Private vs. Public Companies

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Private: The Customer is Always Right

So for companies that do not have to answer to public shareholders, that old adage can guide them to profitability. Private companies know which side the bread is buttered on and  rational economics prevails, or the business goes under.

Nobody cares about potential explosive earnings growth at some unspecified future date of a private business. Are the customer’s needs being met today? Is that generating more revenue than are going out the door as expenses? If so, all is well. If not, the business needs to reign in costs and shore up revenues or it faces the inability to continue as a going concern.

Public: Shareholder Value Uber Alles

To public companies, all that matters is the share price. If management can undertake an action today which will screw the customers but bump the share price (i.e. laying off support staff thus making customer wait times longer), they’ll do it. It’s not even an option: if they don’t take action to prop up the share price then they are violating their fidicuary duty to its shareholders. They may even face a lawsuit or attract some meddlesome shareholder activist.

To public companies, the customers are not the butter on the bread. They are cells in a spreadsheet. Cells which compete with other cells and whichever cells move the needle of the share price higher now (not in the future), wins.

The overriding imperative to boost the share price at all costs is reinforced by executive compensation schemes that reward management with stock options which themselves increase in value as the stock price goes up.

For these public companies all priorities are aligned: on moving the share price up or otherwise maximizing shareholder value. In extreme cases this can even mean the business should liquidate itself and return the capital to shareholders, if they decide it’s the best way to realize their value.

(Personally, I champion the sanctity of property rights. So if public companies are the property of their shareholders, who cares, right? Right. But the point of all this, is that when the shareholders in public companies trend toward extremely short term bias, the end result is a systemic structural myopia toward short-term share price fixation, which drastically changes the nature of “investing”)

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One response to “Private vs. Public Companies”

  1. JOP says:

    Wonder if you would shed light on the following in order to compare:
    1. What is the value of nation-state assets and holdings?
    2. What is the value of corporate and transnational corporate assets and holdings?
    Thank you

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