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.
IPOs are currently in the news because of the legal actions involving the Facebook issue which valued the company at $104 billion. Facebook’s IPO demonstrates how the role of the public company, and the relationship between finance and the real economy, has been completely reversed, but yet mainstream economic thinking still fails to take account of that reversal.
When the public company was invented its purpose was to raise large amounts of capital to fund large scale investments, initially in the transportation infrastructure. Canals typically took seven years before they could earn a penny. Similarly with the railways. Large numbers of small shareholders provided the capital to proceed with these massive long term investments. The net effect was to put huge amounts of money into the real economy. Facebook’s IPO works in exactly the opposite direction. Facebook’s need for massive investment is slight. It has grown to be worth $80-100 billion without a public share issue, and the aim of the IPO is to facilitate the founders of the business to realise the value they have created; in effect to take money out of the company, rather than putting it in.
That reversal is happening right across the piece. The financial sector, investment banking and the financial intermediaries that deregulation has encouraged, the private equity partnerships, hedge funds etc, no longer exists to support the real economy, but to extract value from it where ever possible, in order to fulfil Friedman’s dictum ‘to make as much money as possible for stockholders’ without regard to any other social responsibility. The outcome has been shown to be unsustainable in terms of both damage to the planet and the explosion in inequalities.
Two consequences of this reversal are immediately apparent. Firstly, public companies have ceased to rely on public share issues for their future financing. Even in the Anglo-American economies, retained profit provides the bulk of future investment. Secondly, the money extracted from the real economy firms is invested, mainly by other financial intermediaries, in speculative financial ‘products’. The international market for swaps and derivatives, for example, was estimated four years ago to be already worth $54 trillion ($54,000,000,000,000), many times the value of the world’s stocks and shares. Such investments formed the last bubble from which we are still suffering, and they will certainly create then next one, which may be the last for this form of corporate organisation.
If the public company as we know it is endangered, as it certainly seems to be, the question arises as to what will take its place? Current indications in the Anglo-American world that the simplistic free market idea will persist, and private predation on public companies will continue till there is little of value left. Elsewhere the outlook is not so bleak. ‘The Road to Co-operation’ reviews alternative governance systems and finds in other industrial economies, such as Japan and Germany, systems offer real economy firms protection and encouragement, as well as providing some constraints on financial predation. These may be essential prerequisites for survival of the public company.