Transformative, Evidence-Based Ideas

Smart Regulation for Strong Schools

I recently read a fascinating Wall Street Journal article by Raymond Zhong, a Delhi-based reporter, about regulating global financial markets. I’m by no means a finance person; what caught my interest were the insights relevant to education and how we oversee and regulate schools.

Zhong presented leading theories from Andrew Haldane and others about how to most effectively regulate global financial institutions in a way that minimizes costly and onerous reporting and maximizes strong, viable, and productive financial firms. I thought there were important lessons for charter authorizing, which is becoming more and more process-oriented and risk-averse. Districts and state education agencies that are serious about promoting innovation and managing performance should pay attention to four lessons from Zhong’s piece.

Regulation 1. Don’t try to capture every raindrop—look for thunderstorms. In the effort to avoid disastrous bank failures and bailouts in an increasingly complex and interconnected international web, regulators have moved toward more byzantine rules. Sometimes in complex decision-making processes, simple rules make more sense. In the banking industry, regulators are looking at ways to use simple “leverage” ratios for all banks to disclose rather than requiring complicated reports on all information that might be relevant to investors and regulators. In general, the move is toward cleaner, more transparent reporting.

In education, this might mean that districts and charter authorizers need to shift away from the trend toward longer and more complex new school applications and reporting requirements and toward smart, highly predictive leading indicators of success.

2. Recognize the difference between risk and uncertainty. The financial world, Zhong writes, is intrinsically riddled with uncertainty. There is also a lot of risk. The risk is quantifiable (for example, by tracking the number of shaky bond holdings), but uncertainty is not. Public policy needs to recognize both risk and uncertainty and admit that there are natural limits to what regulators can know and control. Financial experts warn that regulators need to approach their jobs with humility, recognizing that they can’t prevent all failures.

Charter authorizers should take note. There cannot be innovation without failure. The job of authorizing is to make smart bets on which charter schools will be successful and to close the schools that don’t deliver, not merely to sponsor school providers with a track record of past success.

3. Prioritize a self-regulatory framework. The job of regulation is much easier when the entities being regulated, be they banks or schools, do most of the monitoring and risk management themselves. It used to be that banks were required to fill out quarterly spreadsheets containing thousands and thousands of cells. Now, increasingly, they are allowed to create their own internal models to calculate their capital ratios.

Along these lines, instead of assuming that the best way of holding schools accountable is to collect reams of financial, personnel, and testing reports, what if we allowed schools or school networks to demonstrate sophisticated ways of tracking organizational viability? These internal models should roll up to measures that can be compared across schools. Some of the more high stakes measures, like test scores, might require more standard reporting, but schools might still be asked to show how they are tracking their own academic results, evaluating their staff, and tracking their financial and organizational health.

4. Create rather than constrain. Regulators often see their role as stopping bad things from happening. Just as important, writes Zhong, is taking steps to make sure markets can grow and thrive. In the banking world this might mean regulators work to make sure small businesses have access to diverse lines of credit so they are not totally reliant on banks or supply-side policies. This is a shift in culture for most financial regulators, as it would be for most districts and even charter authorizers. In schooling, it might mean that charter authorizers get more engaged in discussions with civic leaders about freeing up unused facilities or putting out requests for proposals for schools to serve a neighborhood where there are many schools at risk of being closed. It means seeing the role of overseeing schools, whether they are district-run or charters, as not just preventing harm, but proactively creating a healthy ecosystem in which strong schools can thrive.

Students and teachers are obviously not bankers. But sometimes lessons about smart regulation in other sectors can give us food for thought about what those in education might do more to balance innovation and responsible action.

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