(FORTUNE Magazine) – AS A MAJOR contributor of tax dollars to public education, corporate America is getting a lousy return on its investment. Not only are schools today not preparing kids for jobs, they aren't even teaching them to read and write. In the U.S., 30% of all high school students -- one million teenagers each year -- drop out before graduating. Most are virtually unemployable. Of those who do graduate, many do not have the problem-solving skills to function in an increasingly complex information society. All this has the business world worried -- and ready, finally, to take action. Threatened with a severe shortage of talent, corporate America is becoming a powerful new supporter of reform in the public schools. Says Apple Computer Chairman John Sculley, who ranks education -- along with drugs and the economy -- as one of the top three issues on the national agenda: ''Education is in crisis, but there are a lot of people ready to do something about it.'' Consider, for example, what recently happened in New Orleans. In early April a group of prominent businessmen gathered for lunch with Owen ''Brad'' Butler, retired chairman of Procter & Gamble. Butler wasn't in town to talk shop. In nine days residents of New Orleans were to vote on a tax levy to raise more money for the city's decrepit, overcrowded schools. Two years ago they voted down a similar proposal 2 to 1, a defeat that propelled local businessmen, concerned about the city's economic future, into forward motion. Working with the school superintendent, the business leaders drew up a new proposal. They got a sudden-death assist from Butler, a leading member of the Committee for Economic Development, a research and education organization of 225 top businessmen and university presidents. He came to New Orleans to talk up the levy on television and with citizens' groups. Butler and his fellow businessmen were persuasive. In mid-April, New Orleans voters approved a $20.5-million-a-year property tax increase to pay for new textbooks, higher teachers' salaries, and preschool programs for low-income youngsters. Score one for business. Score one for the public schools. And in this battle of minds that everyone wins, score one for the citizenry. Until recently companies viewed schools as dull sport and none of their business. But times have changed. In a Conference Board survey of 260 major companies, banks, and utilities, two-thirds listed primary and secondary education as their No. 1 community concern -- above local economic development, arts and culture, and higher education. Less than 10% of the money corporations voluntarily contribute to education goes to elementary and secondary schools. But the percentage is slowly rising, and companies are spending smarter. Instead of promising trips to Dodger Stadium to seniors with good attendance, they are working at national, state, and local levels to help change the entire system. Having restructured their own businesses, they now want to restructure the schools. Innovations abound. In Pittsburgh, Westinghouse Electric, Dravo Corp., PPG Industries, and other companies support the Allegheny Conference Education Fund, which awards grants to teachers and principals who develop imaginative teaching methods. Two teachers, for example, created a course combining art and geometry that is now part of their high school's curriculum. The involvement of business is one reason more than 3,000 students in four years have moved from private and parochial schools back into the Pittsburgh public schools. Corporations spend $10 billion a year on management training. Convinced that this is an area in which school districts dramatically underinvest, Cigna, Sun, Arco, SmithKline Beckman, and Rohm & Haas invite Philadelphia principals to participate in seminars where they learn how to delegate, negotiate, and communicate. ''It was interesting to be involved with bottom- line people,'' says one newly executized educator. ''Here, kids are our bottom line.'' General Electric helps an oft-overlooked group: talented, motivated students who frequently get ignored as frazzled teachers deal with a class full of Johnny Rottens. GE spends $50,000 a year working with top students at the Manhattan Center for Science and Mathematics, a new public school in New York's Spanish Harlem. The company provides mentors and special classes to help its GE Scholars get into prestigious universities. The center is a big success in its own right. Located in the old Benjamin Franklin High School -- which was closed in 1982 after only 30 students in a class of 1,000 graduated -- it prepares mostly minority students for careers in engineering and science. In two years, 95% of the seniors have received diplomas. Industry is also creating technologies to help kids learn. Schools have been unusually successful teaching literary skills to children in kindergarten and first grade with a software program sold by IBM called Writing to Read. Youngsters are first told to write words the way they sound -- ''enuf,'' say, or ''clowd.'' Later they read books that pair the words with their correct spellings. ''You can put the program in the worst schools and go back a year later, and it's almost like a religious experience,'' says Ken Lay, director of marketing for IBM's educational systems. ''The kids come up and ask if they can read a story to you. They do better in every way than their peers who don't have the program. We thought it was because they could read better. But a principal told us, 'You're crazy. It's because now they have self-esteem.' '' Most of these children have seen nothing but failure in their short lives. What turns them around, Lay says, is realizing that they can succeed. The school superintendent in Pekin, Illinois, says that in just two years, Writing to Read has reduced the percentage of first-graders needing remedial help from 11% to 2%. THE PILGRIMAGE from boardroom to classroom has been fired by devotion to that sacred corporate