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Corporations are Private

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Here’s a letter to a reader of my blog:

Mr. F____

Thanks for your e-mail in response to my criticism [2] of Dennis Prager’s call for the U.S. government to suppress the freedom of expression of private companies such as Google.

You write:

“[O]ne persnickety point: Google is a private enterprise but a public company, albeit with two classes of shares.  It must answer to shareholders.

Given the dual share structure, it is unlikely that shareholders could dramatically alter policies.  But as a public company, shareholders do have a voice in Google’s affairs, at least at annual meetings when the mic is open for questions.”

It’s true that ordinary shareholders in a large company such as Google have virtually no voice in that company’s management. But these shareholders do have the power to sell their shares if, for whatever reason, they disapprove of management’s decisions. This feature – the fact that investment and ownership in the company are voluntary – is central to what it means for a company to be private.

And importantly, this freedom to buy and sell shares exerts market discipline upon management. In a now-classic 1965 article (“Mergers and the Market for Corporate Control [3]”*) the late Henry Manne explained that when managers displease shareholders, thus prompting shareholders to sell their shares, share prices fall. Falling share prices, in turn, incite – and better enable – astute outsiders to buy enough of these shares to acquire a meaningful say in the company’s operation. Poor managers are thus replaced with better ones, causing share prices to rise.

The beneficial results of this market for corporate control go beyond the ousting of poor managers. The very risk of being replaced gives existing managers incentives to run companies as profitably as possible. This active exchange of private property rights is an important means by which the market encourages corporations to attempt to satisfy as many consumers as possible as well as possible, and in ways that meet the approval of actual and potential shareholders.

Dennis Prager is unhappy with Google’s operation. But that company doesn’t belong to him. Nor is Google “public” in the sense of being an agency or arm of the state; it is indeed private. And so what Mr. Prager is arrogantly demanding is that government order fellow citizens to use their private property not as those citizens judge best but as Mr. Prager judges best. Not only would such government action violate the First Amendment, it would be a direct and dangerous assault on the principles of a free society.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Journal of Political Economy, Vol. 73, April 1965, pp. 110-120.