What good are Stock Markets?

An article in the current issue of Harvard Business Review notes that there has been a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ [‘What good are shareholders?’, Fox & Lorsch]. The City of London achieved similar disinvestment. But that’s not what stock markets are supposed to be for. The money was supposed to flow the other way, from myriads of investors into new industrial, technological and business developments.

But public companies clearly no longer need to issue shares for sale on the stock market. Their funding is largely through retained profit and more and more of them are actually being taken private where disclosure and transparency requirements are less invasive. At the same time, the fast growing small and medium sized innovators on which a sustainable future depends, and which do need to acquire additional funds for future investment, don’t find stock markets a satisfactory means of raising the necessary. The fund managers and traders who control investment in stocks and shares want fast, low risk returns. But returns from SME innovators, even though they may be exciting and sustainable, are unacceptably long term.
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What will replace the public company?

The public company, the corporate form that Chandler once described as the most powerful institution in the economy and which made industrialisation possible, is rapidly becoming an endangered species. Over the past decade the number of public companies in the UK has almost halved and declined by 38% in the United States. Similarly, the number of Initial Public Offerings (IPOs) has declined by over two thirds, and in the case of SMEs by more than 80%.

These statistics are quoted in a recent article in The Economist which puts the rapid decline down to the over regulation of public companies. This is the only explanation available that fits The Economist’s free market dogma. The article cites the case of Boots the Chemist as an exemplar of how ‘now it is perfectly respectable to choose to “go private”’. This is a distortion of what happened to Boots. Under the leadership of asset stripping accountant, Sir Nigel Rudd, Boots merged with Alliance Unichem which was preliminary to the opportunistic takeover by an American private equity firm, which saddled the company with the debt raised for its acquisition and moved its registration to a tax avoiding canton in Switzerland. What part of that sad story is ‘perfectly respectable’ is open to debate. The result is that a great British company was raped and pillaged for the benefit of a small number of individuals, mainly in an American private equity limited liability partnership.
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