has the public corporation reached its twilight?
I think the nexus of law and organization is a fascinating area. While doing some searches in this space, I ran into former guest blogger Jerry Davis’s recent, provocative article on the matter – arguing that the public corporation has reached its twilight:
ABSTRACT
During the five decades after Berle and Means published The Modern Corporation and Private Property in 1932, their analysis became the dominant understanding of the American corporation. Social scientists, policymakers, and the broader interested public knew about the separation of ownership and control, the potentially fraught relations between shareholders and managers, and the image of the corporation as a social institution. Berle and Means’s view of an economy dominated by a handful of ever-larger corporations run by an unaccountable managerial class inspired scholarship from sociologists (who were convinced they were right) to financial economists (who wanted to prove them wrong) to lawyers (who contemplated the rights and obligations implied by this system).
A decade into the twenty-first century, however, the public corporation may have reached its twilight in the United States. The “shareholder value” movement of the past generation has succeeded in turning managers into faithful servants of share price maximization, even when this comes at the expense of other considerations. But the shareholder value movement also brought with it a series of changes that have undone many core features of the Berle and Means corporation. Corporate ownership is no longer dispersed; the concentration of assets and employment have been in decline for three decades; and today’s largest corporations bear little resemblance to the companies analyzed by Berle and Means. Moreover, there are far fewer of them than there used to be: the United States had half as many publicly traded domestic corporations in 2009 as it did in 1997. In another generation, the Berle and Means corporation may be just a memory, overtaken by new forms of organization and financing.
Here’s the link and full citation:
orgtheory.net 
Predicting the death of capitalism is a time-honored hobby.
For a graduate class in “Global Crime” with Gregg Barack I wrote about the future of capitalism. (Barack considers capitalism to be criminogenic.) In Adam Smith’s day, the South Seas Bubbble and similar scandals suggested no future for the joint-stock corporation; yet, America’s railroads were financed this way – repeatedly despite repeated failures, mergers, and acquisitions. (See for example The Man Who Found the Money: John Stewart Kennedy and the Financing of the Western Railroads by Engelbourg and Bushkoff, 1996.) By 1929, individual corporations were supposedly doomed to trusts – despite some headline-grabbing trust-busting. Then came Conglomerates, the wave of the future. Then, they went away. I closed that paper specifically with one of the examples that Gerald Davis offers, private equity taking over formerly public firms.
With capitalism, there’s always something new.
Yet, the old forms remain. Before the corporation, we had only family businesses and partnerships. We still do – and in new varieties. Major league sports are successful trusts. GE finds success in diversification. The Spanish co-operative, Mondragon is a successful, employee-owned conglomerate. Despite the death knell, IPOs are born.
Davis’s suggestion that sociologists and lawyers can invent new forms of organization is compelling. It remains to be seen what is to be created and what will prove to be profitable.
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Michael E. Marotta
June 14, 2011 at 11:09 am
[…] has the public corporation reached its twilight? […]
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Daily Links for June 13th through June 14th | Akkam's Razor
June 14, 2011 at 1:03 pm
Thanks for mentioning this article, Teppo — I”m anxious to read it. I very much enjoyed Davis’s Managed by the Markets, but I have to say the way he makes the following claim makes me skeptical:
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Robert Couch
June 14, 2011 at 1:33 pm
(Sorry for missing the closing blockquote command.)
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Robert Couch
June 14, 2011 at 1:39 pm
I would not want to equate the decline in public corporations with the death of capitalism. As Michael points out, there are plenty of ways of organizing a capitalist enterprise that do not involve selling shares on a public market, even in financial services. (Two that I interact with regularly are my local credit union and TIAA-CREF, both of which are non-profit organizations. Check out Marc Schneiberg’s fine article in the same issue on mutuals, co-ops, and municipally-owned companies at http://lawpublications.seattleu.edu/cgi/viewcontent.cgi?article=2049&context=sulr.)
Most of us consider Germany to be a capitalist economy, and according to the World Bank it had only 571 domestic listed corporations last year–fewer than Israel (596), Pakistan (644), Malaysia (957), Romania (1383), and far fewer than China (2063). So, it’s worth stipulating that “shareholder capitalism” is not the only viable form of capitalism.
In any case, it’s a remarkable thing that the number of public corporations in the US has been in continuous decline since 1997, as the number of IPOs has not nearly kept pace with the number of mergers, bankruptcies, and delistings. (Public corps declined by 22% from 2008 to 2009 alone.) It is also notable that even the most successful public companies no longer create many jobs within their own boundaries, even when they create lots of shareholder value. (Google’s market cap today is $163 billion, with 24,400 employees; Apple’s market cap is $304B, with 46,600 employees; Amazon’s market cap is $85B, with 33,700 employees.) And on average, public corporations in the US have not been creating that much shareholder value: on the first trading day of 2000, the S&P500 stood at $1455; on the first trading day of 2010, it was at $1115 (i.e., down by almost one-quarter for the decade).
