto rights over revenue programs involving the CSU's academic content
or intellectual property, or CSU-related revenue generating programs and
campaigns. (paras. 7.3 and 7.8)
Here's the deal with the Directors. There are to be 13
(a lucky number?) with three each appointed by CSU, GTE and Fujitsu, one
each from Microsoft and Hughes, and two non-member directors elected after
recommendation from a special nominating committee. (para. 6.4 (b)) One
of the CSU Directors gets to chair the board for the first two years. The
Directors manage the business and choose a Chief Executive and other CETI
officers. (paras. 6.1, 6.5(a)) All Directors must consent to any single
CETI borrowing of over $15 million. (para 6.5 (b)), and Board approval
is required for any revenue generating program that uses CSU academic content
or intellectual property, or has start-up costs over $100,000.
Who do the Directors represent - the member who appointed
them or CETI itself? Since CETI will be buying from the corporate members
and selling to the CSU, CSU students, and CSU faculty the potential conflicts
of interest should be apparent, especially because it is the Directors
who determine whether the prices CETI will charge the CSU as its sole supplier
are "competitive in the industry". (para. 7.4) Paragraphs 6.8 and 6.9 acknowledge
the conflicts of interest and then brazenly require the members to give
advance waivers of any claims against the Directors. As noted above, the
votes of 3 corporate partners will also exculpate the fourth. If you've
got a problem with that, the only remedy is to tell your boss:
"To the extent that a person working for the Company
believes that a conflict of interest exists between the person's obligation
to the Company and his or her obligation to another organization, the person
shall be instructed to advise his or her supervisor of such conflict."
(para. 6.13)
Finally, there is a neat little joker tucked away in paragraph
6.16, which is titled "Conflicts of Interest". It's worth quoting in full:
"This Operating Agreement allows for the appointment
by the Initial Members of members of the Board of Directors of the Company
and also allows for the Company to utilize Member employees as officers
of the Company. The Members agree that any appointee of a Member to the
Board shall not be inhibited by the Member in any way from carrying out
the appointee's fiduciary obligations as a member of the Board. Additionally,
each Member agrees that should any of its employees serve as an officer
of the Company, such Member will not inhibit the employee in any way from
carrying out the employee's fiduciary duty to the Company. Any Member whose
employee becomes an officer of the Company agrees to release such employees
from any job responsibilities with the member that may create a conflict
of interest with the fiduciary obligations owed to the Company."
That's right, CETI Directors. Your first loyalty is to CETI.
And if, heaven forbid, you find that CETI is charging CSU a little bit
more than it should, ask yourselves where your loyalties lie. If you're
not sure, then try asking CETI's lawyers. In a bit of business-grabbing
chutzpah, the Orange County
law firm of Rutan & Tucker has written itself into the deal (para.
11.13, way at the back) and tossed in its own conflict of interest waivers.
You see, Rutan & Tucker "has previously represented and presently represents
Fujitsu and GTE in other, unrelated matters." I'm confident that they can
enlighten the CETI directors on the fine points of conflict-of-interest
law.
There's a *lot* more wrong with the Operating Agreement
from the CSU perspective. For example the intellectual property protection
for faculty is tenuous, not even mentioning the CSU - Faculty Union "Memorandum
of Understanding" (a nice way of saying "agree to disagree".) Also, CSU
keeps saying that it will have no liability for the $300 million borrowed
funds (most of which is to be paid to GTE to build excess capacity for
resale), yet some very tricky language in paras. 2.4 and 7.10 suggests
that the educrats are caught in another "terminological inexactitude."
What really happens is that the corporate members will
try to find an insurance company dumb enough to guarantee the debt -- and
have the CSU share in the premium cost. When they can't find an insurer,
the partners will guarantee the construction bonds. If any of them actually
pay, they get a Number 1 priority claim on all of CETI's cash, and the
other partners (*including* CSU) then must pony up their share. There's
amorphous language about letting CSU off the hook for the "intra-campus
network", but most of that $300 million is *inter* campus, so CSU would
still be hooked for the cost of GTE's lines.
Then again, what can you expect from people who pretend
that three directors out of 13 are a "majority controlling interest"?
Part 5 of a series on the computer
privatization follies at CSU. rdaniels@sfsu.edu