US Regulatory Structure Discourages Companies From Going Public

Declining Trend of IPOs

• 📉 The number of companies choosing to go public is decreasing, which is a long-term problem for the country as public markets are essential for savers to participate in economic growth.
• 💰 Companies are staying private for much longer, with valuations of private companies reaching unprecedented levels (e.g., $200 billion).
• 💡 Historically, going public was the primary way for successful private companies to provide liquidity to early investors; now, selling the company is a more common exit strategy.

Public Company Governance as the Culprit

• 🏛️ The complex system of public company governance, where various groups create rules for managing public companies, is identified as a major deterrent.
• 🧩 These rules, covering aspects like director selection, executive pay, and climate change responses, have accumulated over decades, creating a hazardous environment for navigation.
• 📚 Extensive research suggests that many of these corporate governance rules do not produce better company outcomes, make companies more valuable, or effectively manage underperforming CEOs or executive pay.

Impact of Governance on Business Operations

• 🌐 The accumulation of governance rules is seen as interfering with how managers would prefer to run companies, making operations expensive and cumbersome without tangible results.
• 🤝 Private companies that are acquired by larger firms can leverage the acquirer's existing infrastructure to manage regulatory and governance concerns, a benefit not available to companies trying to navigate these issues independently.
• ⚠️ While ESG regulations have faced pushback, the governance aspect of ESG is a significant factor, with rules impacting companies financially and requiring attention.

Executive Compensation Trends

• 📈 Executive compensation began to significantly increase in the 1990s, coinciding with changes in tax rules, the influence of proxy advisors, and institutional shareholders.
• 💰 Increased executive equity exposure and the drive to pay for performance have led to massive increases in executive pay, which had been relatively flat for decades prior.
• 🧐 Despite the association of various governance practices with pay increases, these efforts have not demonstrably improved company performance or shareholder value.

Future Outlook and Alternatives

• 🚀 There is optimism that mistakes in public markets can be fixed to make them as compelling as they were in the 1980s and 1990s.
• 🌐 If making public markets more attractive proves impossible, alternative ways to give average individuals exposure to private markets will be necessary to ensure they don't miss out on economic growth.
• 📊 While CEO pay is an optics issue, it is not considered a primary factor that significantly impacts a company's bottom line or overall costs compared to other expenses.