The curse of the big, publicly-held company

The bigger the company, the more lavish its executive perks. And the bigger the company, the more likely it will be a publicly-held company.

Just about every corporate malfeasance seems to have been committed by those at the top of the publicly-held toy company, Mattel over the years – accounting fraud, lavish entitlements, golden parachutes given despite disastrous management reigns, corporate property theft, and endless litigations. These and other ‘dirty laundry’ are aired in the book, “Toy Monster, the big, bad world of Mattel” by Jerry Oppenheimer.

Now, the book is mostly about the personal backbiting and internal politicking that went on at Mattel, and as such, are not the main concerns of this site. But since I have read it (and it’s an interesting read for those of you who like reading about insider dramas at big corporations), I want to raise the human interest themes of the book to a more macro-level question: Just how much better governed are public companies than privately owned ones?

We know that going public tends to bring in more professional management, who should be bringing in best practices, to a company. But once you have management who are company insiders but are divorced from the fiduciary duties coming from true personal ownership of the firm, and who are in a position to negotiate for themselves better returns (whether in the form of salaries, wages, or stock options) than its small, passive shareowners, are we at all surprised that these things constantly happen at the large public companies?

Stock options were supposed to have better aligned company management interest with the interest of the small shareowner. But still, this didn’t prevent unscrupulous executives from writing for themselves backdated options, options with low exercise prices, or instituted other methods that ensured their options were never ‘out of the money’, regardless of what happened to the stock in the long-run (meaning in the years after they have left the company).

Now, just because a company is public doesn’t mean it automatically gets the best executives who can bring in the best practices. In reality, being a public company actually meant the company can now afford to participate in bidding wars to lure ‘rock star’ CEOs, those who are best at promoting their agenda and in keeping themselves in the limelight.

Are we then surprised that as companies got bigger, more politicking and backbiting went on, and those who managed to get to the top often are those who really are the most narcissistic, opportunistic go-getters? It’s the shareholders who end up paying more, to get these people - who end up driving the company to the ground.

And who is to keep the CEO from looting the company, usually by negotiating lavish perks and a golden parachute for himself? Is it the Board of Directors? Not if they are cronies who also profit from giving these concessions to the CEO. We see a bit of that also in the Mattel story.

So you ask me, where do I think the real wealth creation will come from in the years to come? As far as 'public wealth creation' is concerned, without a doubt, my answer is, from the smaller companies, as they always have been ever since companies started becoming public. Who should we be looking out for in terms of providing better economic incentives? I don’t have to repeat myself on that.