Economix Blog: Nancy Folbre: The Twilight of the Public Corporation

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Public corporations that ordinary people can invest in and get rich from represent one of the great selling points of American capitalism – at least according to the salesmen.

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Yet public corporations, which rose to dominance in the United States economy in the second half of the 20th century, are now waning in significance.

As Gerald Davis of the Ross School of Business at the University of Michigan points out, the number of public corporations in the United States in 2009 was only half what it was in 1997. The share of employment represented by the largest 25 corporations has also declined over time.

Professor Davis asserts these trends result from increased reliance on overseas contractors for manufacturing, discussed in my last post.

Public corporations have also become less public. Professor Davis contends that share ownership has become heavily concentrated through mutual funds, such as Fidelity, which he says now holds significant blocks of 10 percent to 15 percent in many large companies. Even Fidelity’s role is overshadowed by BlackRock, proprietor of iShares Exchange Traded Funds, which, Professor Davis estimates, was the single largest shareholder in one out of five corporations in the United States in 2011.

Private companies going public often rely on “dual-class shares” that give original owners more voting rights than other investors. The founders of both Groupon and Zynga gained extra clout in this way.

The incentives to “go public” are smaller than they once were, because the rise of private equity firms and hedge funds has made it easier to raise money outside the stock market. Private companies are less subject to government regulation and oversight. As The Economist put it in a recent article discussing this trend, “Companies are like jets; the elite go private.”

The rise of shareholder activism may be contributing to the trend. The California Public Employees Retirement System, a major pension fund investor, is now campaigning strongly against dual-class shares, threatening the viability of that strategy for maintaining minority control.

In June, many stockholders of this country’s largest public corporation, Wal-Mart Stores publicly registered strong discontent with its policies. They were unable to dislodge the company’s chief executive, because the Walton family stood behind him with their substantial voting shares. It seems likely, however, that both majority owners and management were discomfited by the bad publicity.

Shareholder activism itself reflects a growing disillusionment on the part of individual investors, many of whom have quietly fled the stock market. In 2012, 53 percent of American households polled by Gallup reported that they had investments in the stock market, through individual accounts, mutual funds or retirement accounts, down from 67 percent in 2002.

Net investments in mutual funds, variable annuities, exchange-traded funds, and closed-end funds burgeoned between 2001 and 2007 only to sag in the wake of the Great Recession. They are now lower than they were in 2001 (See Figure 1.3 of the Investment Fact Book).

Declining real returns explain much of this change. As Professor Davis observes, the “first 10 years of the 21st century represented the single worst period of stock market performance in U.S. history.” The Standard Poor’s 500 index has yet to regain its 2000 level.

But disillusionment with the public corporation also plays a role. Accounting scandals, insider trading violations, and bailouts have taken a toll.

Andrew Ross Sorkin reports that three-quarters of students surveyed at 18 high schools across 11 different states agreed with the statement: “The stock market is rigged mostly to benefit greedy Wall Street bankers.”

This is a pretty dark view. No wonder Professor Davis refers to the “twilight” of the public corporation.

Article source: http://economix.blogs.nytimes.com/2012/09/03/the-twilight-of-the-public-corporation/?partner=rss&emc=rss