The blessing and curse of being public

The grass always seems greener on the other side.  Managers of public companies want to be private so they don't have to hit quarterly targets.  And strong private companies would love public capital to grow without micromanaging oversight from their VC overlords.  Even though being public is positioned as a black and white binary decision I think it's far from that, the value of being public comes from the company itself.

Let's take an example of something that is public, parks, to see why.  There are public parks and there are private parks.  In both cases a park is a piece of property that exists to benefit some party.  A park is a perfect analogy for public companies.  Parks come in all shapes and sizes, for tiny one acre plots stuck in the corner of a subdivision to the massive and well known Grand Canyon.  In the United States it's hard to travel far without encountering a park of some sort, either a large national park, or a small local township park.  Just as there are people everywhere, there are parks everywhere.

Parks vary in their quality.  The majestic National Parks are considered in a class of their own.  They're destination parks with scenic features unmatched anywhere else.  These are the large caps of the market, the companies that everyone knows that are capitalistic national treasures.  The thing with National Parks is that while they're beautiful they don't hold a monopoly on beauty.  George Washington National Forest is just as scenic as nearby Shenandoah National Park, yet one is known while the other isn't.  Likewise there are many state parks and local parks that harbor stunning attractions too.

The scenery between parks varies as does the care and quality of parks.  If you listened to Americans for long enough you'd have the impression that public parks are universally trashed and full of nepotistic park management.  This view is probably derived from that fact that most Americans visit a park exactly once a year, on the 4th of July, when they do the trashing while watching the fireworks.

For every trashed local park there are dozens of clean parks with diligent rangers.  Sometimes a park will have onerous rules to compensate for some past evils.  For example State Parks in Pennsylvania will give you a ticket if you attempt to enjoy a beer by a campfire, but in Alabama they'll sell you a beer at the ranger station.  Apparently in Alabama the local youth aren't attracted to trashing their state parks, whereas in Pennsylvania they are.  The same could be said for a company's corporate governance.  Governance varies as much as companies vary, and in almost all cases the variance is due to past issues, or perceived future issues that are unique to each company.

The similarities don't stop there either.  At the local level if a park falls into disrepair or becomes outdated often a small group of citizens will band together to get something done.  These are citizens who individually hold very little power, usually just their own vote.  They petition the government to do something with their dilapidated park.  And if nothing is done they can vote out the bums and vote in new bums with the hope these new bums can get something done.  Is this starting to sound like activist investing yet?  It isn't only local parks that can be changed due to a small group's involvement, it happens at the national level too.  Small outspoken groups can change the outcome for everyone by being persistent and loud.

Company managers act as if the metaphorical trashed park they oversea is someone else's problem instead of their own.  They neglect to mention that they looked on when someone trashed it, and that they didn't want to clean things up.  They pretend that if they were private that it wouldn't be trashed, but that's false.

If a company is in disrepair management often has to look only as far as the mirror to see why they're having problems.  But in the same vein, successful managers shouldn't be too quick to pat themselves on the back.  The Grand Canyon will be magnificent regardless of whatever ranger is in charge, the same is true for many large companies.  Their business runs with them or without them, not because of them.

Unfortunately there are too many managers who think that being public is the root of all of their problems.  When the problem is themselves, their company has cultural rot and needs to be changed.  Change is always possible, but it isn't easy, and executive decrying public markets are usually the same executives who want easy solutions.

Being public or private isn't a silver bullet.  Yes, there are costs associated with being public, but there are also advantages.  A public company can raise additional capital with little cost.  Whereas a private company might not have to hit quarterly targets or carry a regulatory burden, but executives might have to hit the road for month's worth of dog and pony shows to raise capital.

Be wary of when a company's management blames being public as the source of all their problems.  It's usually just a cover for their own incompetence.  But that incompetence is also an opportunity for savvy investors to initiate change.

2 comments:

  1. Great article, Nate. I've noticed a disturbing trend recently of people who have been successfully applying a Ben Graham style of value investing switching over to a so called Munger style. On the surface, of course, there's nothing wrong with this, but the number of people who can successfully apply the great company at a fair price approach is very small. Call me a cynic but what I see are people unwilling to sit still.

    Out of curiosity, what % are you cash at the moment?

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    1. whoops meant to post this under the RIP value investing article

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