Public companies came of age during the 20th century, flourishing as trade expanded and investment in the stock market broadened. The dream of a stock-exchange listing animated entrepreneurs, and the letters IPO acquired, for a time, iconic status. The history of business in that century is, in many ways, the history of public companies.

Will the same be said of the 21st century? Not necessarily. Though there are still many advantages to the publicly traded corporate form, changes in the legal, regulatory, and economic environment have driven up costs. The benefits of being public have gone down. I am not predicting the end of the public company, but the evidence suggests that it is already in relative decline. Following are some important trends that bedevil the publicly held corporation and threaten its dominance as the norm for corporate organization.

The rise of private equity and the management buyout

Many, many prominent publicly traded companies are no longer public. Consider leveraged buyouts (LBOs). These can be found in almost every industry, from casinos (Harrah’s Entertainment) to retailing (Claire’s and Petco Animal Supplies) to software (Kronos). Between 1995 and 2005, according to Goldman Sachs, LBO transaction values increased from $19 billion to $198 billion. Volume naturally diminished when the credit markets froze up, but many executives still see big advantages in operating their companies under private ownership.

Companies go private for a variety of reasons. One is the hassle factor of being public, such as the expense of complying with Sarbanes-–Oxley in the United States and different reporting requirements in other markets. Second, private companies can pay their managers more than they could as public companies, particularly when performance is outstanding. That helps to attract talent. Third, private companies have an advantage when it comes to keeping operational details and other strategic initiatives away from the prying eyes of competitors. And finally, notes Kevin Callaghan of Berkshire Partners (a $6.5 billion private-equity company), private companies have a longer time horizon and can therefore undertake more fundamental changes than they could as publicly traded firms, which feel the pressure to produce earnings growth each and every quarter.

A related trend is that venture capital–backed companies no longer see going public as the inevitable exit strategy. In many cases, these companies remain private until they are purchased by another company.

Lower capital requirements for new businesses

New technologies and management innovations in many industries have reduced the amount of capital required to get to market. Consider software: with many components readily available, the rise of open-source software development, and the availability of highly skilled talent in China, Eastern Europe, and India, launching a new software business does not require the same level of investment it once did. Large capital investments are still the norm for some new technologies, such as biofuels and semiconductor manufacturing. Even here, though, there are opportunities for partnering: new firms do the design and initial development and then find other companies with large manufacturing footprints to do the production work.

To the extent that less capital is required to get in the game, particularly in new and emerging industries, there is less reason for companies to embrace the public organizational form, whose reason for existence is largely to facilitate the raising of capital.

The unwise, unnecessary—and ubiquitous—idea of shareholder primacy

Q: What are the top priorities of almost all public companies?
A: Shareholders, shareholders, shareholders.

This does not have to be the case. There is no legal basis for considering only shareholder interests when making business decisions, as Constance Bagley, a lawyer teaching business law at Yale’s School of Management, has argued. But the facts hardly matter: if everyone believes that shareholders must come first, and behaves accordingly, the legal, business, or ethical case for considering other constituencies is going to get short shrift.

Private companies do not have to confront public shareholders. They do not have to spend money on investor relations departments. Their CEOs and other senior managers do not have to spend time making presentations at analyst meetings and industry conferences. Executives can view longer time horizons in making decisions, so they are less prone to bending to the peer pressure that has resulted in, for instance, waves of layoffs even though evidence shows that the economic consequences of downsizing are quite negative.

Even absent public scrutiny and public pressure, some private companies will undoubtedly make economically inefficient choices. They will go out of business. Others, however, may be able to do things their public counterparts feel they cannot—like taking care of customers and employees. That is nice; it may also be a significant competitive advantage. In The Loyalty Effect,¹ Fred Reichheld proved there is a strong connection between customer retention and profitability. Customer retention, in turn, depends on employee retention. Patient capital is needed to build this kind of loyalty, and public capital is not known for its patience.

Tax considerations

Finally, there are some simple tax considerations that dictate against the publicly traded corporate form. Corporate profits in the United States are taxed at the corporate rate when they are earned. Then, when those profits are distributed to shareholders, for instance in the form of dividends, they are taxed again. Various private organizational forms, such as S corporations and limited partnerships, pass deemed income to the partners or shareholders in a way that ensures that the income is taxed only once, at the level of the individual. Although these forms are used extensively for professional service firms, they are also used for other types of businesses. The tax advantages provide an economic incentive to stay private.

This list is not, of course, exhaustive. But taken together, the items make the case that the future will not necessarily be like the immediate past, with public companies bestriding the world economy—a club that the best and brightest want to join. The advantages of being public are shrinking; the power of public companies, then, will inevitably fall.

¹ Frederick F. Reichheld, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value, Cambridge, MA: Harvard Business School Press, 1996.

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