So, Why Be Public?

Directors and Boards, Winter, 2004

6 Pages Posted: 4 Mar 2004

Abstract

While pundits have written much about the causes and consequences of infamous recent scandals such as Enron and WorldCom, one thing stands out. They all involved a fundamental breakdown in agency - the persistent, inherent problem all corporations face in aligning the interests of those who manage the company (executives) with those who own the company (shareholders).

Once considered primarily an academic issue, agency costs arose prominently in the cases when the interests of managers and the interests of shareholders diverged dramatically. While the ruminations of academics may be of distant interest to board members, mastering agency costs must stand at the top of any board's agenda. As the duly elected representatives of a dispersed and varied group of shareholders, directors must arbitrate between the shareholders' interest and the very real market constraints executives contend with daily. Indeed, boards sit at the intersection of this historic conflict. Managing - or, at the very least, understanding and accounting for - agency costs, then, becomes a priority for all boards.

Sarbanes-Oxley is only the most recent of a number of reforms that, cumulatively, greatly restrict things like holding companies as an investment form. For reasons that may have made sense in the past, the ability of investors to hold large stakes in companies was limited. However, in many cases, those accreted prescriptions for preventing harm have created inflexibility and resulted in stagnation in the way we fund companies. In short, while many things have changed around the corporate form, the form itself has changed little.

Why be public? is a question more and more companies have been asking. Many of the traditional advantages of being public are no longer valid, and the mounting costs all the more obvious. The Wall Street Journal reports that a record number of companies, over 400 at the time of the story in 2003, have "deregistered" their stock - freeing themselves from the burdensome corporate reporting requirements of Sarbanes-Oxley and other regulations. Indeed, for these companies, many of the traditional advantages of going public are no longer valid, and the mounting costs all the more obvious. When one reviews the historical rationales for companies being public in the first place, however, I believe that the evolution of the capital markets, compensation policy, and other factors render most mute. The challenge now is how will public companies attract executives with the capability of entrepreneurs if no means exist to pay them as such.

Keywords: Governance, Agency, Sarbanes-Oxley, Control

Suggested Citation

Fuller, Joseph, So, Why Be Public?. Directors and Boards, Winter, 2004, Available at SSRN: https://ssrn.com/abstract=499942

Joseph Fuller (Contact Author)

The Monitor Company ( email )

Two Canal Park
Cambridge, MA 02141
United States

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