When going public was bad for the public

If the age of greed did not officially begin until the 1980s, there were some early signs that it was on its way. One was the craze for “going public” that took root a few years earlier. A Wall Street firm would descend on prosperous businesses that were either controlled by families or a small group of backers and tell them that they should let the firm assist them in selling their stock to the general public. The idea was that the sale would produce enough money to enrich the owners and, incidentally, give a hefty cut to the Wall Street firms. If the company appeared to be in good shape, the formula usually worked, and everyone did well. Often very well. There was almost no liberal criticism of this practice because “going public” sounded so thoroughly virtuous.

There was however, a downside: the former owners found themselves at the mercy of Wall Street’s habit of rating companies on the basis of constantly growing quarterly earnings. This made it difficult, for instance, for the original owner to keep all his employees on the job during a business downturn. The pressure from Wall Street and the stockholders was to cut expenses—like payroll—in order to protect earnings and make the company’s bottom line look good.

Thus many of these companies in the current recession have found themselves eliminating jobs, often losing employees that they would like to keep. On the other hand, a family-run business, as long as it manages to break even, has the option to keep everyone on the payroll. This is exactly what has helped soften the world recession in Germany, as Steven Rattner makes clear in a recent issue of Foreign Affairs. In Germany, family-owned businesses, called Mittelstand, are a major part of the medium-sized manufacturing sector. They can, as Rattner points out, “put a higher priority on employing Germans than do public traded companies,” because they are freer “to focus on long term growth than on short term profits.”

Charles Peters

Charles Peters is the founding editor of the Washington Monthly and the author of a new book on Lyndon B. Johnson published by Times Books.