From Shareholder to Stakeholder Capitalism: Really? (3/3)
Most corporations are run for the shareholders as a point of fact despite whatever protestation might be made by their CEOs who may be thinking longer term. Sure other stakeholders have always had some traction, but fundamentally companies on the S&P 500 are managed for the next quarter earnings.
That notion of shareholder supremacy comes from 1970, where Milton Friedman said:
“There's one and only one responsibility of business, and that's to use its resources and engage in activities designed to increase its profits. As long as it stays within the rules of the game I characterize the business of business is business.”
Essentially that's where we've been for the last 50 years. Fast forward to August 19th, 2019, The Business Roundtable (BRT) got 181 CEOs to sign new principles of corporate governance.
On the front page of Fortune magazine were Ginni Rometty, the CEO of IBM, Jamie Dimon, the celebrated CEO of JP Morgan Chase and Alex Gorsky the CEO of Johnson & Johnson, hugely prominent figures in American business life. And they said: “We not only have to deliver profits, but we’ve got to be responsible for a much broader base of other stakeholders.”
- We want to invest in our employees.
- We want to deal fairly and ethically with suppliers.
- We want to support the communities in which we work.
- We want to generate long term value for shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them for the future success of our companies, our communities, and our country.
In other words, the BRT CEOs agreed that their corporations have a responsibility that goes beyond just the next quarter earnings for our shareholders. Quite profound, but was it meaningful? Is it a beacon of hope shining on the horizon?
The sad fact is, it was more honoured in the breach than in the observance. This was the conclusion of Lucian Bebchuk who wrote an article in the Harvard Law School forum on corporate governance:
Was the BRT statement on corporate purpose mostly for show?
Bebchuk’s answer was: “Yes.”
And that means that short-termism and activism, the two dominant characteristics of publicly traded markets today, probably still prevail. But the importance of publicly traded markets in our economies has been dramatically reduced.
The number of new public listings on exchanges grew dramatically up to 1985 on the New York Stock Exchange, AMEC and NASDAQ to 7,428 listings.
But what's happened since then?
The numbers have dropped by 50%.
This dramatic decline is the consequence of three “pushes” - short-termism, activism and compensation and one “pull” - the explosion of private equity.
Pushes
A study of 1,000 board members in 2016 asked: “What's the time frame that would be most suitable for your strategic plan?”
The answer: you ought to have three years to five years as your perspective.
The next question: “What’s the actual time frame used in your company?”
Most of the respondents said” “Well, less than two years, that's how we actually run it.
If we could have a longer time frame to do our business, we'd be better off.”
Mark Wiseman, then the CEO of the CPP Investment Board and Dominic Barton, then the Global Managing Partner of McKinsey, thought this short-termism push was so harmful to our society, that they created something called Focusing Capital on the Long Term (FCLT). The intent was to create an opposing force to the endemic short-termism they saw in publicly traded markets from the perspective of an asset manager as well as a strategic consultancy.
Compensation practices actually embeds short-termism. Over half of an American CEO’s compensation comes from some form of share ownership.
Trying to align the managers with the owners by making them shareholders sounded sensible, but it kind of got out of control, and Warren Buffett called it “ratchet, ratchet and pay more”.
The future wealth of the men and women who become CEOs depends almost completely on the future of the stock market prices of their companies.
They all work to ensure they make the quarter so they can make their money when they depart. Compensation builds on short-termism and finally, activism is another huge “push” feature.
In 2022 globally, there were 847 activist campaigns publicly acknowledged around the world. There are three times that number that are not publicly acknowledged. That's a huge number of campaigns. It covers every single market segment, large cap, mid cap, small cap, micro cap, and nano cap. And in Canada, it's no less prevalent than it is elsewhere in the world.
Why don't you become a publicly traded company? …because of short-termism, compensation and activism. These forces ensure management teams spend all kinds of time, energy, and effort on things other than our company’s medium to long term future in order to make the quarterly earnings forecast. If they don't make the numbers, some activists will get after them.
Marc Andreessen created and still manages arguably the most famous private equity venture capitalist firm in Silicon Valley.
Marc Andreessen said at a recent conference, “If I ever took a company public, of course, I will take it public with dual class shares. I want my management team to be worrying about building the company, not about responding to a newly minted 26 year old MBA from the Harvard Business School about what the strategy is. I want them to look forward for the company’s future.”
Pull
Equally, there's a “pull” to stay out of public markets and that's the explosion of private equity. Some $60B USD in private equity was invested in the first quarter of this year, over 1,600 deals. There are approximately over 6,000 actively managed private equity firms in the globe and their estimate there's an estimated US$2.3 trillion in unspent money.
If you have an idea and want to start a business, you no longer have to go to the stock market to get funded. You have ample opportunity to tap into the wealth and resources and knowledge of the private equity world. And as a result, publicly traded companies have declined and probably will continue to decline. To stay private longer (SPL) is the new mantra and dual class shares is the only way Andreesen ever would go public.
Read the first article here.
David R. Beatty, C.M., O.B.E., is Academic Director of the David and Sharon Johnston Centre for Corporate Governance Innovation at the Rotman School of Management. Currently, he serves as a Director of publicly-traded McEwan Copper and the private Bon Intelligence. Over his career he has served on over 40 boards and has been Chair of eight publicly-traded companies. He was the founding Managing Director of the Canadian Coalition for Good Governance (2003-2008) and is a founder of the Directors’ Education Program.