Patrick Pleul/Pool via AP
By Bert Spector
Billionaire Elon Musk says he wants to take Twitter private by buying 100% of its publicly held shares in a deal worth US$43 billion.
In a letter to the board, he said that Twitter can’t serve as a platform for free speech as a public company. “Twitter needs to be transformed as a private company,” he wrote.
I’m a scholar in corporate leadership and governance. A big problem with private companies is they lack the safeguards of public corporations – like outside ownership and independent oversight.
Public ownership
Some years ago, I explored the distinction between public and private companies in detail when the American Bar Association invited me to write about what young corporate lawyers need to understand about how business works. Based on that research, I want to point to an important set of distinctions between public and private corporations.
Public corporations are those businesses that trade their stock on a public market, such as the New York Stock Exchange. They are regulated by the Securities and Exchange Commission and are affected by a number of important federal laws, most notably the Corporate Fraud Accountability Act, popularly known as Sarbanes-Oxley.
Private companies do not trade their stock publicly. Ownership is tightly held by a limited number of chosen investors. As such, they escape the scrutiny of these public overseers.
Outside oversight
The CEO of a public company is subject to an array of constraints and a varying but always substantial degree of oversight.
There are boards of directors, of course, that review all major strategic decisions. And there are separate committees composed entirely of independent directors who don’t have any ongoing involvement in running the business that assess CEO performance and determine compensation.
In addition, public shareholders are entitled to vote directly on the compensation awarded to top executives. Whole categories of CEO decisions, including mergers and acquisitions, international expansions and changes in the corporation’s charter, are subject to the opinion of shareholders and directors.
The composition of the board of directors is also regulated by law. Half the directors must be independent of the company. And the board committees charged with conducting audits, hiring and firing the CEO and determining executive pay must be 100% independent. Company insiders and close family members may sit on public boards but are not counted as independent.
Full disclosure
The Securities and Exchange Commission requires the CEOs of public corporations to make full and public disclosures of their financial performance. Regular reports require disclosure of operating expenses, significant partnerships, liabilities, strategies, risks and plans.
Additionally, public companies must hire an independent auditing firm approved by the Public Company Accounting Oversight Board to conduct and verify the thoroughness and accuracy of those financial statements. Any fraudulent reporting can result in criminal charges against the CEO and chief financial officer.
These rules are all intended to safeguard the integrity of corporations, to help make them transparent to public investors and to guard against corruption. They are far from perfect, but they are helpful. And private corporations are not required to comply with any of them.
Good governance
Well-governed companies, such as Microsoft and PepsiCo, tend to outperform poorly governed ones, often dramatically. That’s largely due to all the factors noted above that are required for public companies.
This doesn’t mean all private companies are governed poorly – or that all public businesses are governed well. But key ingredients of good governance, especially accountability, are baked into public corporations in a way that they aren’t for private companies.
Whether or not Twitter would become a better platform for free speech as a private company is debatable. But management research suggests it would make it perform worse as a business.
Bert Spector is Associate Professor of International Business and Strategy at the D’Amore-McKim School of Business at Northeastern University.
Jimbo99 says
Facebook & Twitter are what they are. I don’t know so much at this point it matters whether private or public ownership can improve content. Not much to improve really, theme are no substitutes or next generation of social media. Parler & Tik-Tok are out there, I think many (anyone really) that have or had a Facebook & Twitter, also have Parler & Tik-Tok. The process starts over again really, finding those new users to follow/subscribe to. Free speech has never been in jeopardy, just whether or not anyone was suspended or banned for speaking their minds & maybe even there were cancel culture cancelations.
