Where the Wild Things Are? The Governance of Private Companies

Private companies far outnumber public ones but receive scant scholarly, public, or regulatory attention and little is known about their governance. In this Article, we begin to fill the void by shedding light on the governance of the largest 200 private companies in the US—some of which are as large as the top public companies in the world. We embarked upon our study with two principal hypotheses.

The first is that there exists a governance gap between private and public companies. According to this hypothesis, the governance structures in public companies are much closer to the ideal than the governance regimes found in private companies. The second hypothesis is that there exists a governance gap between the largest and the smallest private companies—specifically, that the governance structures in largest private companies are better than those found in the smallest. We expected to see governance gaps because private companies are not subject to the same regulation as public ones, are free of the rules imposed by exchanges and the guidelines of institutional investors, and are also largely immune from public and media pressures. 

To test our two hypotheses, we established a dataset about the companies listed on the Forbes’ List of the 200 Largest Private Companies in the US. Each company on the list has revenues of at least two billion dollars, and it employ thousands of employees. For each company in our dataset, we hand-collected data about the parameters that have attracted much attention in the corporate literature on public corporations, and are considered the building blocks of good corporate governance: board composition with an emphasis on board diversity, separation of the roles of CEO and chairperson, CEO tenure, directors’ tenure, director elections, directors independence, use of external gatekeepers, such as accounting firms and legal counsels, and the extent of their involvement. We then analyzed the data we collected and compared our findings to the data on public corporations.

Surprisingly, our findings indicate that there is no significant governance gap between the 200 largest private companies and public corporations. There are some differences on various metrics between the private companies we studied and public corporations, but the disparities are mostly insignificant and do not give rise to serious concerns.

Furthermore, we observed no critical difference in the governance of the largest and smallest private companies in our sample. Even though on some metrics the largest companies on our sample did better than the smallest ones, on other parameters we obtained the opposite result and for most variables there were no differences at all. Overall, the smallest companies in our sample did as well as the largest ones.

We proceed to discuss five theories that explain our unexpected results and explore the policy implications of our findings. The first explanation, which we dub ‘acculturation,’ maintains that directors and officers in private companies absorb and intimate the norms of the business environment in which they operate, and as a result, hold themselves to the ‘gold governance standards’ of their largest public peers. A second theory is the desire of private companies to keep the regulator at bay and avoid imposition of additional regulation. The third is that private companies are interested in attracting institutional investors, and want to make sure that their governance appeals to the latter. The fourth theory we discuss is the intention of private companies to go public one day, which leads them to abide by the government metrics of public corporations. The fifth theory is that all corporations above a certain size—private or public—benefit from a similar governance structure.

Concretely, we examine the need to impose additional regulation on the largest private companies and weigh the option of adopting a model code for private companies that can inform the development of their future governance. We conclude that the governance in the 200 largest private companies does not establish a prima facie case for a regulatory intervention and that the best path forward is to continue to monitor and study the governance of the largest private companies to ensure that it remains in high standing.

Asaf Eckstein is an Associate Professor of Law at the Hebrew University of Jerusalem.

Gideon Parchomovsky is a Professor of Law at the University of Pennsylvania Carey School of Law.

This post was first published on Duke University’s FinReg Blog.