The United States’ New “Public” Company
In a recent entry, I touched on American corporate governance. . The topic is worth revisiting, and I will continue to do so, because structural deficiencies largely explain the causes of today’s global crisis and are partly responsible for the creation of the new “public” companies in the U.S. and the rest of the world.
It’s worth noting that the U.S. corporate governance —or “non-governance”— model, is based on many shareholders that are very short-term investors. In fact, people who hold shares for a single day count just as much and vote just the same way as someone who has invested in the company for a decade. This is absurd. Shareholders are also completely atomized. This reduces their right to a say and a vote, and delegates excessive powers in an unqualified board of directors, co-opted by management and without a long-term vision.
This type of board tends to include people who are not up to the job because of the phenomenon of adverse selection, since accepting a post involves considerable personal risk and few proportional benefits.
With a situation like this, nobody controls or directs upper management, which soon enters into conflicts of interest with shareholders regarding things like executive bonuses and luxury perks like private airplanes, US$35,000 rugs, etc.
As we watch a plethora of cases —all pathetic— of sky-high bonuses being paid out at companies on the verge of bankruptcy like AIG, we should consider that these million-dollar prizes are just the tip of the iceberg of the excesses committed by top executives at big corporations.
Another grave structural problem is top corporate executives’ lack of a long-term vision. Executives aren’t kept on if they don’t present short-term gains. This forces them to take excessive risks to show short-term “results,” and even when they fail, they’re awarded another kind of multi-million-dollar prize: the golden parachute!
All these structural problems have been attacked using excessive, often absurd regulation, with very poor results and extremely high legal and accounting costs, which also atrophy and slow down business operations. The result is a perverse, destructive dynamic for value creation.
Many of the companies that failed due to short-term outlooks and top management excesses, under the auspices of this poor system of corporate governance, will be partially or completely nationalized as part of the government bail-out to prevent complete collapse. These are the new “public” companies, making it a good time to briefly review our terminology.
In the United States and Britain, “public” companies are firms listed on the stock market, and government-owned companies are called “government-sponsored entities” (GSE).
In Mexico and Latin America, the term “public company” is used to describe both the firms owned by the government and those listed on the stock market. In my opinion, it would be better to use the term “public” to describe the firms controlled by the government, and the term “listed” to describe the companies listed on the stock market and controlled by private individuals.
But today in the United States, the big banks and other companies that are getting help from the government —or rather, the taxpayers— are now really going to be “public” companies in all the senses of the word because they will be controlled by the government, even though the mandate isn’t so clear.
“Executives” of these kinds of companies will no longer feel like they’re executives because they’ll be subject to wage ceilingsjust like their public servant counterparts. Given government track records for efficiency, we can only imagine the pending impact on performance.
All of this is very unfortunate since the current environment requires discipline and entrepreneurial vision that create value, not additional bureaucracy.