- Item type
- Periodical
- Language
- English
- Source
- Harvard Business Review. Sep/Oct89, Vol. 67 Issue 5, p61-74. 14p. 2 Diagrams, 2 Charts, 2 Graphs.
- Publication date
- 01/09/1989
- ISSN
- 00178012
The publicly held corporation, the main engine of economic progress in the United States for a century, has outlived its usefulness in many sectors of the economy and is being replaced. New organizations are emerging in its place--organizations that unleash remarkable gains in operating efficiency, employee productivity, and shareholder value. Takeovers, leveraged buyouts, and other going-private transactions are the most visible manifestations of this massive organizational change. A central source of waste in the public corporation is the conflict between owners and managers over free cash flow. For a company to operate efficiently and maximize value, free cash flow must be distributed to shareholders rather than retained. But this happens infrequently; senior managers have few incentives to distribute the funds. This conflict helps explain the prominent role of debt in the new organizations. Debt creation without retention of the proceeds forces managers to pay out funds they would otherwise retain. Debt has become in effect a substitute for dividends. Its disciplining powers force managers to maximize the value of corporate assets and shed business units better owned by others. More than any other factor, the new organizations' resolution of the owner-manager conflict explains how they can motivate the same people, managing the same resources, to perform so much more effectively than publicly held corporations can. The eclipse of the public corporation is real, enduring, and highly productive. INSET: The Privatization of Equity. [ABSTRACT FROM PUBLISHER]
