In his classic 1989 HBR article “Eclipse of the Public Corporation,” Michael Jensen analyzed early leveraged buyouts and identified a new form of corporate organization, the LBO association. He believed it would outperform the traditional public company thanks to “pay-for-performance compensation systems, substantial equity ownership by managers and directors, and contracts with owners and creditors that limit both cross-subsidization among business units and the waste of free cash flow.” To Jensen, the inherent advantages of this structure were so great that it was bound to become the standard. Yet here we are, 25 years later, and public corporations still dominate the business landscape. In a world supposedly changing at unprecedented speed, how can this be?
A version of this article appeared in the April 2014 issue of Harvard Business Review.