Chris Goodfellow says
An excellent review by this professor of why companies that have a high public interest quotient should be run as public companies with all the fore listed constraints. As someone who has served on boards and public interest boards and who obtained their MBA at a very different time from today when the approach to management was quite different. I have lived through the extreme leveraging and asset stripping of American business started by Junk Bond king Michael Milliken and i have lived through the post 2,000 period when the fashion switched to private equity buying out public companies to effectively strip every conceivable cost out, employ maximum leverage and maximize profits. Neither of these approaches are about running sound enterprises; they are about financial manipulation to make a personal bundle to the detriment of the business in question. Elon is a talented man of many interests but he is also somewhat of a manipulator with a not so clean record with the SEC. In my view many of the social media companies have become in a sense like public utilities for us. They are businesses now so deeply integrated into our daily internet information exchange, they must be treated with the utmost care not to fall into private hands that might put them to use for their own ends. We have a glaring example,of this in FOX news which is not constrained along with all other news outlets by the old FCC Fairness doctrine any longer which assured balanced viewpoints to be presented. . News has become opinion now in America and this is testing the limits of our democracy. It is even permitted to lie and taken as a given. That Twitter might fall under the purview of one man and not a balanced Board that can at least debate policy directions would be the end of it in my opinion.
I have asked myself also what is Elon up to here. Is it a Doge coin like maneuver to make a few quick bucks by pumping the stock?. Is Twitter an attractive business investment trading at 330+ plus times earnings at a $46 price. The net book value is $9 and a good deal of that is hot air goodwill so is it judicious to pay five times book. How much additional revenue can it generate in the competitive ad space ? Maybe Elon accumulated 15% and has made a big splash about buying it outright which I am not sure he would accomplish easily. Maybe he is already selling his position off at a handsome profit? My advice be careful!
Fredrick says
Very good comment Mr. Goodfellow!! I could not agree more. Elon has a plan and it is to make money. No choice to let is play out from here . Your comments regarding that News has become opinion is spot on. That applies to Media of all forms even when they have values such as “Fostering open, honest and civil conversations and debate about public, private, social and cultural issues that matter to the community.” When only one side is presented, be it on Twitter, in the so called news sites (FOX, CNN, all of them) or even a simple but informative local web site, it becomes nothing but an echo chamber. I believe that want to hear the facts, reported in an unbiased, opinion ridden manner so they can draw their own opinion. If not unbiased then both sides need to be shared……
Geezer says
I’m gonna go off-topic if you folks don’t mind too much…
2 sensationalized words come to mind: “psychopath” and “sociopath.”
Elon Musk lies somewhere in between. He is a so-called titan of industry
due to his genius mind and killer instinct—he’d steamroll over a family
in a minivan to achieve his goals.
He is the richest and biggest creep (next to Putin) walking on Earth today.
Sam says
He doesn’t do anything unless he will make a profit from it. You never hear of him giving some of his fortune to the homeless or for sick children that need financial help to save their lives. It is all about him and how he can make money for himself.
And he thinks it is ok that he doesn’t pay taxes. How much greedier and more selfish can one person be?
The Villa Beach Walker says
Just because a company is ‘publicly traded’ it doesn’t mean that the company has the best interests of the public in effect as they operate. Twitter is an excellent example of a near public utility whose board and leadership operates based on ‘we’ll get better’ and ‘we won’t make that mistake again’ management priciples. Twitter has become an Internet megaphone for disinformation, half truths, and out and out lies. At the same time Twitter provides documentary evidence in civil and criminal courts across the United States today.
And Twitter is a closed source platform that requires developers to register and provide information about what they intend to develop using the platform (i.e. creating an opportunity to steal their ideas). Depending on institutions like the Federal Communications Commission (FCC) or the Securities and Exchange Commission (SEC) to be able to ‘regulate’ an Internet company like Twitter is unrealistic.
Elon Musk is just one of many people who have been harmed by disinformation disseminated via Twitter. His efforts to try and buy Twitter, taking the company private could help greatly improve the platform and benefit the public. The current board would rather we all look at more ‘promoted’ tweets and by their inaction doesn’t seem to care about the harm being caused by the platform.
LetsBeReal says
I don’t have Facebook, WhatsApp, Facebook Messenger, Instagram, TikTok, Reddit, Snapchat, Twitter, etc. Life is better.
Sam says
Stop it….blame the tax rules on YOUR elected officials. Don’t tell me that you don’t use every trick your accountant can come up with to save you money at tax time. Please……