deity: self-interest. The Hudson Institute predicts that the majority of new jobs over the next 15 years will require some form of education beyond high school. At the same time the number of young workers entering the labor force will decline by 10%. To fill job openings, industry will have to dip into the pool of traditionally less skilled and underutilized population groups -- minorities and immigrants. ''The hidden time bomb,'' says Apple's Sculley, ''is that in the 21st century we won't be able to maintain an affluent middle-class lifestyle. We can't keep flipping hamburgers and making fried chicken for the rest of the world. We need skills for an information economy.'' Today minority students are the majority in the country's 45 largest cities; nearly 700,000 of the 940,000 public school students in New York City are black or Hispanic. By the year 2000, the Committee for Economic Development reports, 38% of U.S. children under 18 will be minorities. Their legacy is largely one of failure. According to the Census Bureau, 35% of ! blacks and 45% of Hispanics drop out of high school. Numerous reports say that 40% of the minority population is barely literate. Companies are already paying a high price. One-third of the hourly workers at Polaroid have taken classes in reading, writing, and problem-solving since 1985. Motorola, which has traditionally employed eight of ten applicants for entry-level positions, today screens as many as 15 to hire just one -- and it is looking for only seventh-grade English skills and ninth-grade math skills. William Wiggenhorn, Motorola's director of training, has calculated that it costs $200 to train a U.S. worker in statistical process control, a basic manufacturing technique. Teaching the same process to a Japanese worker, he says, costs 47 cents. The Japanese simply hand their employees a book. American workers must first learn to read. The U.S. brain drain has been a long time building. Some business leaders have been trying to stop it at least since 1983, when a national commission decried a ''rising tide of mediocrity'' in the schools in its highly publicized report, A Nation at Risk. The good news is that these early efforts brought executives and educators together. The bad news is that many of them failed. Too often, attempts by business to help turned out to be little more than feel-good programs: companies giving uniforms to the band or executives putting their arms around poor kids for a snapshot in the corporate newsletter. The increasingly popular ''adopt a school'' idea, in which a company lends ongoing assistance to a particular school, was derided by educators as patronizing and superficial. Snorts a Philadelphia teacher in an adopted school: ''All we got was a slurpee machine.'' The experience of American Express at Brooklyn's Prospect Heights High School is an example of good intentions gone awry. Three years ago American Express began a work/study program to keep students from dropping out. The company dangled an enticing carrot: part-time jobs at its subsidiary Shearson Lehman and the promise of permanent employment for those who graduated. Then last February, with no warning to Prospect Heights, American Express ended the program. ''I felt so sorry for the kids,'' says Diana Walker, a school counselor. ''I think some of them felt like, 'Hey, I've been kicked in the butt again.' '' Dee Topol, vice president of the American Express Foundation, says the program, budgeted at $97,000 a year, was not cost-effective: ''You wouldn't believe the problems: alcohol, drugs, parental abuse.'' After three years, only four students are still working at Shearson (see box, page 80). Walker says the company knew it was hiring youngsters with special problems, but failed to prepare its supervisors. Both sides do agree on one thing: The kids got a raw deal. KNOCKED ABOUT by false starts, political squabbles, and foggy goals, corporate executives have recently begun a second stage of reform: deep- rooted, radical change. Says Marsha Levine of the American Federation of Teachers, who co-edited a new book, American Business and the Public School: ''Companies should ask, 'Does this change the way things are done, or add on to an existing structure that isn't working very well?' The focus should be on change.'' But how to change? Throwing money ''willy-nilly'' at the problem, as Education Secretary William Bennett puts it, is not the answer. Says he: ''More generosity should come with strings attached.'' On the national level, business can supply direction and leadership. On the state level, it can promote new legislation, such as lengthening the school day and year. On the local level, companies can let schools know exactly what skills they are looking for in new employees. Nothing would make the kids happier. Says a senior at Strawberry Mansion High School in Philadelphia: ''We need more businessmen to come to school and say, 'If you do this and that, we'll give you a job later on.' '' The most provocative educational research done by business on a national scale has been by Brad Butler's group, the Committee for Economic Development. In the early 1980s, as members traced the fault lines in public schools, something caught their attention: an ongoing study of preschool students begun 26 years ago in Ypsilanti, Michigan. Created to test the impact of preschool on later success, the Perry Preschool Program grew out of the frustration of a school psychologist, David Weikart. Teachers kept sending problem adolescents to Weikart with the orders, ''Fix 'em up.'' Most were from poor homes. And unfortunately, Weikart found, ''I couldn't fix 'em up.'' Concluding that the problems must start early, he began to follow the progress of low-income 3- and 4-year-olds who had attended preschool against that of a control group who did not. The startling results: Just one year of quality preschool before kindergarten cuts the likelihood a child will drop out by about one-third (see chart).

