The Differences Between Public And Private

We have all heard the slogan that “government should be run like a business!” It sounds good but it may be not be that simple.

Most small businesses and even many large ones (like President Trump’s real estate empire) are privately held. That means that the business is controlled by a relatively few people who are actively involved in running and financing the enterprise. Privately controlled businesses must comply with accepted accounting principles and pay their taxes, but they are not subject to much public scrutiny. The owners usually control the Board of Directors and business decisions can be made quite quickly without involving the general public.

On the other hand, a “public” company which sells its shares on the open market or stock exchange, has very strict rules on transparency and reporting. Since the general public is buying and selling shares in these companies, it is important that everyone be given the same information at the same time. Directors and top management in a public company are under strict fiduciary rules not to divulge “insider” information which could benefit them more than other shareholders. There are even “black-out” periods before major announcements and regular earnings reports where Directors and managers are prohibited from trading in the company’s stock just to ensure that they will not benefit from “insider” information.

All of this is done and enforced by such organizations as the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) so that public trust will be maintained in the buying and selling of stocks. If the exchanges were deemed to be manipulated by “insiders,” then public trust in the stock market would be eroded.

We were all reminded of these rules recently when Representative Chris Collins from the Buffalo area was indicted in federal court in New York for divulging “insider” information to friends and family so that they could avoid the inevitable price decline in a drug company stock they owned when a drug it was developing was found to be ineffective. Had this been a private company (as is the case with many of Mr. Collins’ own business interests,) it would not have posed as much of a problem. However, since this was a public company and Mr. Collins was on its Board, he was under a fiduciary obligation not to convey this information ahead of a public announcement made by the company itself.

All of this may seem esoteric to those not tutored in the rules related to public companies. However, many people today are participating in 401 (k) programs at their place of work. Most of these programs use mutual funds which in turn are buying and selling the stock of public corporations. A dishonest trading system in the stock market doesn’t just hurt individual shareholders, it hurts everyone who is connected to it… including those who are investing in mutual funds. That is why these laws and rules enforced by the SEC and the various stock exchanges are in effect.

The bottom line is that when you are looking for a comparison in the business world, public companies require much more of the kind of transparency and accountability that people also seek in their government.

Rolland Kidder is a Stow resident.

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