As the nation gets ready for a new administration to take office and for Congress to get back to the important business of legislating, policymakers need to make sure that one agenda item doesn’t get lost in the shuffle: addressing the drastic decline of public companies in the United States over the last two decades.
Last week, the Wall Street Journal—citing analysis from the University of Chicago—reported that the number of U.S.-listed public companies has declined by more than 3,000 since 1997, and that the United States is home to roughly the same number of public companies as existed 35 years ago. (Forgive us if we refrain from any “The-1980’s-is-calling-they-want-their-number-of-public-companies-back” jokes.)
While there is no single reason for this decline, what is clear is that when it comes to corporate governance laws and regulations, Washington has made the public company model increasingly unattractive for businesses. After all, staying private looks like an awfully good option if the alternative means one day having to comply with Dodd-Frank’s disclosure requirements, dealing with endless contested board fights, or having to grapple with shareholder proposals from a minority of special interests intended to embarrass the company you spent years building.
This week, the U.S. Chamber focused on two important issues that impact public companies, their shareholders, and the U.S. capital markets: proxy advisory firms and the SEC’s attempt to mandate the use of universal proxy ballots during proxy contests.
Today, the Chamber’s Center for Capital Markets Competitiveness (CCMC) and the U.S. Chamber of Commerce Foundation – in conjunction with NASDAQ – released our second annual Proxy Season Survey to better understand the outsized role that proxy advisors play in our system of corporate governance. Amongst other data, the Survey – perhaps unsurprisingly – shows that companies still find it difficult to establish open lines of communications with proxy advisors, who wield enormous influence in corporate governance and who continue to operate with conflicts of interest and little transparency. For example, as compared to the 2015 survey, companies that requested a meeting with proxy advisory firms to discuss their concerns were 15% more likely to have their request denied, and those that were granted a meeting often times found that it wasn’t very productive. And just as in 2015, a distressingly low number (25%) of companies believed that proxy advisory firms carefully researched particular issues. Companies also reported that they were given a short period of time to provide input to proxy advisors, ranging from one hour to a month, with 1-2 days being the most common timeframe reported.
Clearly, there is more work to be done in order to improve the proxy advisory system in the United States. The Survey is the latest iteration of the CCMC’s efforts to improve this system, which have included a 2013 document on best practices for the industry, as well as a 2015 report to assist market participants in dealing with SEC guidance related to proxy advisors.
And earlier this week, the CCMC submitted a comment letter in opposition to the SEC’s proposed rulemaking on universal proxy ballots, a vehicle which would empower special interests to launch endless proxy fights in order to advance their own agendas. As with so many other “well-intended” rulemakings, the ultimate loser of a universal proxy rulemaking would be the rank-and-file investor who is simply looking to earn a decent return on their investment to pay for college tuition or to help secure their retirement. The SEC would be better served by focusing on, for example, ways to increase retail investor participation in the proxy process.
To be sure, the decision to become a public company involves a number of factors, many of which (e.g. market conditions, competitive pressures, cost of capital) are outside the control of the company and Washington. But for those decisions that can be controlled – i.e. the laws and regulations that public companies must live under – there is plenty of opportunity to improve the regulatory environment for businesses that may be eyeing an IPO in the future.
So why does all of this matter? Put simply, the drop off in public companies means fewer jobs, decreased investment opportunities for average Americans, and less overall growth for our economy.
A 2012 study from the Kaufmann foundation found that from 1996-2010, the 2,766 companies that went public in the United States cumulatively increased their employment by 2.272 million employees, which equals 822 jobs per company. The job and revenue growth that results from going public allows these companies to reach their full potential and produce the next breakthrough technology or life-saving medical treatment. Businesses choose to remain private or to be acquired for a number of reasons, but if more businesses are shying away from the public company model because of the challenging regulatory environment, that is a significant problem that requires a serious response from Washington.
The CCMC firmly believes that—while not a cure-all—the implementation of sound corporate governance laws and regulations will help arrest the decline in U.S. public companies and once again help make an IPO the ultimate dream of any entrepreneur. The CCMC is eager to get to work in 2017 to help preserve the reputation of the U.S. capital markets as the envy of the world, and one of our great national assets.