LAST SEPTEMBER, the CED published its revelatory report, Children in Need. It cites statistics showing that more than 25% of children under age 6 now live in poverty and says that poor students are three times more likely to drop out than students from more affluent homes. ''These kids start out behind and they continue to lose ground,'' says Butler. Just $1 spent on early prevention and intervention, says the CED, can save $6 in costs of remedial education, welfare, and crime down the road. The CED's conclusion: To save the kids most at risk of failing, it is vital to reach them in their earliest years and even, in some cases, before they are born (see box, page 76). Solid evidence that preschool works has led many business leaders to ask why the federal government spends so little money -- $1 billion a year -- on Head Start, a preschool program for low-income youngsters. Says Xerox Chairman David Kearns: ''It is one program we know is effective, and we still don't fully fund it. This is an outrageous misallocation of funds.'' The CED estimates it would cost around $3 billion to reach all of the 730,000 4-year- olds in the U.S. who can be considered ''at risk.'' Because of the money shortage, less than 20% of children poor enough to qualify attended Head Start programs in 1987. A FEW STATES are trying to make up the shortfall, sometimes under prodding from prominent businessmen. In Texas, H. Ross Perot pushed through an education reform package in 1984 that required all school districts with 15 or more preschoolers from low-income or non-English-speaking families to provide programs for them. At Ysleta Pre-Kinder in El Paso, 720 4-year-olds play on computers and check out books from a well-stocked library. The initial batch of kids who attended Ysleta has just completed first grade. Teachers at Edgemere Elementary School say the children all performed as well as or better than their middle-class peers. Most states claim they can't afford preschool programs. Says Anne Mitchell of New York's Bank Street College: ''The public school system doesn't have the capacity to absorb all 4-year-olds. Building new schools is a big investment.'' The real problem seems to be that preschool is not yet a top priority at either the federal or the state level. Ed Rigaud, a middle manager at Procter & Gamble, got a typical response when he asked an Ohio legislator to support preschool programs. Said the legislator: ''We can't invest in preschool. We have three more prisons to build.'' Michigan this year will spend $2 million on preschool programs -- and nearly $1 billion over five years on 15,000 new prison cells. Because of Head Start's demonstrable success, educational reformers are convinced the federal government should spend more on the program. But when it comes to restructuring grades K-12, these same crusaders would leave change up to the states. It's one thing for the federal government to provide money to get 4-year-olds into preschool classes. It's quite another to dictate educational programs and policies for 16,000 independent school districts and 83,000 public schools. ''There's no way to do this at the national level,'' says Perot. ''You've got to do it 50 times over.'' IT WON'T BE EASY. Warns former Tennessee governor Lamar Alexander: ''All the agents of the status quo will be on your doorstep, you can be sure.'' Chief among them will be the teachers' unions, particularly the National Education Association, which includes 75% of all teachers. The NEA has adamantly opposed moving to a performance-based system that would include merit pay and teacher testing. ''So when governors say, 'Let's pay our best teachers more,' '' says Alexander, ''businessmen should support those of us who are getting our knees cut off leading the charge.'' He knows of what he speaks. In 1984, Tennessee business leaders backed Alexander's plan for a 1-cent sales tax increase to pay for a Better Schools Program, and then contributed $500,000 to help him win a bitter year-long battle against the state's largest teachers' union. What was the union opposing? A career ladder that would promote outstanding performers to Master Teacher and pay them more to take on added responsibilities. It was the career ladder that helped superintendent Mayfield Brown make a difference in rural Clay County, Tennessee. Per capita adult income is $6,600 in Clay County, and the illiteracy rate is 38%. Like most rural areas, it cannot depend on local industry to contribute much to special programs in the schools. But business-backed state reforms gave Brown the money to pay his best teachers to provide remedial reading during the summer to first- and second-graders. Clay County has since moved from 14th place to third place among neighboring counties on