Rival versions of capitalism: The endangered public company | The Economist

May 17th, 2012 § 0 comments

The Economist makes a compelling argument for a the publicly held company as an institution for the public good.

First, public companies have been central to innovation and job creation. …. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.

Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.

Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines.

Clearly publicly traded companies are an essential component of the world economy and we can’t take these institutions for granted.

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain.

I do wonder, however, about the conclusion they reach regarding the reason for the decline in IPO’s.

The burden of regulation has grown heavier for public companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth.

Fussy regulators are an easy target but it’s the demanding money managers that worry me. The emphasis on quarterly and year over year growth is untenable. It’s not longer acceptable for a public company to merely be profitable, they must instead grow. Constantly. Those that don’t grow are punished and this leads to an unwillingness on the part of corporate chiefs to look beyond however long it will take for their stock options to fully vest.

I wish I had a solution for this but I don’t. While I see the sense in The Economist’s conclusion I don’t think it will be enough to protect the IPO.

All this argues for a change in thinking—especially among the politicians who have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run. Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role.

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