Professor Royston Greenwood (expert and authority on organization theory, particularly surrounding professional service firms), highlights in his work that professional partnership organizational formations have superior incentive structures for professionals and is especially well suited for the management of knowledge workers. In his 2003 paper “The Professional Partnership: Relic or Exemplar Form of Governance”, Professor Greenwood describes:
“Professional service firms apply complex knowledge to non-routine problems … an organization that trades mainly on the knowledge of its human capital, i.e., its employees and the producer-owners, to develop and deliver intangible solutions to client problems; ‘knowledge is … manipulated by highly educated employees and applied in order to provide a one-time solution to specific clients’ problems’.
Properly visualized, schools are in essence no different than these enterprises in that they operate mainly via the intellectual efforts (instruction) of its human capital (teachers). Yet most public schools are operated under a corporation structure, where one senior manager (the principal) supervises the work of employees (teachers) on behalf of an external set of shareholders (the State, Department of Education, etc.). Professor Greenwood notes that the formal hierarchies and bureaucratic control structures that are staples of the corporation model (and are common place in the vast majority of public schools) are unlikely to succeed in effectively managing knowledge workers for (at least) two reasons: “a) expectations of the ‘professional’ for autonomy and freedom from external constraint”, and b) “the high costs involved in supervising non-routine behavior”. Viewed from this perspective it is unsurprising that so many schools struggle to attract and retain the talent they need to provide superior instruction to students:
- First: potential top talent looking for the autonomy and freedom offered by a career as a professional would not identify teaching in most schools as choice employment since its knowledge workers (teachers) exercise very little control, autonomy or freedom.
- Second: on the other hand, those who do decide to become teachers experience very high frustration levels, leading to burnout and flight from the profession (either ‘up’ through principal or vice-principal ‘promotions’, ‘out’ of the profession or to other schools with other compensatory “perks” (smaller class size, more affluent students, etc.), or ‘down’ by disengaging and giving the bare minimum effort to their work).
- Lastly: schools expend an inordinate amount of capital on work-monitoring costs, particularly in the form of solely supervisory personnel (Principals, Assistant-Principals, etc.), thus leaving insufficient funds to create financial incentives to compensate teaching professionals for the loss of autonomy, control and freedom that comes from working in a traditional school.
Professor Greenwood concludes that the partnership form of governance is far better suited to the management of knowledge workers than the corporation model for several reasons, including:
- Professional-Partnerships use more efficient (collegial) control processes: monitoring and ensuring work-quality is accomplished through close working relationships between the owner-producers (typically the master/experienced practitioners) and junior practitioners (as knowledge-workers, practitioners’ work-product consist primarily of interactions with clients in providing those clients with appropriate services and solutions). The owner-producers’ ‘management’ of their own organization (most of which takes place in the mentoring of junior practitioners), saves the significant costs of hiring separate supervisory personnel whose primary job would be to supervise, yet would otherwise produce no work-product;
- Professional-Partnerships provide superior incentives for expert individuals to share their knowledge and expertise with fellow practitioners: in this organizational structure, the master/experienced practitioners are also the owner-producers (“partners”), and thus it is in their interest to ensure that junior practitioners are producing outstanding work-quality and developing into similarly strong practitioners—with knowledge-workers this is best accomplished through the sharing of best practices between master/experienced practitioners and junior practitioners in a collegial environment. The more adept the junior staff becomes, the better work-output produced by the firm overall, the more clients (and therefore profit) the firm (and therefore the owner-producer) earns; and
- Professional-Partnerships offer superior career incentives to professionals, which result in higher effort and productivity: As we discussed in (b), owner-producers are incentivized to produce and manage well since they are the primary beneficiaries of a successful firm (as its owners). For junior practitioners, as knowledge-workers they have the opportunity to become owner-producers (partners) and thus acquire the power, prestige and pecuniary rewards that come with the position, in a manner depending almost entirely on the knowledge and expertise they develop—junior practitioners who develop into master/experienced practitioners will either be:
- retained and asked to become an owner-producer (a “partner”) in the firm that developed them (in professions highly dependent on intellectual efforts, owner-producers will want to keep highly proficient human-capital with the firm as long as they can); or
- asked to bring their developed expertise and leadership to a rival firm as an owner-producer (again, in professions highly dependent on intellectual efforts, every firm wants to have the highest quality human-capital on the team—this ‘capital’ is either developed within the firm or acquired externally from rival firms); or
- ‘inspired’ to strike out on their own and become the owner-producer of their own firm. Thus junior practitioners are also highly incentivized to produce so that they too might develop into master/experienced practitioners, increasing the likelihood they can become a partner in some fashion.
