Modern business, modern markets
Stock markets of the kind we recognise today owe their existence to the development of railways in the 19th century. Railways were large, capital intensive businesses, and their physical assets were specific to their particular purpose. There is little you can do with a railway except run trains on it.
.. This model was successfully extended to the large manufacturing corporations which were at the centre of the industrial landscape for much of the 20th century – breweries, automobile plants, petrochemical installations. The shareholders provided the plant, the workers operated it, the managers oversaw the process.
But this does not describe the typical corporation of the developed economy of the 21st century. Business is no longer capital intensive. Apple is today the largest corporation in the world with market capitalisation approaching $600bn, but owns operating assets valued at less than $20bn, and is typical of the ‘new’ companies that have come to dominate the global economy in the last two decades.
.. Modern businesses are typically cash generative at a much earlier stage of their lifetime.
.. When they come to market – and some are querying the need to do so – it is to provide a liquidity event for early stage investors and for employees rather than to raise funds for new investment.
.. In both Britain and the United States, amounts taken out of the market through share buy-backs and acquisitions for cash have exceeded the amounts raised through new issues over the last two decades. The stock market is no longer a means of putting money into companies, but a means of taking it out.
.. It is a corporate cliché that ‘our people are our most valuable assets’, and, like many clichés, it is often true. But if your most valuable asset goes home every evening, and can terminate his or her contract with you at short notice, your claim to ownership of such assets is tenuous.
.. A people business is intrinsically a partnership between its employees and its investors. The alignment of interests that follows from employees maintaining a substantial equity stake is an essential part of such a structure. Indeed, the transaction could only sensibly occur in the first instance on the basis of a relationship of mutual trust and confidence.
.. Shareholders in financial businesses which became limited liability companies and floated on public markets did not do well: neither former building societies nor investment banks proved rewarding for their shareholders. They fell victim to two problems: the asymmetry of risk allocation, in which employees shared the profits but not the losses from highly leveraged equity: and a clash of organisational culture within the firms which was incapable of maintaining a relationship of trust and confidence with outside investors.
.. It may be time to rethink the general hostility to multiple share classes which is visceral in Britain. Historically, these structures were typically used to maintain family control of a business in which the primary economic interest had passed to outsiders. But for Sergey Brin, Larry Page, and Mark Zuckerberg and their senior colleagues, the businesses they control are in a real sense still their businesses even after a majority of the shares are held by others; they are dependent on the founders not just for the realisation of their ideas, but for the development of their long-term value.
.. Our markets need to adapt to the changed nature of 21st century business if they are to remain relevant in a world in which capitalism has little need of capital.