Public corporations are government-owned and operated. Public corporations provide essential goods and services to the public. The USPS, Amtrak, and NRPC are publicly traded. Public firms receive public cash and are overseen by the government. Public corporations have their own management, board of directors, and shareholders, but the government owns and decides them. Governments regulate and oversee publicly listed corporations to ensure public interest.
Advantages of Public Corporations
Companies that sell shares of stock to the general public are known as public corporations. They are led by a group of directors and administered by executive managers who are answerable to the shareholders for their choices and activities. There are benefits to going public that benefit both the business and its shareholders.
Access to Capital
A primary benefit of public companies is their easier access to funding. Selling stock to the general public is a major source of funding for publicly traded companies. This paves the way for investments in growth, innovation, and other areas that would be challenging to support with traditional methods. Stock in a public company can be used as collateral for lower-interest loans than would be available to a private company.
Liquidity
Liquidity is another perk of public companies. Stocks that are available to the public are exchanged on stock exchanges, where buyers and sellers transact at market prices. In addition to providing a steady flow of funds for the company, this allows investors to diversify their holdings and reduce their overall risk.
Visibility and Credibility
Corporations that go public get the same benefits of greater public awareness and trust. Going public is a great way for a company to gain recognition and credibility in the marketplace. Detailed information about a public firm’s financial condition and operations is made available to investors as part of the company’s required reporting and disclosure. A higher level of trust from investors and the potential for new shareholder recruitment are both benefits of more openness.
Access to Talents
When it comes to hiring employees, public companies have more options. Call options and other incentives are powerful tools for public corporations to use in their quest to attract and retain talented employees. In a market where competition and innovation are constantly evolving, this might be a game-changer for the organization.
Subject to Greater Scrutiny
Last but not least, public enterprises are subject to higher levels of surveillance and regulation than private ones. This has potential drawbacks as well as potential advantages. More openness and responsibility from business leaders can reduce the likelihood of theft and other types of wrongdoing. Public companies can be encouraged to maintain honesty and moral business practices by the danger of court proceedings and the risk to their reputations.
The advantages of public corporations over private ones are numerous. They include better accountability and oversight, access to top personnel, enhanced visibility and reputation, access to financing, and liquidity. Although there are drawbacks to going public, many companies find the advantages of greater openness, reputation, and access to finance and talent to be worth the risk.
Disadvantages of Public Corporations
The term “public corporation” refers to a company whose stock is freely traded on stock exchanges by the general public. Although there are benefits to being a public company, such as having access to a big pool of cash and being able to earn money by selling shares, there are also drawbacks. Here we’ll look at a few of the ways in which public companies fall short of ideal models.
Loss of Control
When a firm goes public, shareholders have less say in how the business is run. A company’s accountability to its many shareholders, each of whom may have their own priorities and concerns, increases after it goes public. Management may feel pressured to make decisions that aren’t great for the company’s long-term health or growth if it means keeping shareholders happy and the stock price up.
Increased Regulations and Disclosure Requirements
Financial statements, auditing, and release of information are just a few of the many restrictions and disclosure requirements that publicly traded companies must comply with. These needs can be expensive and time-consuming to provide, and they can take focus away from running the firm. To add insult to injury, competitors may gain useful knowledge about the company’s inner workings, plans, and financial performance thanks to the disclosure obligations.
Short-Term Focus
There is a widespread belief that publicly traded companies put quarterly earnings and profit maximization ahead of long-term development and sustainability. The expectations of investors and the drive to keep or boost the stock price can be the impetus for this near-term orientation. Because of this, businesses risk not taking advantage of long-term investment possibilities or funding crucial R&D that could fuel their expansion in the future.
Pressure to Maintain the Stock Price
A public corporation is under unrelenting pressure to keep or grow its stock price. At times of economic or market turbulence, the pressure from stockholders, analysts, and the press can be more intense. Because of this, businesses could make hasty choices that put short-term profits ahead of long-term sustainability.
Increased Risk of Litigation
A public company’s exposure to legal action rises when its executives violate ethical standards or break the law, or when it fails to disclose material information to investors. Litigation from stakeholders, regulators, and other interested parties can be expensive for a business in terms of both legal fees and the potential cost of any damages awarded to the plaintiffs.
Loss of Privacy
Information regarding a public firm’s management, economic condition, and management is available to the general public and can be used by anybody, including potential investors, customers, and workers. In addition to the general inconvenience, this breach of privacy can pose serious problems for businesses that rely on secretive methods or products.
In sum, there are positives to going public, such as access to a larger pool of capital, but there are also some significant drawbacks to consider. These include things like being less able to make decisions, having more rules and disclosures imposed on you, feeling pressured to focus on the short term, having your stock price fluctuate wildly, being more likely to face legal action, and having your privacy invaded. Businesses thinking about going public should examine the benefits and drawbacks, and make sure they have the resources and setup necessary to handle being a publicly listed firm.
Bottom Line
In sum, there are benefits and drawbacks to operating a public company. They provide security and easy access to financing, but they can be weighed down by red tape and rules from above. Another obligation they have is to their stockholders, which could potentially clash with serving the public good. Whether or not a company should form a public corporation depends on its particular set of circumstances and objectives.
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Nishat Tarannum Mridula is a contributing writer at The Strategy Watch. She has been contributing for last two years.
Nishat is currently studying at the University of Dhaka. Even though her major is in Banking, she enjoys writing on diverse topics, starting from appliances to blogposts. She is in the middle of completing her BBA from University of Dhaka. Alongside that, she writes different types of business articles for The Strategy Watch.