Tension between owners and managers has been inherent in the public company since the beginning, notes Tony Jackson in his On Monday column in the FT. Private equity and shareholder activism are merely its latest manifestation.
But is the public company model broken? After 150 glorious years, is the limited liability joint stock company no longer fit for its purpose? Everyone seems to think they can do a better job, Jackson says, from shareholder activists to private equity marauders.
“The most obvious weakness is the so-called agency problem, whereby managers have a different set of incentives from the owners. One response to that was the rise of value-based management in the 1990s. Executive rewards should depend on results as measured by the shareholders. Of course, it did not work. Rewards went up a lot faster than the stock indices.”
But none of this is new — and irrationality on the part of both owners and managers continues to rein. Private equity is just the latest attempt to address the flaws of the public company model. But the ploy only makes sense at this point in the cycle, when money is cheap and corporate cash flows stable.
“The paradox is that when those conditions cease — when the outside world gets tougher — the pressure will come off the public company,” Jackson says.