TFOA’s Approach: The Professional-Partnership Hybrid
The Teaching Firm model developed by the Founder is a professional-partnership hybrid, a design that uniquely combines the governance models of the nonprofit corporation and the professional-partnership structure described by Professor Greenwood. Typical nonprofit corporations are governed by a Board, which delegates the day-to-day management of the enterprise to an individual (e.g. an Executive Director, President or CEO). As discussed earlier, the professional-partnership is an organization governed by two or more producer-owners (the “Partners”), individuals who are full-time practitioners and share equally in the ownership, management and responsibility for the day-to-day operations of the enterprise. In the Teaching Firm, the Board of Trustees (“Trustees”), will delegate the day-to-day responsibility for the charter school to a group of master-teachers (the “Partners”) who will be full-time teachers who also share equally in the management and operation of the school within a professional-partnership structure formed via contract (as oppose to a formal for-profit legal entity). The Partners will exercise exclusive authority over every aspect of the charter school, except in the following:
- Partner contracts: the Trustees will retain the power to determine the compensation, bonus and ongoing-employment of the Partners—these determinations can be made or changed by the Trustees (with a majority vote at a meeting with quorum), for any legally permissible reason at any time. Trustees will also retain the power and legal authority to alter or recall the authorization of power and/or distribution of management responsibilities to and/or among the Partners at anytime for any reason with a majority vote of all of the Trustees. Partners will be “at-will” employees; a Partner may be fired and/or removed from the partnership for any legally permissible reason by either: 1) a two-thirds vote of all Trustees; 2) a majority vote of all Trustees and a majority vote of all other Partners; or 3) a consensus or unanimous vote of all other Partners (which closely resembles traditional professional-partnerships). Partners may be appointed only by current Partners via a majority vote or any other selection process otherwise determined by the current Partners. Partners will begin with a base compensation of $125,000/year and will be eligible for annual bonuses of 20%-200% or more, and raises of 2%-5% each year; and
- Consent and Approval of the Budget and Yearly Academic Goals: the Trustees will retain the power to provide advice and consent to the ratification of the annual budget and a plan outlining the academic goals and objectives of the charter school (the “GO-Plan”), both to be presented to the Trustees each year by the Partners. The Trustees shall determine the date of the presentation of the GO-Plan, but under no circumstances shall this presentation occur when the charter school is in session. The Trustees may make comments and recommendations to the Partners with respect to any aspect of the budget or GO-Plan, but their consent (a majority vote of the Trustees at a meeting with quorum), shall not be unreasonably withheld. The Partners may choose to decline any recommendations or changes to the budget or GO-Plan and may proceed without the Trustees’ consent except with respect to a) the student achievement goals (any changes to this section recommended by the Trustees are automatically incorporated into the GO-Plan); and b) Partner compensation (any changes to this section recommended by the Trustees are automatically incorporated into the budget).
The Teaching Firm itself more closely resembles the professional-partnership described by Professor Greenwood than the nonprofit corporation, except in two important ways: 1) the use of a “Board”, and 2) the lack of actual “ownership”:
- The Use of a Board: under current charter school law in most states (including New York), for-profit entities are not permitted to operate charter schools. In fact the law requires that a nonprofit Board of Trustees be empanelled to receive the actual charter and hold ultimate responsibility for the charter school. Yet while it is typical practice for most Boards to hire one person as Principal, Executive Director or CEO to manage and supervise the charter school, nothing in the law precludes the Board from hiring a group of individuals to do the same thing, so long as that group is not a formal for-profit legal entity. By creating an organizational structure via contract that embodies the relationship between the Trustees and the Partners in the way we described above, we are able to simultaneously:
- comply with the legal requirements (the Trustees will ensure “success” will be measured (primarily) by the academic performance of the school’s students—this is accomplished through the Trustees’ retention of power over Partners’ compensation and the establishment of the student achievement goals); and
- empower the group of master-teachers to act as a fully formed professional-partnership despite being under the authority of a Board of Trustees.
