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Reader
Profile
Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase. How has the pressure to meet short-term earnings expectations impacted the corporate decision-making of public companies? Ability to consider business decisions with a view to the long-term is the premier reason private ownership captures the high ground. All public company C-suite executives live and die by quarterly earnings. That was my experience as well when I was CEO of two public companies. The mantra intones, “What have you done for me lately?” It is the tyranny of the short term; it terrorizes the minds of public company chief executives, especially in the world of earnings guidance. That sort of angst leads to some serious questions about how publics become hog-tied when compared to their cousins in the private sector, particularly in view of the recent economic meltdown. The CEOs of public companies, especially financial institutions, are focused on the short term as reported in annual 10K and quarterly 10Q filings with the SEC. Execs have traditionally been compensated with stock options designed to bet the ranch on short term results. A big run up in the price of my company’s stock, I win; a big fall off in price, I don’t lose anything. The tyranny of the short term, as investors have so painfully learned, has left many of them holding an empty bag. Ignoring the long-term in favor of immediate gains was the root cause of the 2008 collapse of Wall Street, pure and simple – the great unwinding of unprecedented over-leveraging. Private companies, in contrast, do not face the stress of answering to analysts’ expectations. What advantages do private companies have over public companies in terms of earnings expectations? The value proposition of long-term thinking afforded private companies is easily embraced. Shareholders are rewarded by management’s long view and efforts to pay lower taxes. The ultimate absurdity is that public company CEOs punish shareholders by paying more state and federal taxes in their efforts to improve EPS (and dump personal stock options.) Private companies are able to filter out the short-term noise to the pecuniary benefit of investors. They are also able to exclude the costs of complying with onerous Sarbanes-Oxley requirements and orchestrating SEC filings. Many successful small private companies have voluntarily established boards which have cherry-picked SOX best practices in an effort to encourage effective corporate governance. In what ways do private company boards function differently than their public company counterparts? First, strategy oversight is typically placed early on the board’s agenda, as compared to some public companies that place it last. A dead last placement means a strategy discussion commences as board members are closing board books and hurriedly rushing out to catch flights home. Second, advisors read their board books with a long-term view in advance of the meeting. Third, active and involved advisors are conversant about their industry, its practices and how their particular company fits. They work in lock-step with management in developing company strategy. Unlike the corporate mission, strategy is what you want to be when you grow up. Well-conceived strategy can be the biggest contributor to shareholder value. Is there a difference between how public and private companies manage risk? Even though much has been written about audit committees of public companies’ attention to risk, results have been unsatisfactory. The current recession has exposed the deficiency of the risk assessment process of prominent public companies. Witness the bankruptcy of venerable Lehman Brothers and lifelines tossed to Wachovia and Merrill Lynch. The best private companies have maintained an exemplary, case-hardened balance sheet that should serve as a take-home study for public companies. Processes in place to manage private enterprise risk, including the following, have tended to work effectively:
Do private companies have employee relations advantages over public companies? Even though a company’s major asset, nowhere does the human resource appear on the balance sheet. Private companies make employee retention a major goal. At successful private companies, a long view of the HR investment is largely responsible for their success. A sustainable competitive advantage is assured over the long-term by investing in people, which often dramatically translates into innovation, a superior product, superlative customer service and, ultimately, profits. Investing in people transforms the workplace. The reason for a HR wake-up call during these radical times is three-fold:
Because it requires a long-term commitment, public companies will frequently find it too challenging to adopt the best of the private companies’ ingrained habits. The siren song of quarterly and yearly earnings guidance is too compelling. But, to survive, public corporations require an injection of common sense and must develop greater vision in order to focus on the long-term horizon, which gives a clearer, more realistic perspective on prospects for growth, and focus on employees. Human resources require a financial commitment and a long-term view but will yield meaningful returns in employee loyalty and overall profitability. By paying careful attention to these elements, growing private companies have avoided the tyranny of the short-term that still holds public companies in its despotic, destructive grip. |
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| Phil
Johnston is a corporate attorney who has served as chief financial
officer or chief executive officer of 10 venture capital-backed
companies. As CEO of the 10 venture-backed technology turnarounds, he
led each of the companies to double-digit revenue growth. He was
previously chief executive officer of NASDAQ-listed Digital Recorders. Additionally, he has raised more than $100 million in private capital, served on the board of directors of five publicly traded companies, including a NYSE-listed public company, and 15 private boards. Phil is an SEC Audit Committee Financial Expert and was the chief government regulator of the $18 billion dollar North Carolina credit union industry. Phil is also the founder and co-director of the UNC School of Law Initiative for Corporate Governance. He was previously chief executive officer of NASDAQ-listed Digital Recorders. A prolific author, Phil has written extensively on corporate governance topics for national publications such as NACD and Directors and Boards magazines. He is the author of two books - the best-selling Success In Small Business Is A Laughing Matter, which Forbes magazine called the best book ever written about small business (now in its fourth printing) and a new offering which will be on bookstore shelves in June, 2009 entitled Biscuitville - the Secret Recipe For Building A Sustainable Competitive Advantage. Phil is currently President and CEO of The Center For Board Evaluations and serves as chief in-house legal counsel for Remote Light, Inc. Copyright © 2009 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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