It seems to me there are a number of common elements that
exist in a good many of the financial scandals we have been reading about over the
past two years. The one that stands out
most for me is the fact the chief abuser of the public and shareholder trust is
the individual who was either the founder of the company or the person
responsible for its formation as an economic power. Why is that?
The answer to the question may lie in the
motivation behind the founder of the company’s desire to bring the company
public in the first place.
Just what does it mean to “go public?” Well, this is really the heart of the concept
of capitalism because it is the ability to raise “capital,” that is “money,” to
expand the capabilities of one’s enterprise: to build that new plant, to
develop that new product, to move into new markets. The difficulty for a founder is that it also
means giving up some of the ownership.
An entrepreneur is one who organizes and takes the risk
to establish an enterprise. That
enterprise is under their total and complete control and they answer to no one
but themselves (except, of course, for whatever governmental regulations might
exist for the industry in which they are involved). They also take all the risks and, rightly so,
reap all the rewards. However,
when they go public all that changes.
There are lots of ways to finance the expansion of a
plant. Commercial Bank loans have,
historically, been the most common but they come with some restrictions in that
the funds have to be paid back and the bank usually looks over your shoulder to
make sure you actually use the money for the purpose intended and that the
enterprise is financially sound. But if
you “go public,” as many Investment Bankers will quickly recommend (and their
motivation is a whole other issue), you sell shares of company stock to the
general public and they provide you with all the funds you will need and, best
of all, you don’t have to pay it back.
The problem for the owner is that now he has partners in
the form of stockholders who, for that share of stock, have agreed to assume a
portion of the risk that was previously totally the founder’s. Where, in the past, the founder could do just
about anything he wanted to with the company and pay himself anything he wished
and incur any business expense he felt personally justified, that’s not the way
it works when you no longer own the company.
The abuses that have occurred are a clear case of going
“public” but continuing to act “private.” Whether it be WorldCom, Tyco, Strong
or a host of others they have managed to have their cake and eat it as
well. That is not to say that all
companies that have gone “public” have owners that have failed to understand
their new fiduciary responsibility as stewards rather than owners, for just the
opposite is true. What these rogue
managers have done is manipulate the system to their advantage by stacking
their boards of directors who affirmed that management should serve as the “de
facto owners” and deem to them all the rights and privileges of a sole owner at
the expense of the real owner - the shareholder.
Where might the solution be? Perhaps if a Board of Directors were to be
held to a higher standard and, among other things, never permit a current or
former company officer to serve as chairman might be a good place to start.
© 2003 Timothy Holland First
Published:
Note:
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