The movement for stronger regulation and attention to the practices of private equity firms is primarily a European phenomenon right now, and is unlikely to be taken up in the same form in the United States. Nevertheless, the number of companies moving from public to private ownership is growing at such a rate that it will accelerate current trends in how public policy is being made in the United States.

After emerging for a decade in the United States, the use of market campaigns and other social pressure on corporations has crested. In short order, corporations began to perfect sophisticated processes and management styles for addressing social pressures. Then, the November 2006 elections placed Democrats in power in Washington, which offered many interest groups the allure of achieving long-standing goals through regulation rather than social pressure. The combination of corporations' responses and the political shift has initiated trends that are leading toward a re-emphasis on achieving policy change through law. Because taking companies private reduces the responsiveness of them to social pressures, it provides one more reason for activists to look to Washington (or London or Brussels) to again take a major role in regulatory policymaking.

The Growth of Private Equity Takeovers

Private equity is growing in two directions. First, the total amount of money being pooled by private investors is growing quickly. Though specific data is impossible to obtain -- the money is, after all, private -- estimates from groups such as Credit Suisse and Preqin indicate that the total amount of money pooled for private transactions has risen from $310 billion in 2005 to $400 billion in 2006, and likely will approach $500 billion in 2007, with almost half of the $500 billion dedicated to corporate takeovers. Because most private equity deals are leveraged, that is, financed by a combination of cash and loans, Credit Suisse has estimated that the buying power of private equity in 2007 will reach $2 trillion worth of corporate stocks.

The second important direction of growth is that many private equity funds themselves are getting very large. More than a dozen private equity funds now have more than $10 billion in assets, with the largest nearing $20 billion. This means that private equity is no longer limited to buying small- and medium-sized companies. Last week's private equity purchase of Texas utility TXU for $32 billion was nearly unthinkable five years ago, but it was not even the biggest private equity deal of February (a title that belongs to the $35 billion purchase Equity Office Properties). As private equity funds grow, the number of familiar companies that can be taken public grows markedly.

This affects policy since it means large players in industry are reducing their vulnerability to public pressures and actively changing their fundamental business strategies.

In 2005, the publicly traded forest products company Georgia-Pacific was bought by privately held Koch Industries. Georgia-Pacific owns a number of well-known brands, and for years had been involved in numerous discussions with its critics over its environmental, labor and social policies. For its part, Koch is well-known for its support of libertarian causes and its dedication to free markets. Most discussions between Georgia-Pacific and interest groups stopped cold when Koch purchased the company. The views interest groups wanted Georgia-Pacific to endorse often were squarely at odds with the views of its new owners, and activists have left the company alone in the 18 months since the merger.

Ultimately, Georgia-Pacific's interlocutors have come to recognize the same thing that the UNI protesters have: that private ownership insulates executives from politics. Many of the companies taken private in recent years in Europe could not have competed for long without major structural changes, but politics kept companies from making serious moves toward efficiency. In Europe, layoffs and extending work weeks are legal but strongly discouraged by society. As such, major shareowners, pension plans and even some securities regulators stop management from making significant structural changes. Politically insulated private equity firms have stepped in, however, and are building streamlined, efficient companies that can compete globally. As it is now, if private equity is willing to play the bad guy, Europe is rife with targets.

From Football to Ice Skating

In the current policy environment, the most dramatic changes in corporate policy are taking place outside the realm of government. These changes are largely expressed through negotiated deals between corporate management and interest groups (often shareholder activists). If regulatory policy is a fence circumscribing corporate activities, the combination of negotiated deals and codes of conduct has created a second fence, one representing the de facto public policy that governs corporate activities. This fence, which a new book, "The New Capitalists," by three former asset managers and financial advisers has termed "circle of accountability," has become far more restrictive in the past decade than the de jure fence.

The move toward marketplace campaigns acknowledges this development. The market campaign model is designed to change the practices of an entire industry, but through winning concessions from specific corporations. The basic strategy was predicated on the responsiveness of individual corporate targets to public pressure. The majority of a market campaign's public pressure, be it public relations campaigns against corporate brands, harassment of executives and pressure on major corporate customers, is possible regardless of whether the company is publicly or privately held. But practitioners know that public companies are far more likely to quickly shift under this pressure than privately held companies.

Shareholder activism plays an important role in making public companies responsive, but it is not decisive. More important is the way in which top executives' job performance is being perceived in the wake of Enron, WorldCom and other public scandals. Shareholder opinion of the performance of top executives (particularly CEOs) is based in part on how Wall Street and broader society view their company.

