Corporate Governance Outside Wall Street

Private companies far outnumber public ones but receive scant scholarly attention and little is known about their governance. The largest private companies are on par with public corporations in terms of their annual revenues, number of employees, and impact on the economy. At the same time, private companies are not subject to the reporting requirements that apply to public corporations. Furthermore, private companies are virtually free of all the other market forces that improve corporate governance. They need not comply with the governance norms that institutional investors impose on public corporations or worry about activist hedge funds intervening in their affairs. Nor do they need to abide by the rules of stock exchanges. Even the searching gaze of analysts or the media rarely reaches private companies. As a result, the largest private companies have almost complete autonomy to manage their own affairs. While private companies are content to be left to their own devices, their sentiment is not shared by others. Recently, there is a growing concern among academics and lawmakers about the largest private companies, which has given rise to calls to impose additional regulation on them. Presently, however, there is no empirical data to support these initiatives. This Article is the first to offer a comprehensive, detailed, and careful account of the governance of the largest 200 private companies in the U.S. For almost two years, we hand-collected data about the governance of the companies on the Forbes 200 Index. We analyzed approximately 5,000 fields to produce as complete a picture as possible of the inner governance of these companies, employing the same measures of good governance used by institutional investors and scholars with respect to public corporations. We then ran additional tests to verify our results. We expected to find that the governance of the largest private companies lags far behind that of public corporations. Surprisingly, our findings reveal that no such gap exists. There are differences on various metrics between the private companies we studied and public corporations, but the disparities are mostly not substantial and do not give rise to serious concerns. On most good governance metrics, private companies do as well as the flagship public corporations. We raise five different explanations for our results: importation of governance norms, desire to keep the regulator at bay, indirect impact of institutional investors, plans to go public, and uniformity among large private and public companies. We show that the most plausible explanation of our findings is provided by the first theory—that there are governance spillovers from public to private companies via a process we term “acculturation.” The Article enriches extant academic discourse by illuminating the hitherto overlooked world of corporate governance in private companies. In so doing, it substantially expands the customary scholarly focus that has been concentrating exclusively on public companies. Normatively, it sheds new light on an ongoing debate between two policy approaches—the “free market” paradigm and the “regulatory” school of thought. Intuitively, our results may be interpreted by conservative, free-market champions as evidence of the redundancy of regulation: after all, private companies perform well on most accepted governance measures without being subject to regulatory requirements. Be that as it may, we read the results as indicating exactly the opposite and credit them to regulatory spillovers—i.e., to governance norms that regulation has originally embedded within the world of public corporations—but have been slowly permeating into the private domain.