The Privatization of Business can be Aligned with Social Response Capitalism Goals

Reflections on "World Inc.": Questions from Government, Corporate & Social Leaders

Since the release of Bruce Piasecki’s new book, World Inc.: When It Comes to Solutions - Both Local and Global - Businesses Are Now More Powerful Than Government, and the launch of our Blog World Inc. "For Better or For Worse?", we’ve received many insightful questions from government, corporate and social leaders. We have decided to use this blog entry as an opportunity to address a one of the questions we feel are important to our pursuit to have more dialog and interaction on how business going global is colliding with business going green.

Question: There appears to be an emerging trend to take public companies private, and out of the hands of shareholders. What effect will this trend have on your thesis?

There is indeed a trend for firms to go through the transition from public to private ownership. We’ve seen this with firms like Georgia-Pacific who was acquired in 2005 by one of the largest private firms in the world, Koch Industries, Inc. for $21 billion. We also see the impact of private equity firms like the Carlyle Group, Blackstone Group, and Bain Capital. In February 2007 the electric utility TXU accepted a $45 billion offer from two leading private equity firms, Texas Pacific Group and Kohlberg Kravis Roberts, along with global investment bank Goldman Sachs to take the company private. The TXU deal was the largest private equity buyout to that date in time. As these examples show, the privatization of business is a significant trend to watch. We do not believe that these mega money deals will preclude private mega-corporations from having to operate in a world now being defined by social response capitalism we call “World Inc.”.

Although public firms have seemingly greater financial reporting and accounting standards to adhere to, private firms often undergo similar internal review from their leadership who oversee and manage finance and governance protocols. Businesses often prefer private ownership as it offers certain flexibility in making swift decisions, particularly in agile and industries in which companies compete heavily on price, quality and performance.

The ability to shift ownership from public to private has its downsides. Companies go public to increase investment and grow capital resources to maximize production and profit. Public firms that can compete on price, product performance and “social response” attributes like corporate social responsibility, environmental practices and sustainability metrics will yield new investment from shareholders and may develop competitive advantage over their peer private and public competitors. The privatization of corporations puts fears in the minds of some investors, environmentalists and consumers. Private companies do not have to report their financial statements as stringently as publicly traded firms have to do through SEC disclosure rules. With a perceived veil over their financials and operations, some investors fear the private companies may not be as open about their environmental and social efforts, and may actually minimize those efforts over time due to lack of financial scrutiny.

Some organizations, like SEIU, have studied and reported on the impact private equity firms have through their enormous buyouts of public companies. SEIU sees mega money buyout trends as impacting how companies go green and report social and governance performance. With 1.9 million members who have assets exceeding $1 trillion in pension funds, SEIU is a strong and fast growing union in North America. SEIU is the U.S.’s largest union of health care workers, property services works and the second larges union of public services workers. Thus labor groups like SEIU, large pension funds that invest in private equity firms and others will be interesting to watch over time on how they influence private company reporting of social, environmental and governance metrics.

But we see upsides in private corporations and private equity deals. Private firms we’ve encountered in our 25 year history as management consultants actively benchmark with public competitors and peer companies. This tells us that while firms may go private, they don’t necessarily completely veil themselves from the outside world. In addition, government and the public will always serve as stakeholders to any firms, public or private. So as firms go private, they may lose shareholder influence. They won’t however, rid themselves of government, societal and non-governmental organizations influence on their products, operations and long term stewardship of natural resources.

In the case of TXU, their decision to go private resulted in stronger environmental and alternative energy policies and operations. For example, the Kohlberg Kravis Roberts & Co. (KKR), Texas Pacific Group (TPG), and Goldman Sachs & Co., equity buyout of TXU was said to have the following benefits:

1. Planned coal-fueled generation units reduced from eleven to three, preventing 56 million tons of annual carbon emissions. This scale-back represents a 75 percent reduction in new coal capacity. In addition, the company is committed to continuing its efforts to meaningfully reduce existing carbon emissions and seeks to join the United States Climate Action Partnership (USCAP).

2. A $400 million investment in demand side management energy initiatives. TXU will implement an aggressive demand reduction program through a $400 million investment in conservation and energy efficiency activities over the next five years.

3. Increased commitment to exploring renewable energy sources and investing in alternative energy technologies. TXU will reduce mercury (Hg) emissions, sulfur dioxide (SO2) and nitrogen oxides (NOx) by 20 percent from 2005 levels, as previously committed, through reductions at existing units and installation of emission controls on the new Oak Grove and Sandow units. TXU will reduce its own carbon emissions by increasing efficiency of its generating facilities by up to 2 percent. TXU will become a leader in providing electricity from renewable sources by more than doubling its purchase of wind power to more than 1,500 MW, maintaining its status as the largest buyer of wind power in Texas. TXU will also promote solar power through solar/photovoltaic rebates. The company also intends to join the FutureGen Alliance, a non-profit consortium of companies supporting FutureGen, the U.S. Department of Energy project intended to create the world’s first near-zero-emissions fossil-fuel power plant.

The TXU example tells us that perhaps there is promise and benefit in firms going private from a social response perspective.

Global environmental and social needs have ballooned to the point where the roles of governments and businesses are no longer mutually exclusive. Businesses are taking on the role of government in providing social products and services to the world’s population that is impoverished, unhealthy and uneducated. Governments are taking on roles for creating wealth and providing incentives for new technology. In our view, the book World Inc. is mostly about recognizing that a transition in how we value products, services and investments through advanced capitalism is upon us. The role of private equity firms and companies in creating a better world by delivering social products is as important as the public firm. The World Inc. thesis on how public and private companies are innovating superior products, delivering on their bottom lines and providing societal value based upon social response capitalism will be played out in the next decade. We believe there will be winners and losers from both sides of the publicly held and privately held corporation.

Mark C. Coleman
Senior Associate, AHC Group, Inc.
Mark@ahcgroup.com