Motivations Behind the Privatization of a Public Company (Essay Sample)

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Motivations Behind the Privatization of a Public Company
There are two types of limited liability companies, private and public limited entities. Each type of company has its distinct features. It is this difference in the traits that make investors prefer investing in either of them. For example, public companies are required by law to have their shares publicly traded through the securities exchange of a country. On the other hand, private companies do not have to issue their shares to the public. In this essay, factors such as the need to increase efficiency will be discussed as the motivations behind the privatization of a public entity.
Going private reduces the management time that is spent on ensuring compliance with various laws and regulations. Managers are thus able to focus on growing and running the business. The formulation of strategies that will enable the entity to gain a competitive advantage becomes the concentration of the administrators. This is not the case in a public limited company. In these entities, managers work hard to ensure the organization complies with rules and regulations which are provided by the industry regulators. Among the regulations is the Sarbanes and Oxley Act (SOX). The act was formulated following the emergence of some corporate governance scandals in the United States. It entailed the establishment of harsh new corporate governance principles. The act is exceptionally comprehensive and conveys the full force of the law. The provisions of SOX are pertinent to directors, auditors and employees working for listed companies in the United States. Private companies are not required to comply with this law.
The privatization of a public entity results in an improvement in efficiency. It is assumed that private companies are guided by the profit motive. For them to achieve the desired profit levels, strategies to cut on cost must be put in place. This is unlike in government run businesses where managers do not take part in the distribution of profits. They, therefore, lack the motivation to reduce operational and production costs.
The increased levels of efficiency in a private company could also be attributed to the fact that, the managers are also the owners of the business. This is because the principle of separation of ownership from management does not apply to a private limited company. The executives in the private company will thus ensure that the operational costs are maintained within minimum levels. In any case, a rise in profits will mean an increase in the income to them. For example, some entities recorded an improvement in efficiency and profitability right after conversion into a private entity. Such as situation was observed after the British Airways was privatized.
The conversion of a public firm to a private entity would be motivated by the need to evade political interference in business. Unlike in the private sector where managers are driven by the strong desires to make a profit, government executives are inspired by political influences instead of sound business and economic ideologies. For instance, a government entity may recruit surplus workers, a majority of whom will have no task to perform in the organization. Further, the government may find it hard to lay them off because by doing so, it shall not be delivering its promise of job creation. Therefore, it is clear that state-owned firms hire more than the required number of employees resulting in an increase in inefficiency.
The majority of government policies established interfere with the operations of the public and not the private sector. Examples are fiscal and monetary policies. The government may set the minimum/maximum price at which companies are expected to sell their products to consumers. Private manufacturers are not bound to sell their products at that price, but it is mandatory for public enterprises to abide by the new policy. The government also interferes with business activities during the annual elections held by public companies. The involvement may be motivated by self and other motives that are not in line with business objectives and goals. On the contrary, it is possible that the government may have a genuine reason to interfere with the activities of a public company. These take place more when an economy is in a depression, and economic conditions are worsening. The public could erroneously understand these actions as political interference. Such political snooping be it genuine or not does not occur in the private company. Private entities are formed to be in the business for a definite period. Within that period, they tend to focus more on their set goals rather than politics.
A public company may be privatized to avoid the annual filing of audited financial statements with the Securities Exchange of a country. The publication of the statements makes them available to the public for scrutiny and analysis. Competitors may get access to them. They may in return use them to identify areas where the company has a weakness that they can successfully exploit. Investors use the financial statements to make investment decisions. Based on the performance of the enterprise, they may decide to either withdraw their investment or invest more in the business. Compliance with the numerous legal restrictions and formalities make the management of a public enterprise very cumbersome and expensive unlike in the private company (Kershaw 12).
The regulation of annual filing of returns does not apply to limited private enterprises. This is advantageous to the company as it can maintain its secrets and weaknesses without disclosing them to competitors. Private companies are exempted from publishing their annual financial statements because they do not source for capital from the public. Their shares are not issued to the public, but to specific institutional investors and other individuals who may be the owners of the business. The managers of private entities end up getting more time to concentrate on other business activities. They, therefore, avoid the responsibility of preparing financial statements and incurring an extra cost to have them audited.
Private companies are not required by the companies’ act cap 486 to hold an annual and statutory meeting. This is dissimilar to public entities which must hold the shareholders and other stakeholders meeting every year. The purpose of the gathering is to ensure compliance with the law, which requires the meeting to be held annually.
Private companies are required to hold annual general meeting after a certain duration has elapsed but not yearly. This is beneficial to them because organizing a meeting is a costly and hectic affair. For a meeting to be held, a notice must be sent to every shareholder and the directors. The notice contains the venue, time and the agendas to be discussed in the meeting. Before the meeting, financial statements have to be prepared and audited in readiness for their presentation to the shareholders. During the meeting election of new directors to replace those whose term may have expired or have resigned takes place through voting. Exemption from the regulation of holding the annual general meeting saves a lot of management time and financial resources.
Private companies enjoy the benefit of quick decision making. This is different from the case in public companies where major decisions are made through voting. The votes are cast by all shareholders present in person or by a proxy either through the secret ballot or by the show of hands. Even though quality decisions may be arrived at, the decision-making process is slow. In a private company, decisions are made by the directors in consultation with other top executives; no meetings are required to be held, and the consultations are minimized. Approval from the few shareholders is not necessary for growth and operational strategies to be selected. However, the decisions and strategies selected have to be within the scope of the activities specified in the corporate records. It is, therefore, clear that the need to simplify and fasten the decision-making process would lead to the privatization of a public entity.
The government may privatize a public entity in a bid to st...