Back at Square One
Still, boards have many reasons to remain cautious. As we have so painfully learned, assuming such solutions will authoritatively address the failings of a complex system would appear naive. With the limitations of stock options, at least as generally conceived and implemented, now laid bare, we find ourselves back at square one. No instrument has emerged that consistently causes executives to bring a perspective similar to that of owner/operators to the stewardship of assets or the management of risk. In short, the agency dilemma remains unresolved.
Many, many observers have offered potential solutions. Some seek to address the issue of agency directly. Other prescriptions, including those embedded in the recently passed Sarbanes-Oxley bill, seek to increase transparency in financial reporting and strengthen the supervision of executives by boards. Although most of these provisions have merit, they raise more fundamental and often unasked questions: Can we solve the agency problem definitively and, if not, why do we remain so wedded to the form of the public corporation? In short: Why be public? And why, when we have witnessed so much innovation in business practice, has the corporate form itself been so static?
The reasons for posing these questions go beyond the problems posed by agency. Over the past several decades, the costs of being public have risen steadily. Sarbanes-Oxley adds another tranche of substantial new costs to being publicly traded. New rules and restrictions relating to audits and accounting firms, enhanced reporting obligations, new standards on qualifications for board membership, and other regulations add to the already high costs associated with being public. Add those to many other costs—some direct, some hidden—associated with public status that have emerged in recent years, such as the costs associated with fending off the trial bar. The cumulative costs of being a publicly traded company have mounted steadily.
At the same time, we have seen little of the dynamism in corporate forms that one witnesses in other domains in which costs have mounted for large companies. That reflects both a lack of originality and a welter of regulations meant to stop the accrual of wealth by fraudulent means that greatly limit the corporate form. Sarbanes-Oxley is only the most recent of a number of reforms that, cumulatively, greatly restrict things like holding companies as an investment form. For reasons that may have made sense in the past, the ability of investors to hold large stakes in companies was limited (as discussed in “Erosion of the Power of Large Shareholders”). However, in many cases, those accreted prescriptions for preventing harm have created inflexibility and resulted in stagnation in the way we fund companies. In short, while many things have changed around the corporate form, the form itself has changed little.
So, Why be Public?
This is a question more and more companies have been asking. Take as evidence a report in The Wall Street Journal that shows a record number of companies, over 400 at the time of the story in 2003, have “deregistered” their stock—freeing themselves from the burdensome corporate reporting requirements of Sarbanes-Oxley and other regulations.