The authors were somewhat disappointed, or rather, irritated, to note that developing countries did not embrace the traditional public corporation model completely. Variations that include state ownership or even family control seem to be capable of functioning quite efficiently. More troublesome to them was an apparent trend towards obsolescence in the UK and, particularly, in the US.
The evidence that companies are choosing other organizational models can be found in the following charts.
Further evidence arises from the dramatic decrease in initial public offerings (IPOs).
The authors suggest three attributes of public companies that have gotten worse over the years and may have encouraged others to look into alternate types of organizations. They consist of the temptation for managers to play loose with others’ money to improve their personal financial gain, the increased hassle of regulation, and a growing focus on short-term market issues.
"Public companies have always had to put up with more regulation than private ones because they encourage ordinary people to risk their capital. But the regulatory burden has become heavier, especially after the 2007-08 financial crisis."
"Companies must strike a balance between the short and long term, satisfying the market’s demand for profits today, while planning for the future.....Leo Strine, a judge with expertise in corporate law, accuses institutional investors of ‘gerbil-like’ activity as they move money from one company to another. Standard Life Investors complains that the noise generated by quarterly earnings has become an "unwelcome distraction" from thinking about the long term."
What have become the main competitors for public companies? In the US the main alternatives have come from the return of partnerships as viable models.
"The result has been a revolution: one-third of America’s tax-reporting businesses now classify themselves as partnerships. They have adopted exotic forms of corporate organisation, such as Limited Liability Limited Partnerships (LLLPs), Publicly Traded Partnerships (PTPs) and Real Estate Investment Trusts (REITs). Private-equity firms are typically organised as private partnerships. The individual funds through which they raise money are limited partnerships. And they treat their managers more like partners than employees, rewarding them accordingly."
Entrepreneurs have a variety of choices available to them if they wish to cash in on the success of their enterprise. One is to go public to bring in big money, but to maintain control of the running of the company.
Many seem more interested in developing another enterprise than managing the one they just created.
Those who wish to sell their companies while still maintaining control have numerous partnership options that can be created in alliance with wealthy private equity investors or other groups of individuals.
The authors worry that these changes will diminish the dynamism of the economy and lead to less innovation. Being who they are, they try to lay blame for all unfortunate developments on government regulators. There is another issue that the article touches briefly on that ultimately may prove to be more troubling.
One of the positive aspects of twentieth-century capitalism is that ownership in companies was broadened to include a large slice of the population. Pension funds, the popularity of mutual funds, and the rise of IRAs and 401Ks encouraged individuals from all income groups to participate in the economy as stakeholders. This trend may reverse itself as more companies prefer to keep ownership in the private realm.
Can it be that wealth has become so concentrated in the hands of a few individuals that young companies no longer need to turn to uncertain public markets for funds? Is it possible that a few extremely wealthy individuals are in a position to select winners and losers for the economy as a whole?
The trend toward fewer publicly-owned companies is particularly pronounced in the US and in the UK. These are the countries that have most avidly embraced what has come to be called "free-market capitalism." In truth, markets in these countries are anything but free. Could this capitalist system be evolving—inevitably—in a direction that gives large corporations and wealthy individuals even greater say over what paths the economy is allowed to take?
Taking companies off the public exchanges and putting them in private hands can only increase the already extreme concentration of wealth.
The trends noted in this article bear watching. Not all change is bad, but it is easier to stumble in the many wrong directions than in the few beneficial directions.