Stock Buybacks & the End of the Modern Corporation

Should you even bother protesting corporations when they're dying anyway?

A most curious phenomena occurring in the new millennium as far as businesses are concerned is the number of publicly listed firms engaging in large stock buybacks. To be sure, there is a purely "window dressing" aspect to this: by reducing the number of outstanding shares, firms' earnings per share (EPS) figures are boosted to placate shareholders. But, these buybacks also raise questions about corporate governance. That is, if companies keep buying their own stock at their current pace, then pretty soon we won't have publicly listed companies anymore. If anti-globalization protesters have long demonized MNCs for being insular and unresponsive to public pressure, wait till they aren't floated on stock exchanges as the firm as we know it evolves to the next stage.

Simon Caulkin at the FT extrapolates these trends and invites us to think of a world where the public corporation is a thing of the past. Certainly, the trend described above is already in full swing in the most sophisticated of capitalist economies, the US and the UK. Are they firms dinosaurs in this day and age?

In the anglophone world at least, the publicly quoted company has been the central institution of modern capitalism, the marshalling yard for the economy’s resources – investors’ funds from one side, entrepreneurial animal spirits from the other – for 150 years. Yet all around the globe, listed companies are dying off, if not like flies then perhaps more like other things no longer suited to their environment – dinosaurs, say. 

Nor is it likely to be a temporary trend:

Could this be temporary, with normal service resumed once business has finally recovered after the crash? It seems unlikely. First, the decline in quoted numbers started around the millennium, well before the financial crisis. Second, although the shrinkage is worldwide, it is greatest – nearly 50 per cent since the high point in 1998 – in the economies most attuned to the stock market: the US and the UK. Third, unlike their 20th-century predecessors, today’s new companies have little appetite for public capital. At Google, Facebook or Apple, intangible assets dwarf tangibles, which mostly consist of offices and computers, rather than capital-intensive production plants. These companies do not even need to own them.

In fact, companies are using the stock market less and less to raise capital for productive ends, instead employing it for the opposite reason: retiring equity capital via share buybacks running at a staggering 2-3 per cent of gross domestic product, according to City economist Andrew Smithers.

Like nearly everything else, the joint stock corporation probably does not have an infinite lifespan:

If this is right, we are witnessing not just a blip but the start of a historic shift. This is the view of the University of Michigan’s Professor Gerald Davis, who in a 2013 article, “After the Corporation”, described the public corporation, at least in the US, as a “distinctly 20th century phenomenon” that had been rendered “unnecessary for production, unsuited for stable employment and the provision of social welfare services, and incapable of providing a reliable long-term return on investment”. The consequences are already visible in declining employment prospects, rising insecurity and inequality, and endangered retirement and (in the US) health benefits, as well as indirectly in social pressures emanating from the likes of the Occupy movement.

Gerald Davis has an interesting article discussing this phenomenon at greater length. For left-leaning folks, he offers the more sanguine view that the coming end of the corporation should usher in more inclusive forms of social organization. Here is its abstract:

Shareholder-owned corporations were the central pillars of the US economy in the twentieth century. Due to the success of the shareholder value movement and the widespread “Nikefication” of production [firms being mere brands as opposed to having tangible manufacturing facilities], however, public corporations have become less concentrated, less integrated, less interconnected at the top, shorter-lived, and less prevalent since the turn of the twenty-first century, and there is reason to expect that their significance will continue to dwindle. We are left with both pathologies (heightened inequality, lower mobility, and a fragmented social safety net) and new technologies suitable for being repurposed in more democratic forms. Local solutions for producing, distributing, and sharing can provide functional alternatives to corporations for both production and employment; what is needed is the social organization to match the tools that we already have, or will have shortly. The time for democratic local economic forms prophesied by generations of activists may finally be at hand.

Should globophobes cheer on the death of the corporation as we know it? I think it's too early for them to rejoice since the alternative--the non-listed entity--will likely be more insulated from public pressure emanating from being a publicly listed company. Caveat emptor, then, for both lovers and haters of big businesses alike. Even if the shape of things to come is not yet definite, we at least know change is a-coming.