Another effect of SOX: America going private

  Bill Sjostrom refers to a NYT article that quotes hedge fund manager is quoted as suggesting that buyout funds are appropriating profits that should go to public shareholders. Sjostrom says that can’t be in the longrun because of competition in the buyout market.

I’m sympathetic with that view, but I think there’s a bigger question. Whoever is getting the profits from the switch to private ownership, it’s clear that there are such profits – that is, the costs of being public increasingly outweigh the benefits, even for big firms.

The NYT article cites SOX, but it also mentions other problems. It quotes one executive as saying, "Do I want a board of people who are owners that want to make the business better, or a group that acts like scared regulators? I'd much rather have a strong businessperson on my board than a Harvard professor who is an expert in corporate governance who only wants to talk about process." It also says” Private companies can pay executives more without having to face the wrath of shareholders or the public.” This, of course, will increase with the SEC compensation disclosure proposal.

So if public corporation shareholders are sharing in the wealth from going private, who cares? I’ve talked about the increasing trend away from public ownership as a tax on entrepreneurship. For big public companies going private, there are even broader concerns. By discouraging public ownership, regulation is decreasing the availability of the risk diversification and market efficiency benefits of public ownership. Also, there’s a political advantage to Americans having a direct stake in public companies, rather than very indirectly through, say, pension funds.

The dynamic public markets in the US have long been an important key to our success, as compared to the more institution-driven markets virtually everywhere else in the world. Improvident regulation is killing the goose here. Meanwhile, capital markets and public ownership are popping up elsewhere.

As the NYT article points out, it’s not just SOX. But I think we’ll look back in a few years and see SOX as a kind of tipping point. I hope by that time something has tipped us toward saner corporate governance regulation.

Comments

[Bruce MacEwen]

See my related post about the impact this is having on law firms:

http://www.bmacewen.com/blog/archives/2006/01/operator_get_me.html