What Do Corporate Earnings Reports and School Test Scores Have in Common?

The answer is that intense pressures upon corporate executives to satisfy investors and upon school leaders to raise test scores distort routine practices and too often leads to chicanery. Over the last decade, stories have emerged from multi-billion dollar corporate offices that CEOs doctored earnings reports to keep investors happy (while protecting their stock options), and educators fiddled with standardized test scores.

Before the 2008 financial meltdown, earnings statements (and forecasts) as signs of corporate success pushed corporate officers to claim as earnings funds that had little to do with actual transactions with customers in a given year. For example, Computer Associates and Xerox CEOs claimed revenues in one year that their customers were actually paying them over three years. In some cases, the chicanery was so blatant that it became criminal. Bending flexible accounting rules too far sent Kenneth Kozlowski of Tyco  and John Rigas of Adelphi to jail. The collapse of these corporations  destroyed the lives of employees and investors.

The obsession with earnings in a given year even now in the midst of slow job growth, comes from the hard-core belief that these numbers signal the quality of a firm’s performance. Yet economists and financial analysts say repeatedly that one quarter’s earnings do not predict the next quarter’s profits. Nonetheless, earnings reports have become the single marker that has convinced investors that CEOs and their chief financial officers have created value for them and shareholders.

What’s the connection between earnings reports and use of standardized test scores to judge school performance? In the past two decades, business-oriented reformers have pressed schools to set standards, be accountable for results, and use test scores as measures of performance. To prod superintendents, renamed CEOs, to produce higher scores, especially in big cities, bonuses go to school chiefs who meet and exceed their targets of improved student achievement. Scores from standardized tests have also become vital in promoting (and flunking) students and awarding (and denying) diplomas, a factor in evaluating teachers and principals, and ranking schools for receiving cash awards or penalties for unsatisfactory performance.

By narrowing school quality to standardized test scores and ratcheting up the consequences for poor results, many superintendents, principals, and teachers have devised short-term strategies to secure the benefits and avoid the costs. They work with those students who could make large gains on the tests rather than work with the lowest performing students. They increase test preparation. They drop electives that subtract time away from those skills and knowledge that will be tested. When scores rise, have students learned more? Hardly.  But the adults learn a lot about bending rules to beat the system.

Just as earnings statements are too narrow a measure of corporate performance, test scores barely cover what students are expected to learn in schools. Civic engagement, knowledge of the humanities, building moral character, working in teams, critical thinking, and independent decision making– historic aims of public schools–are missing from standardized tests.

Moreover, if earnings reports mislead investors as to the actual worth of the firm, standardized test scores mislead parents about the actual performance of their children. There is, for example, no substantial body of evidence demonstrating that students with high scores on standardized achievement tests will do well in college or perform well in the workplace. Sure, graduating from high school and college will mean that you earn more over a lifetime than a dropout. But those earnings derive from the credentials, not from scores on standardized tests.

For those that relish irony, here is a delicious example of business leaders pushing onto schools narrow and misleading measures of student performance while harboring their own narrow and deceptive measures. But irony is cheap. What is expensive is the cost of relying on a single measure to judge complex institutional performance and the life-affecting consequences for those in the private and public sectors.

Of course, it doesn’t have to be this way. A few wise corporate leaders, lonely to be sure in the recent stock market frenzy, have said publicly that concentrating on annual growth in earnings will lead to short-term higher stock prices and weakened long-term performance. Not until former corporate leaders were indicted,  handcuffed, and put behind bars, however, did investors take note.

In education, prospects for leaders to  raise their voices are dim. When the President of the United States and the U.S. Congress still want every child between the ages of 9 and 14 to be tested annually, it will hard for educators to stick their necks out and say that such an obsession with testing, like the corporate obsession with raising stock prices and gaming annual earnings reports, is short-changing students and distorting the mission of public schools in a democracy. Yet that is exactly what is happening.