In July, Muddy Waters – a U.S.-based short-seller – targeted New Oriental Education & Technology in an attack on New York-listed Chinese firms. New Oriental, China’s largest private sector education and training company, saw its shares plummet from US$22 to US$9.50 in just one week. Chairman and founder Yu Min Hong fought back. In November, Muddy Waters backed off and New Oriental jumped to its highest price since July. 

The provocation for the Muddy Waters raid was an investigation by the U.S. Securities & Exchange Commission (SEC) into the company’s change in accounting practices. New Oriental set up an internal investigative committee and was able to satisfy the SEC on all counts. 

It is, in some ways, the story of Yu’s life – always overcoming adversity. He failed in his first two attempts to get into college because of his poor English. Finally, in his third attempt, he was accepted by Peking University. Even there, he was put in a class for backward students, this time because his spoken Chinese was poor. 

With perseverance, Yu graduated and became a teacher at Peking University. In his spare time, he used to teach students preparing for TOEFL (Test of English as a Foreign Language), mandatory for admission to U.S. universities. That was considered to be against Peking University’s norms, so he had to leave in disgrace. But his TOEFL training continued. Today, New Oriental has grown into the biggest private sector firm in China’s education sector. According to the company’s recent annual report, the empire includes 55 schools, 609 learning centers and 32 bookstores. Yu has a personal net worth of US$1.05 billion, according to the Forbes Billionaires List 2012.

The 50-year-old Yu is not about to rest on his laurels. His new dream is to start a private college for the liberal arts. Liberal arts are very necessary to provide the balance in life for every person, he tells China Knowledge at Wharton in this interview. 

An edited transcript follows. 

China Knowledge at Wharton: New Oriental became a target for Muddy Waters and the stock price slumped this July. How did you react? 

Yu Min Hong: As a listed company, we have to conform to all the regulations and requirements of the market. Fraud is not our style. That’s why I was not worried at the attack by Muddy Waters. Our corporate governance standards, financial data, consolidated financial statements, and internal management have all met the requirements of the SEC. We are also fully compliant with the Sarbanes-Oxley Act. 

Muddy Waters has its own agenda. It has built up some reputation because of the financial vulnerabilities of some Chinese listed companies. But the vulnerable companies are limited in number. So Muddy Waters has been forced to target well-run companies. 

The reason for the SEC investigation and the Muddy Waters attack is the VIE (variable interest entity) structure of Chinese companies. [A VIE is a sort of special purpose vehicle in which the ownership is partly divorced from control.] The Chinese laws are rather ambiguous about VIEs. There has also been some controversy over the transfer of shares of Alipay, spun out of the Alibaba Group (the biggest e-commerce group in China). The VIE structure has been a big concern for foreign investors in Chinese firms listed abroad. 

But I have never thought of separating the domestic and the overseas entities, as it could harm foreign investors. We have strengthened the overseas entity. The SEC has accepted our explanation. Our stock price has recovered. 

China Knowledge at Wharton: What makes you so confident about New Oriental’s innocence? 

Yu: First, we are in the education and training business and every penny has been clean from the beginning. There has been no collusion with politicians, no behind-the-scenes activity. Second, we are working hard to strengthen our internal management. We have never made false financial statements. Third, New Oriental has values. There are many Chinese businessmen who are in business only to make money. We could have done a lot of things to make more money, but we didn’t. Why? Because we would have to do deals. You cannot have values and ideals and strike [underhand] deals. 

My value system is to help other people through my work. New Oriental makes children love learning. It sends them abroad to study. It changes the trajectory of their lives. This gives me a sense of achievement and makes me happy. 

China Knowledge at Wharton: What have you and New Oriental learned from the recent accusation? 

Yu: This experience will make us more sophisticated. You are either brought down by such accusations or you become more transparent and trustworthy. We want investors around the world to see we are clean. When we fought back, it was not just for ourselves; we wanted foreign investors to regain confidence in Chinese companies. 

China Knowledge at Wharton: Changing the subject, you have been talking about a new project — building a private university. How has that progressed? 

Yu: The first issue is land for the campus. There are two ways to address this. One is by asking the government for land. The other is to buy an existing private university. I prefer the first option. But, 10 years ago, the government gave a lot land for setting up universities. This was misused in some cases. Today, the government is very cautious about granting land for schools. I am applying to the Beijing municipal government for setting up a small private university; there are possibilities. 

If this doesn’t work, I will consider purchasing an existing private university. At present, there are more than 300 private universities in China, Some have operational problems; some are short of money. Some others saw schools as an entry into the real estate business and have now been closed down by the regulators. They are looking for buyers. Because I want to set up this campus in Beijing, things are more difficult. But it is still possible. 

China Knowledge at Wharton: What is the vision for your new school? 

Yu: ‘Independent personality and free thinking’ — that is my basic principle to guide this school. First, we have to educate the children to build their independent personalities, and their capabilities to think independently. Secondly, we have to give them the freedom to think, do research and innovate. I prefer to adopt the European-American style of running a university to help students develop freely their interests and capabilities. Also, this will not be a university for general subjects; it will be a small liberal arts college, which focuses on cultivating humanism and the scientific spirit in its students. 

China Knowledge at Wharton: What do you mean by humanism and how will you cultivate it? 

Yu: To me humanism means understanding the perceptions of other people and the world. It means applying a conscientious heart and a strong sense of responsibility to make the world a better place. 

