There is a belief among experts that corporate governance at private companies is not as good as that at public companies, which are subject to all the rules and regulations that come with being traded on public markets. New research suggests that this old assumption may be misplaced, at least in the United States.
A new study looking at 200 of the largest private companies in the US finds there are “no significant governance gaps” between either public and private companies, nor between the largest and smallest private companies in the sample analysed.
The researchers conclude: “The governance of the largest private corporations is clearly not broken. In fact, it closely resembles that of public corporations on all metrics we examined.”
The study was undertaken by Asaf Eckstein and Gideon Parchomovsky, academics at the Hebrew University of Jerusalem and at the University of Pennsylvania Carey Law School, who wanted to test the idea that governance structures in public companies are generally “closer to the ideal” and that big private companies do better on governance than smaller outfits.
The pair looked across a selection of governance best practice markers, such as boardroom diversity, separation of chair and CEO roles, board size and the tenure of directors. They found few disparities that might suggest private company governance lagged behind.
When the research looked at how many women held the role of chair, it was 7% among the 200 private companies and 5.8% at the Russell 3000, an index of top public companies.
As for the chief executive’s job, women occupy 6.5% in the S&P 500 and 5.7% at Russell 3000 companies. Among the 200 private companies, the figure is 9%, with no difference between the largest and smallest.
But what about other key executive roles? The study found 16.5% of chief financial officers are women in the 200, ahead of 15% in the S&P 500 and 13.7% in the Russell 3000.
One mandate, two guvnors
Separation of chair and CEO roles is a perennial point of governance friction in the US. The study found 53.5% of the 200 companies separated the jobs, compared with 64% in the Russell 3000 and 52.8% in the S&P 500.
Board size was also examined, as it is often assumed larger boards signal poorer governance. The team revealed that the boards among the 200 averaged 5.94 people, compared with 11 in the S&P 500 and 9.2 in the Russell 3000.
Long serving chairs are also considered a red flag by many governance observers. The median tenure for the 200 is 13.33 years, against 9.7 at the S&P 500 and 9.5 years for the Russell 3000. It’s different, to be sure, but not radically so. Chief executive tenure is much the same.
The figures paint a picture of the largest private companies largely keeping pace with governance developments among public companies, though without the regulatory or investor pressure.
Here in the UK, regulators were so concerned about private company governance that they saw fit to developed a special code: the Wates Principles, introduced five years ago to deal with concerns.
They were designed to increase transparency, but many business observers said at the time that private companies “demonstrate genuinely high standards”.
As for Eckstein and Parchomovsky, they say their study should not be seen as proof that “all is good in the world of private companies”.
They add: “At the same time, our findings suggest that the largest private companies that have the greatest economic impact and set the tone for other private companies, care about their governance, invest in it, and constantly improve it.”