standardized tests. ''It all boils down to reading,'' says Brown. ''If you teach a child to read, his education continues until the day he dies.'' / Enacting educational reform is only half the battle. Once passed, reforms often have all the staying power of a Third World government. In 1985 legislators in Illinois happily passed a bill calling for more preschool and dropout-prevention programs. There was only one problem. ''We didn't stop to ask, 'Where are we going to get the money?' '' says Robert Beckwith, director of education at the Illinois Chamber of Commerce. ''It was a pie-in-the-sky dream.'' In South Carolina, executives and educators combined to make the dream a reality. ''They are the Oscar winners for the best-conceived state education reform,'' says Michael Kirst, a professor of education at Stanford. At the request of Governor Richard Riley, more than 30 business leaders joined with educators to write South Carolina's 1984 Education Improvement Act. Funded by a 1-cent sales tax increase, it included 61 new programs and policies. Among them: higher teachers' salaries, remedial education, management training for principals, and bonus dollars for schools that perform well. SOUTH CAROLINA businessmen vigorously supported the legislation. Their chief lobbyist, real estate developer Robert Selman, spent every day for six months at the state capitol; the directors of the business he runs, the Keenan Co., had given him their blessing to devote 40% of his time to the project. ''There is no question that it was frustrating,'' says Selman. ''There are 46 senators and 124 representatives in the general assembly. You're talking about going one on one with each, and they all represent a different constituency.'' To monitor the progress of the reforms, a division of public accountability was created within the department of education. The committees that wrote the bill also publish a report each year so that South Carolinians can see how their money is spent. The latest report shows that since 1984, SAT scores have risen 34 points, the largest gain in the nation. Yet the dropout rate has declined only slightly. Robert Thompson Jr., a vice president at Springs Industries, which makes textiles, believes that's because the benefits of preschool programs haven't been felt yet. ''The biggest challenge here is to have the patience to wait for change,'' says Thompson, who is on a committee to plan the next phase of South Carolina's reforms. ''You have to be able to bite your knuckles and not scream when you spend that money up front. We're talking about a generation or two before we start producing the quality we want.'' For business people who live and die by quarterly reports, a generation is a long time. Working locally to provide students with tutors, computers, and jobs can yield more immediate gratification. But helping out demands visiting the schools to see what the problems are. The experience can be a shock. Says Time Inc. Chairman J. Richard Munro: ''Businessmen want to get involved and then they say, 'Oh my God.' They see that the schools are a huge socioeconomic quagmire. They say, 'I've got to run my railroad. Let someone else do it.' '' Philadelphia businessmen have learned that getting involved can pay off. The Philadelphia High School Academies program is an 18-year-old venture created for low-income students that combines academic and vocational education with on-the-job experience. Executives from 40 companies, including Continental Bank, Philadelphia Electric, and Rohm & Haas, meet with teachers to help plan courses suited to employer needs. ''This way, both sides know what to expect,'' says Curtis Mathews, manager of corporate staffing at Rohm & Haas, who regularly hires kids from the academies. ''We were tired of guessing.'' The chink in many of the jobs-for-grads programs is that they save the saved: Companies tend to hire kids who would have made it anyway. Witness the Boston Compact, the most written about, talked about, glorified, and maligned school/business collaboration going. In 1982 a group of companies in Boston guaranteed that by 1985 they would hire 1,000 graduates a year from the city's degenerate public schools. In return, the schools promised to raise standards, reduce absenteeism, and stanch the flow of students dropping out -- 36% of each graduating class. BY 1985 a new curriculum was in place, attendance was up, and 900 seniors got jobs. But the dropout news was depressing: 43% of the class of '85 quit. Says William Spring, director of community affairs at the Federal Reserve Bank of Boston and one of the originators of the Compact: ''We did well on the externals -- providing jobs. But actual reform of inner-city schools is tough. You need to give kids the assurance that