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E-MailLast month I published this op-ed in the Financial Times questioning whether the push for greater “shareholder democracy” may end up harming public investors by driving companies into the arms of private equity firms. After assessing the substantial increase in private equity activity in recent years, the piece concludes:
There is reason to suspect that the modern trend towards greater “shareholder power” has gone too far and is beginning to harm the very shareholders it was designed to protect. A certain level of investor protection and power is, of course, essential to an honest and healthy public market. But you can have too much of a good thing. The buyout trend suggests we may already have too much “shareholder democracy”–at least, too much for shareholders’ own good.
2 Comments
I enjoyed Professor Stout’s provoking and thoughtful piece (though I enjoy her journal articles more). However, I would pose the following questions:
1) Private equity shops typically have an intermediate term horizon, so any firm taken private can be reasonably expected to eventually return to the public market. The WSJ Monday reports that 1/3 of IPOs this year were PE sponsored. The NY Times last Sunday noted a study that PE sponsored firms tend to outperform other companies, probably due to residual holdings that provide incentive to the PE fund to continue to oversee management. If shareholders get a premium when it goes private, and a premium when it goes public again, then where’s the cost?
2) Stout’s team production model with Professor Blair emphasizes stakeholder roles in the corporate existence. If the Chrysler buyout represents a new era of stakeholder/management affiliation, why worry about shareholders anyway?
3) Buyout shops seem to make a lot of cash for pension funds, and also minimize the agency costs between the intermediary and the ultimate beneficiary. Shouldn’t this be measured against remaining costs to shareholders that Stout identifies?
I am, as usual, confused. The op-ed has an implicit assumption that an equilibrium with more public firms is better than one with fewer public firms. This may not be true. The real question should center on what ownership structure promotes economic efficiency for which firms. Perhaps all we are seeing is a moving of demarcation between firms that are optimally public and those that are optimally private. This may be bad, or it may be good, as we have no idea that the line was in the optimal location before. Moreover, the private equity firms must get their money from somewhere. Some are already talking about public offerings, which will (1) give small investors a chance to invest and (2) make them start to a bit like diversified investment opportunities.