I am an advocate of liberal education. First of all, you have to ensure that young people are able to access all kinds of knowledge, not just on one particular subject. The required courses during the first two years in my college will cover arts, philosophy, sociology, economics, math and all kinds of basic subjects. Does an engineering student need to learn the history of art? Yes he does, not as something to make a career, but to cultivate his taste and perception of the arts and his aesthetic senses. Does a literature major need to learn logic and statistics? Very much so. A rigorous training in logical thinking is of vital importance for future development. 

China Knowledge at Wharton: What are the main problems in China’s higher education system today? 

Yu: Chinese universities still focus too much on examinations. They have done very little to develop research ability and independent learning. Look at what our children are doing today in college. It takes only two weeks at the end of the semester for them to prepare for exams. They get a passing grade and the semester is over. But what have they really learned? 

The other major issue is that China’s universities are administration-oriented. The president and other leaders in universities are appointed by the government. They are concerned about their political career, not on how to govern the school better. This is the fundamental weakness in Chinese universities. 

In my school, I would like the president to be elected by the faculty. But I will, of course, go by government rules. 

China Knowledge at Wharton: How do you see the problems in the higher education system in the U.S.? 

Yu: Frankly speaking, it’s not that serious. America is always on the frontline of educational reform. They are very quick to correct errors. For example, many Western universities were started by religious bodies. This does not encourage innovation. But the well-known schools — from Harvard, Yale and Stanford in the U.S. to Oxford in the U.K. — are all strong advocators of innovation. There are many Nobel Prize winners from these schools. They are very quick and strong on self-renewal and we should learn from that. 

On the other hand, their recruitment mechanism is more fair and balanced. Harvard would not enroll more students from Boston just because it is located in Boston. But Peking University is biased in favor of students from Beijing. I hope my school will recruit students from across the whole country. Generally speaking, I will make the school closer to the American private colleges. 

China Knowledge at Wharton: Where will you get the faculty for your school? 

Yu: This should not be difficult. We will first decide the disciplines. Then, we will recruit the best faculty from all over the world. We will offer them the best salaries and kindle their interest in our educational concepts and systems. You have to be attractive on both hardware and software. A decade ago, we invited a lot of people to come to New Oriental to start the business. I am confident that we will find outstanding faculty members who share the same vision as I do on education. And they will work hard to support me and make my dream come true. 

China Knowledge at Wharton: Humanities arenot mainstream in today’s workplace. Are you concerned about the availability of jobs when your students graduate? 

Yu: Not at all. Lawyers and economists are very popular and get high salaries. Mo Yan has just won the Nobel Prize for literature. Yu Dan is now a well-known professor on classical Chinese literature. Around half the graduates in the U.S. are from the liberal arts. You don’t hear that they are starving.

On the other hand, I always think that if a country does not have an excellent civil service system and outstanding humanist talent, there will be no hope for the country’s future. There is high correspondence between the level of humanist studies and the cultural inheritance of the country. 

Look at the background of the members of China’s Politburo Standing Committee. The majority are engineers. China today is still in a technical-governing stage. When half of the members are graduates of humanities, China will step into a more balanced stage. 

China Knowledge at Wharton: How will you address the financing issues of your school and will it be self-sustaining? 

Yu: The first round will come from my own funding. I would like to donate money to build the school. But this money will not last for a 100 years. So there is need to build a donation mechanism for my entrepreneurial friends. The well-known private universities in the U.S. all rely on a social donation mechanism. China has to create such a mechanism, otherwise private universities will not be sustainable. We will only have public schools that are constrained by their administrative systems. 

China Knowledge at Wharton: I hear that your school will mainly recruit students from rural China? 

Yu: Rural kids are the major targets of our school, but not the only targets. Some 50% may be from rich families and 50% from the poor families of rural China. There will be a balance. 

China Knowledge at Wharton: The wealth gap between the rich and the poor is expanding rapidly in China. It is also becoming more difficult for college graduates to find a job. What role do you think higher education can play in this? 

Yu: This issue is not one that can be addressed by higher education alone. The government has the responsibility to give students across the country access to balanced education resources. The quality of the education has to be homogeneous. This will create a level playing field for those entering college. But that is not happening. The best resources are dominated by the children of the powerful and the rich. My suggestion is to, first, increase the number of scholarships and, second, encourage more private universities. 

There is a fatal belief today that education is useless. Because some university graduates can’t find jobs in cities and go back to rural areas, some short-sighted parents think higher education is useless. I believe that though some graduates are temporarily jobless, the future potential is much higher for those who have attended college. 

China Knowledge at Wharton: Many students with doctoral degrees can’t find jobs either. 

Yu: This is another issue. If you have a clear goal, your doctoral degree will be of value. If your motive is to find a better job, you will be disappointed. Knowledge acquired has to match what you want to do. I am concerned that many people learn a lot but have no idea how to use the learning. 

China Knowledge at Wharton: What role does education play in a person’s life? 

Yu: Education plays a vital role in molding a person’s career and even the destination of a nation. People are born as a tabula rosa. They experience two major systems of education. One is family education with its focus on cultivating character and personality, rather than knowledge. Family education should be based on parents as role models shaping the child’s personality. The goal is to make him open, optimistic, positive and confident – a sincere, helpful, considerate and grateful person who understands love.

For schools the more important role is in imparting knowledge, though they have to develop personality as well. School education is the driving force for career development. I think high-school education is even more important than college as it shapes a person’s personality and curiosity for knowledge.