For much of the 20th century, public corporations did indeed become larger and more powerful, leading to the mega-corporations, or conglomerates, formed by mergers in the 1960s, according to Davis. “ITT grew from 132,000 employees in 1960 to 392,000 in 1970, adding Sheraton Hotels, Hartford Insurance, Continental Banking, Avis Rent-a-Car and dozens of other businesses to its portfolio,” he wrote. “During the same period, GM added 100,000 workers and AT&T added almost 200,000…. Berle’s and Means’s prophecy about the ever-increasing concentration of corporate control seemed to have come true.”
But he said the landscape changed during the Reagan Administration, when the Justice Department eased rules that had restricted mergers within the same industry, the Supreme Court struck down state laws limiting hostile takeovers and the IRS opened the door to 401(k) retirement plans in the workplace. That encouraged millions of Americans to own stock in mutual funds – and gave Wall Street more power over Main Street, Davis noted. “The proportion of households with money invested in the market increased from just over 20% in 1983 to more than 50% by 2001,” he wrote.
All these changes led to a growing emphasis among managers, shareholders and other players on public firms’ role in maximising value to shareholders. Managers have come under increasing pressure to raise stock prices or be replaced. In his paper, Davis termed it the “triumph of the shareholders.”
Shareholders, rather than losing power as Berle and Means had predicted, gained it, as more and more shares ended up in the hands of institutional owners like mutual funds, insurance companies, pension funds, hedge funds and private equity funds. Assets in 401(k)s, which mainly invest in mutual funds, soared from $135 billion in 1980 to $12 trillion in 2007. A handful of mutual fund companies became the largest single shareholders in many major corporations, Davis reported.
Though the number of public corporations continued to grow well into the 1990s, the “shareholder value movement” gradually led more and more managers and other insiders to feel that being public was more trouble than it was worth, Davis wrote. For public companies, regulatory scrutiny is tighter than for private ones, and the need to meet shareholders’ constant demand for stock-price gains made long-term strategies more difficult.
Then, new techniques like leveraged buyouts allowed managers to get out from under shareholders’ thumbs by taking public companies private. Other companies never went public in the first place. Companies that needed capital to grow found they could turn to alternative sources like the private equity industry, rather than sell shares to the public, Davis argued.
In the three major US stock exchanges – NYSE Euronext, NASDAQ and the American Exchange (acquired by the NYSE in 2009) – listed companies peaked at 8,823 in 1997 before beginning a steady decline to 4,957 at the end of August, according to the World Federation of Exchanges. Not only are there fewer public companies, they tend to be different. “In recent years, corporations have become less numerous, less integrated, less concentrated and more ephemeral, and more constrained by their shareholders,” Davis concluded.
He observed, ominously, that the decline in public companies coincides with the worst stock market performance in U.S. history, during the first decade of the 21st century. Many of today’s corporations, he added, have adopted practices exemplified by Nike and Apple, which are based in the US but have most of their employees overseas, causing a drop in US employment by the largest firms.
A change on the margin?
But is the change really that dramatic? Are public corporations now passé? Or are their declining numbers just a somewhat wider-than-normal swing of the pendulum?
Edmans thinks too much is being made of the listings decline, which he characterizes as changes “on the margin.” The rise in regulatory costs in recent years, he says, is like a rise in room rates at hotels. Certainly, that would discourage some potential guests, but the hotel will still be there, serving many others.
Christopher C. Geczy, an adjunct finance professor at Wharton, says the decline in listings has been offset by growing market capitalisation – share price times shares outstanding – among the firms that remain. And while Davis noted a large drop in the number of people employed by the 25 largest public firms, Geczy states that employment by publicly owned firms does not appear in trouble if one takes a larger sample.
Part of the decline in listings is due to a drop in the number of initial public offerings, which traditionally help replenish the list as other companies merge, go private or go under. In 1996, there were 561 IPOs; in 2008, just 28. The financial crisis and faltering stock market have been key factors, as companies don’t want to sell shares when prices are low.
In addition, the extremely low interest rates of recent years have made it preferable for many firms to raise money by borrowing rather than issuing shares. And a number of firms once listed in the US have switched to stock exchanges in London and elsewhere. While that is a worry for US exchanges, it’s not a sign those companies are abandoning public ownership.
