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Privately Held Companies Are More Trustworthy

Sat, January 19, 2013 1:30 PM | Deleted user
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Andy Serwer, the Managing Editor of Fortune Magazine, was on Morning Joe on January 17, 2013 promoting the new 100 Best Companies to Work For issue. This list is created in large part by an employee trust survey. Serwer was asked why so many of the companies listed are privately held. Do they have an advantage? The answer is yes they do. Privately held companies are inherently more trustworthy for one major reason: they are under less pressure by investors to manage the business for each quarter so they take a longer-term view.

What makes a company that takes a longer time horizon in decision-making more trustworthy? Trust is much more likely where there is an alignment of interests and incentives. When we take the longer-term view, there tends to be more alignment among stakeholders. This is the trust inducing rationale for bonus claw back provisions - create a disincentive for an executive seeking short-term benefit by creating a longer-term problem that someone else will have to solve. During the global financial crisis we learned of the expression “IBGYBG” in some emails at the ratings agencies. IBGYBG stands for “I’ll be gone, you’ll be gone” meaning lets do the deal, get the credit and let the next poor sucker sort out the disaster later. Game theory research in economics and prisoners dilemma research in psychology, confirms that people are more opportunistic and less cooperative when exchanges are framed as one-shot versus longer term relations..

As an example, consider the possible conflict of Private Equity (PE) firms which tend not to hold a position for more than 5 or 6 years. The PE firm tells the hired gun management team that, if they improve the valuation of the company in 5 years, they will get a very large bonus. Will these executives have any incentive to invest in something that will put the five-year valuation at risk but may position the company well 10 or 20 years from now? Of course not. from a trust perspective, incentives and market forces that encourage managing for the next quarter, or for the next 5 years, lead to conflicts of interests with stakeholders in the ecosystem of the firm that have longer term interests (e.g., employees, suppliers, communities). This is why privately held companies like SAS and Quiktrip, which are listed on the 100 Best Companies to Work For, do not want to go public. They believe that the short-term opportunism demanded by the stock market will destroy the high trust cultures that they have so carefully nurtured.

These high trust privately held firms have a long-term philosophy that guides them and benefits all stakeholders. This seems to have been lost in many public companies. The idea of sustainably leading for the long term goes back a long way. In the Iroquois nation constitution leaders were instructed as follows: “… in all your official acts, self interest shall be cast into oblivion….. return to the way of the Great Law which is just and right. Look and listen for the welfare of the whole people and have always in view not only the present but also the coming generations.” This is the origin of the sustainability expression “Seventh Generation.” Few CEOs will have the luxury of following the Iroquois way when the average investor holds a stock for about 7 months (used to be about 7 years). Until we find a way to get back to more patient, longer-term philosophy, the 100 Best Companies to Work For are more likely to be some very cool privately held companies.


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