- The Lack of Actual “Ownership”: without a formal legal entity to organize the Partners, there exists no enterprise for the master-teachers (who would otherwise comprise the partnership), to “own”. Reason would hold that without ownership, the incentivizing components that come with it—autonomy, control, and profit, should likewise disappear, or at least significantly diminish. Yet within the governance framework described above (and memorialized within the TFOA bylaws and Partner contracts), we successfully and sufficiently captured the cogent aspects of the incentivizing structure inherent in the formal professional-partnership enterprise lauded by Professor Greenwood:
- Autonomy: Each TFOA Partner will have the freedom to use whichever methodologies and strategies they feel (in their professional opinion) is most appropriate and effective to accomplish the project goals (i.e. the charter school’s student achievement goals), essentially exercising 100% autonomy over how they practice their craft. Even though TFOA Partners will not control the student achievement goals, nor their own compensation, neither will function as a true restriction on the Partners’ autonomy, not as compared to the relative autonomy they would be afforded within a tradition professional-partnership. Clients that hire professional-partnerships always establish the desired outcomes for the project, not the professionals hired to accomplish it. Clients also determine what fees they are willing to pay for the service provided by the professionals. With the Teaching Firm, the ‘client’ that ‘hires’ the firm, sets the project goals, and determines what they are willing to pay for the services rendered, is the Board of Trustees—while not a perfect rendering, this arrangement allows the TFOA Partners to exercise substantially similar autonomy as they would have in a traditional professional-partnership.
- Control: As in traditional professional-partnerships, TFOA’s Partners will (as a group) exercise ultimate authority to establish all of the rules, policies, procedures and protocols governing the charter school (of course in compliance with all applicable local, state and federal regulations). They will also make all pedagogical, professional, fiscal and operational decisions (including the hiring, firing and compensation of all other staff (junior teaching professionals, administrators, etc.)), for the charter school, except with respect to their own compensation and the student achievement goals; they also share authority to remove individual Partners with the Trustees. Even with the latter caveats, these restrictions amount to minor restraint on the control the Partners would otherwise exercise in a traditional professional-partnership enterprise—as we discussed with Autonomy, the client determines the project goals and the fees they are willing to pay. The exception that most impinges on Partners’ control is the authority of the Trustees to remove individual Partners—in traditional professional-partnerships, the partners (as a group) make all determinations regarding who can become and remain partners, not the clients. Though in the Teaching Firm the Partners retain the sole authority to add partners, they share the authority to remove individual partners with the Trustees, and it is important that they do—without this very real check on the individual professionals hired to manage the charter school, external regulators might determine that the arrangement with the Partners is the legal equivalent of hiring a for-profit partnership entity, which is impermissible under the current charter law. Yet this constraint still fails to meaningfully hinder the Partners’ control in this area—both the Trustees and Partners are equally incentivized to remove only those Partners who are not performing and fulfilling their duties in such a way that helps the enterprise accomplish its goals.
- Profit: In traditional professional-partnerships, it is the sole purview of the partners (as a group) to determine how to divide the revenue remaining after all enterprise expenses are paid (the “profit”), even deciding how much (if any) of those profits are to shared with the other employees. Yet even though this is not the case with the Teaching Firm—there is no “profit” to be shared in a charter school—the significantly above-market compensation for teaching professionals serves as very strong economic incentives for the Partners and the junior teaching professionals. TFOA will endeavor to raise private funds to provide bonuses to all of its teaching professionals—the Trustees will determine the bonus amounts for the Partners, while the Partners will decide on the bonuses to be received by junior practitioners and other staff. TFOA’s ability to raise these funds will depend on the success of the charter school, thus providing an economic incentive for all of the teaching professionals to provide high-quality service, incentives not too dissimilar from the profit-based motivations of traditional professional-partnerships.