The public corporation is typically bedeviled by the gap between managers’ and shareholders’ interests. Over the years, governance has attempted to close that gap by aligning incentives with measures of performance. These attempts have often failed. But where they have succeeded, they have left public corporations increasingly swayed by short-term results (which are easy to measure) at the expense of future success.
Over the last 30 years, the private equity model has risen to the fore as a solution to the governance problem. In private equity, managers and shareholders are closely connected. Typically, there is a very clear medium-term investment thesis that downplays short-term pressures, with a view to an exit within three to five years. The great strength of the classic private equity model is the clear- sighted medium-term focus on strategy. The weakness is the generation gap, losing continuity of purpose as ownership passes through successive private equity houses and new cadres of top management.