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Is it a blip? Or something permanent? If the latter, what are the implications? In the general preoccupation with propping up the financial structure of capitalism since 2008, few people seem to have noticed the void opening up in the engine compartment where the publicly quoted company used to be.
In the anglophone world at least, the publicly quoted company has been the central institution of modern capitalism, the marshalling yard for the economy’s resources – investors’ funds from one side, entrepreneurial animal spirits from the other – for 150 years. Yet all around the globe, listed companies are dying off, if not like flies then perhaps more like other things no longer suited to their environment – dinosaurs, say.
Could this be temporary, with normal service resumed once business has finally recovered after the crash? It seems unlikely. First, the decline in quoted numbers started around the millennium, well before the financial crisis. Second, although the shrinkage is worldwide, it is greatest – nearly 50 per cent since the high point in 1998 – in the economies most attuned to the stock market: the US and the UK. Third, unlike their 20th-century predecessors, today’s new companies have little appetite for public capital. At Google, Facebook or Apple, intangible assets dwarf tangibles, which mostly consist of offices and computers, rather than capital-intensive production plants. These companies do not even need to own them.
In fact, companies are using the stock market less and less to raise capital for productive ends, instead employing it for the opposite reason: retiring equity capital via share buybacks running at a staggering 2-3 per cent of gross domestic product, according to City economist Andrew Smithers.
Companies also still use the stock market for measuring success, via the share price – and that may be where the trouble begins. “Almost nothing in economics is more important than thinking through how companies should be managed and for what ends,” wrote Martin Wolf in the FT in August. “Unfortunately, we have made a mess of this. That mess has a name: it is ‘shareholder value maximisation’.”
Operating companies to maximise shareholder value damages not only (ironically) most shareholders and society as a whole, but also companies’ own health, believes Lynn Stout, professor of law at Cornell University. Companies do not invest enough, do enough research and development or pay enough attention to customers or workers – although they pay far too much to cutting costs and raising prices – to survive in the long term in competition with rivals that do all those things. They have forgotten their key function and asset is their ability to innovate. Underneath wealth and power on the surface, they are starving themselves of the real nutrients of success.
Bright managers know this, says Stout, so those with long-term ambitions are either taking companies private or not floating them, or, if they do, they take care to do so via share structures that disenfranchise stockholders from any semblance of control.
Mergers are also playing a part – the current rage for “inversions” (tax-driven reverse takeovers) is a classic financial-engineering ploy, while some of the most enthusiastic champions of maximising shareholder value, such as Enron and several banks, have gone spectacularly bust. A plausible conclusion for this argument is that the decline in stock market numbers reflects a Darwinian process of weeding out a corporate life form that is no longer viable.
If this is right, we are witnessing not just a blip but the start of a historic shift. This is the view of the University of Michigan’s Professor Gerald Davis, who in a 2013 article, “After the Corporation”, described the public corporation, at least in the US, as a “distinctly 20th century phenomenon” that had been rendered “unnecessary for production, unsuited for stable employment and the provision of social welfare services, and incapable of providing a reliable long-term return on investment”. The consequences are already visible in declining employment prospects, rising insecurity and inequality, and endangered retirement and (in the US) health benefits, as well as indirectly in social pressures emanating from the likes of the Occupy movement.
It is too soon to class the public company with the dodo. But unthinkable as it was 25 years ago, with the triumph of western capitalism seemingly complete, at the very least its long-term prospects are in serious question. Business schools would appear to have a bit of new – and fast – thinking to do.