Non-Public Firms Also Face Exposure

Public company board directors dream of taking their company private to escape onerous regulation, the high cost of compliance, and the sometimes conflicting demands of different shareholder groups.

Our recent Directorship Boardroom Roundtable, “Private Companies: Compliance and Liabilities,” convened a group of leading directors and executives to look into this issue and answer such questions as whether private companies would be well served to remain private, especially in the current environment. In the absence of shareholder lawsuits, what are the real liabilities for private companies? What are the best practices public and private companies can learn from each other, and what types of issues should directors and advisers be attuned to?

Leading the discussion was Brian Inselberg, who serves as president of AIG Executive Liability’s Corporate Accounts and Private & Non-Profit divisions. He quickly listed the primary reasons for becoming a publicly traded company: access to capital, new forms of compensation for employees, a potentially higher profile and wider following, the diversification of personal holdings, among others. Inselberg noted that liability exposure remains a function of size and structure and that being private doesn’t translate to reduced compliance risk.

While the risks are typically smaller for private companies, he noted there are potential areas of compliance risk that private-company management and board directors would be well advised to pay particular attention: data breach and data privacy; transparency and independence of board; regulatory issues; and the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person and certain foreign issuers of securities to bribe a foreign official for the purpose of attracting or retaining business. (For more information on the FCPA, go to www.usdoj.gov/criminal/fraud/fcpa.)

The Public/Private Debate

The decision to go public or stay private (or go private via a private-equity firm) comes with a set of pros and cons. Robert La Blanc, a former partner at Salomon Brothers, and now an active director on multiple boards of public and private companies, was asked how going public changed the once venerable Wall Street investment bank. “The management committee at the time only had partnership money and they were looking at the model of a Citigroup which had a larger base of clients…The desire to go public was access to capital so that we could play among these big players.” Indeed, access to capital is usually first on the list of benefits to going public.

Georges Ugeux, chairman and CEO of Galileo Global Advisors and former head of the international division of the New York Stock Exchange, countered that going public doesn’t always have a positive effect. He said going public “completely changed” the culture of Salomon, which was later bought by Smith Barney, and eventually became part of the corporate structure its former management had aspired to emulate: Citigroup. “It changed from a culture where people worked for the good of the company to one where people worked for what was good for the individual. Within six months, it was a totally different firm,” Ugeux asserted.

And companies that go private or stay private to avoid compliance and regulation headaches might be engaging in a bit of wishful thinking. “You are still going to have regulatory exposure and you still have the need for a compliance program,” noted Directorship Publisher Christopher Clark. For example, he said that any company that has $5 million or more in government contracts needs to have a compliance program. And in certain industries, he said, class actions and antitrust issues can be as significant for private companies as they are for public companies.

“What you’re saying then,” said Jeffrey M. Cunningham, chairman and CEO of NewsMarkets, the parent company of Directorship magazine and Global Proxy Watch, “is that there isn’t a huge difference in liability, but as a private-equity investor what I need to carefully assess is the risk-control environment for private companies.”

Some Roundtable participants pointed out that private companies and especially non-profits and family-owned businesses are often guilty of lessvigorous or even sloppy financial controls and bookkeeping, raising the specter of liability and risk. Joseph Fichera, the founder and CEO of Saber Partners, offered the contrasting view that from a risk standpoint, private companies backed by venture capital might actually be in a better position than public companies.