Showing Its Vulnerability
As in all things, change to the corporate form will come slowly and in fits and starts. We would be wise to remember that famous quote from Mark Twain, who cautioned that reports of his death had been greatly exaggerated. So, too, have been reports of the demise of the public corporation. Still, the form is showing its age and its vulnerability.
Joseph Fuller is a founder and chief executive officer of Monitor Group, which offers consulting and advisory services globally. With a particular interest in industries undergoing structural transition, he helped to create Monitor’s organizational strategy practice and advises leading companies in such sectors as life sciences and high technology. He is a director of Phillips-Van Heusen Corp.
A Short History of the Modern Corporation
Public companies first arose as a vehicle to raise capital for entrepreneurial ideas that conservative 19th-century bankers balked at funding. Most historians point to the Boston Manufacturing Co., founded in 1813 in Waltham, Mass., as the first public company in the United States.
Scholars have estimated that two-thirds of the industrial wealth of the country was transferred from private ownership to public shareholders in the early part of the 1900s. During that period, public ownership became the norm for large companies and the aspiration for emerging companies. Perhaps more important, it became the form that most capitalist constituencies came to assume any legitimate company should adopt.
Small and medium-sized companies aspired to public status for reasons beyond merely raising capital for expansion. The status associated with public ownership and, eventually, the enticements of compensation based on equities encouraged executives to go public. The creation of new stock exchanges and the competition emerging between them fanned those flames.
As the process of going public became easier, a host of interested parties—ranging from investment bankers to corporate lawyers, public relations and advertising firms to the exchanges themselves—all proffered arguments for public ownership.
Companies began to think less about whether they genuinely benefited from public status and needed the high cost capital associated with it and more about the management of shareholders and the prestige and liquidity afforded by being listed on different exchanges. This trend reached almost a fever pitch in the rush to take many dotcoms public before they had established a true earnings stream or demonstrated a viable business model.
Erosion of the Power of Large Shareholders
At one point in the recent past, large shareholders had the naked economic incentive to develop a textured understanding of the operations of companies they own. Moreover, they had the standing to demand access to information about a company’s actual performance.
Over the last 50 years, significant impediments were created to major shareholders exercising any meaningful control over companies—and not without good reason. Concerns about substantial shareholders exploiting their power at the expense of smaller holders are hardly theoretical. The late 19th and early 20th centuries are rife with all-too-real examples of insider trading, asset stripping, and other frauds. Indeed, it took the appointment of one of the masters of some of those techniques, Joseph Kennedy, as head of the SEC, to put an end to most of them.