Private Thoughts Is the Tide Turning? the Over-Regulation of Corporate Governance Could Hasten the Demise of the Public Company and Push a Widespread Move to Private Equity Enterprise

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While New Zealand Exchange (NZX) chief executive Mark Weldon last month bemoaned the current drop in the volume of share trades, some observers are asking if there is more to the collapse than just a slowdown in the economy. Are public listed companies losing ground to private equity?

The private equity market in the United States last year invested US$302 billion compared with about US$100 billion just four years earlier. And in Australasia, private equity firms are growing just as rapidly and becoming a much larger and more central part of our business landscape. Here in New Zealand, as Management magazine went to the printers, Australian private equity investor CVC Asia Pacific was making a $160 million takeover offer for local fast-food company Restaurant Brands.

According to Auckland-based investment banker Rob Cameron, the shift is an outcome of the stifling and costly impact of excessive governance regulation and compliance. "The private equity market is becoming more competitive," he says. "Private equity now represents the 'natural' alternative to the open [public] corporation."

Cameron believes private equity firms are getting "increased attention" from investment bankers and other transaction advisers because their "decisive style and increasing share of transactions" make them attractive to deal with.

And rather than simply impeding economic growth and employment, as some commentators claim, poorly conceived and implemented regulation of publicly listed companies is:

* driving more talent and financial resources to private equity firms; and

* leading to the 'eclipse' of the open corporation as the dominant form of business organisation.

A growing number of companies are asking the question: why go public? Cameron thinks there are good reasons why more companies now, and increasingly, will reject the public listing option.

Increased governance regulation is at the heart of a growing sense of organisational dissatisfaction, according to Cameron. There is, he says, a presumption that poor financial performance and lost investor confidence in the US are the result of problems with market regulators and that "market failures" are endemic to the capitalist system. There is also a belief that failures can "only be addressed by regulations requiring increased compliance with good practices".

A few corporate failures do not constitute a market failure. And, says Cameron, the recommended solutions seldom address what practitioners see as the key challenges facing boards in fulfilling their governance role and responsibilities. In his opinion, poor regulatory responses will "stimulate" a shift to "closed" (private) organisations at the expense of "open" or public listed companies with dispersed shareholdings.

In a broad sense, investors are having to think about what is the most appropriate organisational architecture to deliver high performance in today's market. Organisational architecture is concerned with two issues in particular:

* how to ensure the most capable people have both the authority and the information they need to make the best decisions; and

* how to ensure that all organisational decisions are aligned with the objectives of the business and its owners.

There are, broadly speaking, just two forms of organisation--closed and open. The first includes sole proprietorships, partnerships, private companies, cooperatives and private equity firms. Open corporations on the other hand, usually have a wide dispersal of ownership and are often publicly listed. The difference between the two relates primarily to the degree of separation between ownership and control.

There is limited separation between ownership and control in closed corporations, whereas the opposite applies to open corporations in which ownership and decision making are specialised and delegated--the division of board and management. …


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