Second Reason to Go Private: Corporate Governance

Know More: Investment Banking 2.0, Investment Banking

In short, the second reason to go or remain private is two names: Sarbanes-Oxley.

This law, which creates huge burdens for public companies, fundamentally changes the economics of being public. Without suggesting that this is a complete list, the law requires the following:

Whistle-blowing: the law requires that public companies create a process for employees to alert an independent member of the board of directors to any concerns
Officer Certifications: CEOs and CFOs are now required to to certify, subject to civil and criminal penalties, that the financial statements are properly stated
Internal Controls and Audits: the law set out new standards for internal controls and audits
404 Audits: section 404 of the law requires a thorough audit of the financial system and controls, typically at very high costs
Ban on loans to officers: the law also bans loans to officers
Independent Board Members: the law requires a majority of independent board members for most companies
Independent Audit Committees: the law also creates standards for the audit committee, including a strict definition for financial experts serving on the committee

It is important to note that these burdens are just the new burdens. A public company has traditionally needed to have independent audits, provide quarterly and annual reports and to comply with a host of SEC regulations that were challenging before Sarbanes Oxley.

Simpler corporate governance is a big reason to go or remain private.

Many of these reforms were much needed to protect the investing public. Loans to officers? Give me a break. Why should an officer get a loan, most likely at a preferential rate, from his employer? That is what banks are for. Also, many of these loans were later forgiven completely. As an o/s passive minority shareholder, i like every one of these requirments. If you can't afford this extra administrative burden, then by all means you should go private.

Posted by: Parkite | October 1, 2006 10:04 PM | Permalink to Comment

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