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The long view

Starting in the mid-1990s, the number of U.S. public companies began a steep decline. By 2012, the tally of listed firms was 4,100, down from 8,000 a decade and a half earlier.

Today, publicly traded companies account for only one-third of all private-sector employment in this country.

Do public firms deserve all the attention they get?

Yes, they do. One-third of the nation’s private-sector jobs is a very sizable number. Ninety million is another big one; that’s how many Americans are public company owners through holdings in mutual funds, pension plans and individual investments.

So, most of us have a stake in good governance of these firms. But what exactly does that mean?

Over the last year, a group of prominent CEOs—Warren Buffett, Jamie Dimon and Mary Barra, among them—has wrestled with that question privately. Now, they have delivered an open letter and set of “commonsense principles” of corporate governance.

The principles cover a wide range of concerns including management pay and transparency in public reporting. Many of the recommendations are neither surprising nor likely to spark controversy. But not all.

Take this principle regarding stock-based compensation: “All compensation, including equity compensation, is plainly a cost of doing business and should be reflected in any non-GAAP measurement of earnings in precisely the same manner it is reflected in GAAP earnings.”

The group also believes “financial markets have become too obsessed with quarterly earnings forecasts.” Thus, public firms “should not feel obligated to provide earnings guidance” and ought to avoid “short-term decisions to beat guidance (or any performance benchmark).”

Creation of shareholder value is a bedrock concern, but it must be lasting value. As the letter states: “Our future depends on these companies being managed effectively for long-term prosperity.”

Trust in public companies has been shaken by exorbitant CEO pay, accounting scandals and short-termism. These principles could help remedy that.

7/29/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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