if they graduate they'll get a job. But you also need to give them an education relevant to where they are. The teachers are teaching Shakespeare, but the kids can't read.'' To attack that problem, the Boston Compact created Compact Ventures, a program that provides remedial education, mentors, and field trips to ninth- and tenth-graders -- an age group viewed by many, including youngsters , themselves, as a real danger spot. ''Middle school is the crucible of the education process,'' says Edward Dooley, executive director of the Boston Compact and assistant to the superintendent of schools in Boston. ''I understand you've got to get to kids early. But the real choices emerge at 14, 15, 16. Their bodies grow up. That's when you've got to be there for them, with mentors, innovative education, and exciting experiences.'' The Cincinnati Youth Collaborative, a school/business partnership modeled after the Boston Compact and led by Procter & Gamble President John Pepper, offers reinforcement at all levels of the system: preschool for 3- and 4-year- olds, smaller classes for elementary school children, mentors for middle- school students, and job guarantees for high school graduates. The National Alliance of Business, which gave seed money to the Cincinnati venture, is providing small grants and technical assistance to 11 other cities -- including Louisville, Albuquerque, and San Diego -- to create similar programs. Veterans of successful school/business ventures say that for a partnership to hold together, the following ingredients are essential: sustained top-level involvement from companies and schools; people from both sides who work full time to coordinate the project; shared goals and responsibilities; and the presence of a business intermediary to help move young people successfully from school to work. CAREFUL, though. Lack of coordination can defeat even the best-laid plans. Memphis was a classic example of a city long on good-will efforts -- adopt-a- school programs, youth employment programs, teacher award programs -- and awfully short on results. ''We saw we were just pouring money at the edges,'' says Carol Coletta, a consultant with First Tennessee Bank. This spring business leaders in Memphis went directly to school superintendent Willie Herenton to ask what his priorities were for the next three years. The business people inquired, ''What can we most do to help you?'' Herenton had three goals: to lower the dropout rate, to have 90% of third-graders performing at a third-grade level, and to increase the number of options a student had for attending school. Business leaders are just now organizing to help Herenton achieve these objectives. For all the attention American students are getting, they still lack something that most Japanese students have: a kyoiku mama, or education mother. ''The single biggest influence on a kid's ability to learn is parental involvement,'' says Jerome Rosow, president of the Work in America Institute. ''Research shows that the home outweighs everything, including intelligence.'' So now corporate America finds itself assuming one final role: surrogate mother. To help employees foster motivation and achievement in their children, Work in America is developing kits to distribute to 10,000 Employee Assistance Programs around the country. Through videotapes, learning games, and counseling, workers will learn how to help their children read and do homework. What more can business do? Constance Barkley, executive vice president of the New Orleans Metropolitan Area Committee, puts it best: ''In the end, there is no substitute for active, individual involvement, whether it is going to a voting booth and pulling a lever, or going to a school and talking to teachers, or getting involved in a child's life.'' Barkley knows better than most how individual actions, added together, produce results. Says she: ''What I've seen happening between the business community and the school community in the last two years gives me hope. In New Orleans you don't see people trying to assign blame anymore. Now everyone is racing to be part of the solution.''

CHART: NOT AVAILABLE CREDIT: ANDERS WENNGREN CAPTION: HIGH MARKS FOR NURSERY SCHOOL Since 1962, researchers with the Perry Preschool Program in Ypsilanti, studied 100 children, half of whom attended nursery school and half of whom did not. By age 19, big differences in academic and social skills were evident between the groups. DESCRIPTION: Percentage of children with preschool training and without preschool training who garner educational achievements, become involved in crime or go on public welfare; number per 100 who have babies by age 19 also noted; color illustration of two children, one with mortarboard and diploma, one without.