Short-Term Pressures in Public Companies and the Rise of Private Equity
Public corporations often claim a commitment to broader stakeholder value, but their actions tell a different story. Despite efforts like the 2019 Business Roundtable (BRT) petition, which saw 181 CEOs pledge to embrace principles beyond profit-driven governance, the reality has been far less transformative. Instead of prioritizing long-term growth or stakeholder interests, many companies remain tethered to shareholder profit and quarterly earnings.
The Shift Away from Public Markets
The decline in public company listings underscores the waning enthusiasm for the governance principles championed by the BRT. In 1985, over 7,400 new companies listed on the NYSE, AMEC, and NASDAQ. Today, those numbers have dropped by 50%. This stark reduction reflects the increasing challenges of operating as a public company, driven by several interrelated forces.
The Forces Driving the Decline
- Short-Termism
Public companies often succumb to the relentless demands of short-term market expectations. Shareholders and analysts closely scrutinize quarterly earnings, leaving little room for long-term planning. This myopic focus diverts attention and resources away from innovation and sustainable growth. - Compensation Practices
Executive compensation further entrenches short-termism. In the U.S., over half of CEO compensation is tied to share ownership or stock performance. This incentivizes leaders to prioritize immediate shareholder returns, often at the expense of the company’s future stability. - Shareholder Activism
The rise of shareholder activism has added another layer of pressure. With nearly 1,000 public campaigns targeting corporate decision-making, companies are constantly fending off challenges to their strategies. This often results in management prioritizing quick wins to appease activists, rather than pursuing long-term initiatives. - The Pull of Private Equity
Private equity has surged as an attractive alternative to public markets. In Q1 2023 alone, approximately $60 billion was invested in private equity, offering founders and companies access to significant funding without the scrutiny and pressures of public markets. Private equity allows companies to grow and innovate without being beholden to quarterly earnings reports or activist shareholders.
Implications for Corporate Governance
The shift from public to private markets has profound implications for governance. Public companies are under increasing strain to navigate short-term pressures while maintaining long-term vision. At the same time, private equity’s rise has led to fewer publicly traded companies, concentrating governance challenges within a smaller subset of firms.
Boards must find ways to combat short-termism, whether by revising compensation structures, fostering transparency with activist shareholders, or emphasizing sustainable growth over immediate profits. Without these changes, the decline of public companies will likely continue, reshaping the corporate landscape.
A Call for Governance Reform
The Business Roundtable’s principles, while noble in intent, have yet to create substantial change. For meaningful reform, companies need to rethink their governance models to prioritize long-term value creation. Otherwise, the trend of shrinking public markets and the dominance of private equity will only accelerate, leaving the promise of stakeholder-focused governance as little more than a missed opportunity.
By addressing these challenges head-on, corporate leaders can help restore balance to public markets, ensuring they remain a viable and competitive option in the evolving financial ecosystem.