Privately owned companies far outnumber public ones. They constitute the lion’s share of the companies in our world and, accordingly, have a comprehensive impact on commercial reality. There are over 25,000,000 private companies in the U.S. and around 4,000 public ones. Furthermore, while the number of public corporations is lower than its peak in the 1990s, the number of private companies continues to grow. In 2022, the average revenue of the 200 largest private companies in the U.S. was $7.89 billion, and the average number of employees was 17,474.
Yet, private companies receive little attention from regulators and corporate scholars relative to public firms. Private companies are not subject to the same regulation as public ones. Similarly, they are not subject to governance rules and structures imposed by exchanges as they are not traded on any exchange. Finally, since non-accredited retail investors do not own the shares of private companies, they are relatively immune from private pressures to spruce up their governance or to promote environmental, social, or governance (“ESG”) values. Corporate law scholarship focuses almost exclusively on public companies, leaving private ones largely unstudied. Consequentially, private companies are the dark matter of the corporate universe: they are omnipresent and make up most of the space, but we know little about them.
Some argue that private companies receiving so little attention should not concern us. After all, the public at large cannot directly invest in private companies, and therefore private companies should be left to their own devices and handle their affairs via private ordering. Further, lawmakers and regulators will wisely direct their attention and resources to public firms. Although this argument has some surface appeal, it does not withstand scrutiny. First, it is odd—not to say anomalous—for scholars to leave the vast majority of companies uncovered and unexamined. Second, and relatedly, it is impossible to know the exact impact of private companies on the financial realm and society when we know so little about them. Third, in an age where corporate law scholarship and policy are moving away from the “shareholder primacy” ideology and increasingly adopting “stakeholderism” as the main prism through which corporate law should be examined, private companies can no longer be disregarded.
In the aggregate, private companies employ more individuals than public ones, interact with far more businesses and individuals than public companies, and the scope of their economic activities is far greater than that of their public brethren. Our research reveals that the economic activity of the largest private firms is similar to that of the companies that populate the bottom half of the S&P 500 index. Fourth and finally, the rise of ESG values renders it irresponsible to disregard private companies. ESG goals can only be attained if they are promoted across the board. Consider board diversity, for example. Much regulatory and scholarly attention has been paid in recent years to the composition of boards of directors, and especially to the presence of members of underrepresented groups.
Yet, there is a paucity of data on the governance of large private firms. Little is known about their board composition, separation of CEO and chairperson positions, gender diversity, and the employment of gatekeepers. Similarly, the campaign of activist shareholders to improve the environmental record of companies has focused almost exclusively on public companies where such shareholders have a voice.
In light of the differences between public corporations and private companies, our two research hypotheses are: (a) there exists a significant gap between the governance of public corporations and private companies, and (b) there exists a substantial disparity between the governance of the largest private companies and the smallest private companies. We expected to see a governance gap between public corporations and private companies because private companies are largely immune from the regulatory and market pressures that apply to public corporations. We expected to see a gap between the governance of the largest and smallest private companies because a similar gap was recently identified in the 200 smallest public corporations [Kobi Kastiel & Yaron Nili, The Corporate Governance Gap, 131 Yale L.J. 782, 823 (2022)].
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 U.S. Each company has revenues of at least two billion dollars and employs thousands of people. 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 no significant governance gap between the 200 largest private companies and public corporations. There are differences in 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. On most good governance metrics, private companies do as well as the flagship corporations, and even on those parameters where differences were observed, such as CEO and chair tenure, the private companies in our sample fared a lot better than the 200 smallest public corporations studied by Nili and Kastiel. Indeed, theorists believe that the agency problem in private companies is less acute than in public corporations since private companies do not have widely dispersed ownership, making monitoring the management difficult. Hence, even if, in some dimensions, the governance of private companies is not identical to public corporations, it may still be as effective, if not better.
Furthermore, we observed no critical difference in our sample’s governance of the largest and smallest private companies. Even though on some metrics, the largest companies in our sample did better than the smallest ones, we obtained the opposite result on other parameters, 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 then use our results to develop five theories that explain our surprising 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 the imposition of additional regulation. The third is that private companies are interested in attracting institutional investors and want to ensure 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 specific size—private or public—benefit from a similar governance structure.
Finally, we explore the policy implications of our findings. In particular, we examine the need to impose additional regulation on the largest private companies and assess the best ways to accomplish this result. We also consider adopting a model code for private companies to inform their future governance development. We conclude, however, that the state of corporate governance in the 200 largest private companies does not, at present, establish a prima facie case for regulatory interventions 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. In this case, the threat of regulation is a more potent policy measure than actual interventions.
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 is adapted from their paper, “Where the Wild Things Are? The Governance of Private Companies,” available on SSRN.