So, how did that happen? Where did the public corporations go? One hypothesis, beloved on the political right, is that meddling politicians and regulators spoiled the fun by requiring public corporations to audit themselves more carefully, disclose more information, vouch for it more rigorously, and staff their boards more thoughtfully. (That would be Sarbanes-Oxley, enacted in the wake of Enron, WorldCom, et al.) The cost of complying with these outrageous demands makes it too costly to go public in the US, so–stay private and find private investors, or head off to London or Hong Kong to list your shares.
An alternative hypothesis is that public corporations were especially suited to a particular way of organizing the economy that no longer characterizes the US. In the US, national-scale enterprises created at the turn of the 20th century needed capital on a large scale, and issuing shares was the most cost-effective way to do it. Being a public corporation provided many advantages that evolved over the 20th century, with the final act being “creating shareholder value.” But outside of the retail and energy sectors (and a handful of others), enterprises in the US today can be relatively tiny in assets and in employment but huge in revenues because much of what an enterprise requires is available off the shelf (including design, manufacturing, distribution, human resource management, and so on). Call it the Nikefication of the American economy. My favorite example is Vizio, the largest-selling television brand in the US, which has 196 employees. It is almost literally a nexus of contracts.
In this situation, why go public? So that entrepreneurs and early employees can get rich quick; so that venture capitalists can get their money back; to provide a currency to make acquisitions. But it’s not to build factories and warehouses, and clearly many entrepreneurs are deciding to skip this step.
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Jerry Davis
June 14, 2011 at 2:17 pm
Thanks, Jerry. These are intriguing issues to ponder and I like you’re way of challenging the right/economist SOX explanation (esp. since I’m a financial economist myself, who’s nevertheless interested in sociology, critical theory, etc.).
I think it would, however, be helpful to differentiate in the future between the following two claims: (1) a declining number of publicly traded corporations, and (2) a declining share of total economic activity (as measured by, say, total capitalization, total revenue, total employees, or some other “total” metric).
This chart, for example, plotting market capitalization of NYSE + NASDAQ as a percentage of GDP, suggests that perhaps we have only witnessed a bubble popping in terms of going-public-hype, rather than any long-run decline in the relative share of publicy traded activity.
Also, in many industries there has been a significant increase in the number of reverse mergers (a private company going public by acquiring a publicly traded ‘shell”) in the last decade or two. This is likely related to the common claim that simply too many firms went public during the late 90s dot com hype, and thus less obviously supportive of your story.
Just some thoughts. Again, I really enjoy your work, so keep it coming!
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Robert Couch
June 14, 2011 at 4:06 pm
@Robert: Thanks for the comments. Figuring out what the right metric is for “prevalence/dominance of public corporations” is pretty tricky. I’ve spent the past 90 minutes trying to calculate one appealing measure that you suggest — proportion of the nonfarm labor force employed by public corporations — and it’s not trivial. (I downloaded employment and other data for every company on WRDS; deleted all those not incorporated in the US; deleted, to the extent possible, duplicates and other misfits like the Postal Service; etc., then summed by year and divided by total nonfarm laborforce from the BLS.) To the extent that the data are plausible, they mirror the same pattern as the # of public corporations, peaking in the mid-1990s and declining ever after, with last year being the nadir. But, these figures reflect global employment, not just US employment. Most employees of the biggest non-retail companies (e.g., GE, IBM, Hewlett Packard, Citigroup) work outside the US. So, this probably overstates substantially the US footprint of public corporations.
The chart you link is interesting but, as commentators pointed out, NYSE and Nasdaq have hundreds of non-US companies traded on them, and much of the run-up in valuation tracks the run-up in ADRs. Limiting to domestic cos. shows something a bit less dramatic, but there is no doubt that Apple’s $300B valuation and a few more like it add up!
On the claim that ownership is no longer concentrated, I’ve written a couple of things documenting this, but here is the short version: due largely to the advent of 401(k)s, mutual funds increased in assets under management 100-fold between 1980 and 2007 (from $135B to $12T), with the biggest families (such as Fidelity) getting most of the bump. As a result, they own spectacularly large stakes (10-15% or more) in hundreds of US companies simultaneously — often competitors in the same industry. On any given day, Fidelity is the largest owner of 1 in 10 US corporations, with the sole discretion to buy, sell, and vote the shares.
[Other fun facts like this are documented in the article. Happy to share the employment data if someone has the energy to fix it!]
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Jerry Davis
June 14, 2011 at 9:51 pm