The Indelible Bonobo Experience

The number of public companies has dropped dramatically in the Anglo-Saxon world—by 38% since 1997 in America and by 48% in Britain’s main markets. The number of initial public offerings (IPOs) in America dropped from an average of 311 a year in 1980-2000 to just 81 in 2011 (via Economist)

• Going public no longer has the glamour it once had. Entrepreneurs have to wait longer—an average of ten years for companies backed by venture capital, compared with four in 1985—and must jump through more hoops. Lawyers and accountants are increasingly specialised and expensive; bankers are less willing to take them public; qualified directors are harder to find, since even “non-execs” can go to prison if they sign false accounts.
• The IPO crisis has coincided with a boom in other corporate life forms. Familiar companies have started to put unfamiliar letters after their names: Chrysler LLC and Sears Brands LLC. The University of Illinois’s Larry Ribstein called this “the rise of the uncorporation”.
• Private-equity companies have taken some of the most familiar names on the high street private, including Boots, J.Crew, Toys “R” Us, and Burger King. They also bagged some of the biggest stockmarket beasts: in 2007 Blackstone bought Hilton Hotels for $25.8 billion.
• Partnerships, too, are thriving, reversing a decline that began in the era of Charles Dickens’s “Dombey and Son” (1848). Partnerships provided unlimited liability to the partners but limited their number. This meant partners could be ruined if their company failed (as Dombey was) but could not expand if it boomed. Now, thanks to three decades of legal reforms, partnerships can offer most of the benefits of listing, such as limited liability and tradable shares. In America they also boast a big tax advantage: partnerships are liable for only one lot of taxes, whereas companies must pay corporate taxes as well as taxes on dividends.
• The result has been a revolution: one-third of America’s tax-reporting businesses now classify themselves as partnerships. They have adopted exotic forms of corporate organisation, such as Limited Liability Limited Partnerships (LLLPs), Publicly Traded Partnerships (PTPs) and Real Estate Investment Trusts (REITs). Private-equity firms are typically organised as private partnerships. The individual funds through which they raise money are limited partnerships. And they treat their managers more like partners than employees, rewarding them accordingly. The former CEO of the Gap retail chain made $300m running J.Crew, a clothing firm, on behalf of Texas Pacific.
• Governments have made it easier to create such alternative corporate structures. Seven American states have passed laws to allow companies to register as “B” corporations which explicitly subordinate profits to social benefits. The British government has established a class of Community Interest Companies which issue shares and dividends but exist to promote social purposes. It has also handed over the management of hospitals to “trusts”— public-private hybrids.
• The rise of new economic powers has further changed corporate organisation. In the 1990s it seemed that emerging-market companies would take the Western public company as their model. In fact they have embraced two slightly different corporate forms: SOEs and family conglomerates. These companies list on the stockmarket but do little to constrain the power of the state or of family shareholders.
• The most serious challenge to SOEs comes from family-controlled conglomerates. Family businesses account for about half of listed companies in the Asia-Pacific region and two-thirds in India. Families exercise tight control of their empires—and limit the power of other shareholders—through a variety of mechanisms such as family-controlled trusts (which have more power than boards), appointing family members to managerial positions and attaching different voting rights to different classes of stock. Diversified family firms are good at taking a long-term view, diverting money from cash cows to new industries that might take a long time to produce results. They are also good at dealing with the government failures that plague emerging markets. It is remarkable how fast even India’s lumbering government can move if a Tata or an Ambani calls.
• Family companies of a different type have had a good decade in Europe. German family firms have led the country’s export boom by dominating niche markets such as printing presses (Koenig & Bauer), licence plates (UTSCH) and fly swatters (Aeroxon). These firms pride themselves on a professional approach to management: Nicholas Bloom and John Van Reneen, of the London School of Economics, point out that only 10% of German family firms choose their CEOs through primogeniture compared with two-thirds of family-owned firms in Britain and France. They also pride themselves on long-termism, investing heavily in training and upgrading their machinery.

Public companies triumphed because they provided three things that make for durable success: limited liability, which encourages the public to invest, professional management, which boosts productivity, and “corporate personhood”, which means businesses can survive the removal of a founder. In 1997 the number of American companies reached an all-time high of 7,888. Even now, American listed companies are as profitable as than they have been for 60 years. (via Economist)

• during the past decade, the title of a 1989 essay, “Eclipse of the Public Corporation”, by Michael Jensen of Harvard Business School, has turned out to be prescient. In 2001-02 some of America’s most prominent public companies imploded. They included Enron, Tyco, WorldCom and Global Crossing, which, before their demise, were admired.
• Private-equity firms flourished in the West, challenging the idea that public companies are the best managed. And the rise of the Asian economies, with their legions of family-owned conglomerates, challenged the idea that they are best equipped to advance capitalism’s geographical frontier.