The latter element, how a company is viewed by society, cuts two ways. First, it involves whether the company's brands are strong and thought well of. Brand is many companies' most valuable asset, and endangering it is fraught with peril. Second, how a company is viewed is important to how shareholders feel about holding stock in the company. When the stock price is rising, these issues matter far less; but if the share price is not rising, shareholders fear the company is stagnating and look for signs that management is working in positive ways to address problems. It is here that the public perception of management can save or sink top executives.

Home Depot's Bob Nardelli is the poster child for this change in how corporate executives are viewed. Nardelli was sacked not because of lower profits (Home Depot profits doubled in the six years under Nardelli) but because of poor stock performance and poor public relations. His handling of a shareholders' meeting, at which he silenced critical shareholders and discouraged board members from attending, is portrayed as the beginning of his demise. By contrast, were Home Depot private, Nardelli likely would still have a job.

"I used to play football," Nardelli lamented. "In football, you always know the score. Now, it's like we are ice-skating, and you've got a bunch of judges on the sideline shouting out the scores."

The judges on the sidelines take their financial cues from influential Wall Street analysts and their social cues from the activists who create and define the issues with which CEOs must deal. The rapid rise of the market campaign in the past four years has coincided with issue activists recognizing the influence they have with the judges.

Going Private

The rise of private equity firms' taking public companies private is not related to these changing social issues, but the confluence of the two is changing the outlooks of the activists who had come to depend on responsive, politicized corporate leadership. Private companies' executives are generally allowed to take a long, strategic view of the company and are freed from obsessing about short-term pressures, such as quarterly results and perception problems.

On the business side, this means they can invest in long-term projects, take short-term risks and retool major parts of the company to make it more valuable in the future. On the political front, it means a company must only protect its brands, but it need not make rank-and-file shareholders feel secure that management "gets it." As a result, private companies are not compelled to give in to social critics to appease shareholders.

There are, nonetheless, many reasons to make deals with critics. First and foremost is brand protection. Many other elements figure in as well, however, including a desire to place competitors at a disadvantage by taking a leadership role in a code of conduct or in a new technology. The proposed takeover of TXU, for instance, provides a clear view into how going private does not necessarily eviscerate the effectiveness of market campaign strategies, but it does show that national policymaking is more important to private equity.

As part of its takeover of TXU, the utility's potential new owners made a deal with environmental groups opposed to the company's plan to build 11 coal-fired power plants over the next decade. The new owners (KKR) agreed to cut that number to three if the environmentalists would relent.

On the surface, the deal KKR struck would appear to be an example of private equity giving in to social pressure in just the situation where private equity would be better insulated against public pressure. In fact, however, KKR was taking advantage of the business benefits of taking companies private. The public TXU had to build plants quickly and show results quickly to appease shareholder pressure; a private TXU, on the other hand, is under no such pressure, and can take a longer-term view of the coal plants.

If KKR envisions the United States implementing a climate change law that essentially places a tax on carbon emissions, investing in 11 coal plants that rely on anything but cutting-edge clean coal technologies is not likely to be a good long-term plan. With traditional coal plants possibly facing high carbon-based costs in the future, the proposed coal plants could shift from a blessing to a curse for KKR, whose objective is to build a new utility with sound long-term growth prospects that can be sold (or made public) at great profit in the future.

The KKR-TXU example is reminder of the power of the de jure public policy sphere. If KKR saw the likelihood of new national constraints on carbon emissions as making the coal plants a risk not worth taking, then it loses nothing striking a deal with environmentalists in which it trades potential long-term liabilities for an easier trip through regulatory channels. The key to the carbon tax's actually coming, however, is continued pressure and activism on the climate issue.

The Move to De Jure Policy

European labor demands that the European Union or London step in and place special regulation on private equity would make private equity more accountable to political pressure. The audacity of the demand is compelling: Since private equity is not as easily pressured by social norms, private equity firms deserve special strictures. The demand suggests just how powerless labor feels in the face of nonpublic entities. This powerlessness indicates that the authors of The New Capitalists are right: Public companies are hemmed in by shareholder values as well as shareholder greed. The growing role of private equity in corporate takeovers is a reminder, however, that shareholder capitalism is not the universal rule for large businesses.

As private equity increases its role in corporate takeovers, the activists who recently have found power and effectiveness in marketplace campaigning will increasingly turn back to where they were 20 years ago -- namely, to laws and regulations. A renewed focus on de jure public policy will by no means spell the end of market campaigning, but it does heighten the shift toward a balance between regulation and the marketplace.

This switch is already happening for other reasons, but it will accelerate as once-public firms go private. Ultimately, this portends a return to a rancorous debate over regulation and legislation, as the give-and-take of negotiations will be replaced with public relations battles for popular support and political power.