Shareholders are becoming a thing of the past. That's the message of new research by Kathleen Kahle at the University of Arizona and Rene Stulz at Ohio State University.
They show that the number of stock market-listed companies in the US has fallen in recent years - from over 7,000 in 1995 to less than 3,800 last year. What's more, the companies that are listed now are very different from those that were on the market 20 or 40 years ago. Companies today, they show, are bigger and older than they were then; are less profitable; invest less in machinery; and hold more cash.
What explains these changes?
Here we have an example of an economic forecast that turned out to be correct.
Back in 1989 Michael Jensen, a subsequent Nobel Laureate, wrote a piece predicting "the eclipse of the public corporation".
Quoted companies, he wrote, have a grave flaw: "an absence of effective monitoring of managers". Shareholders are too dispersed and too ill-informed to exercise proper control of chief executives. This causes several nasty problems.
One, said Professor Jensen, is that bosses will want to build up cash piles to give themselves freedom from capital markets. If companies held no cash, they'd need to raise funds in the market every time they wanted to invest. This would give investors control over the company's plans. If, however, companies can invest internal funds, this control is lacking and so bosses are freer. Events have vindicated Professor Jensen; in both the UK and US, corporate cash holdings have soared in recent years.
Secondly, he said, when companies do invest the job is likely to be badly done. Bosses will prefer grand schemes that gratify their ego rather than humdrum projects that maximize shareholder value. Perhaps the worst economic decision of our lifetime was RBS's takeover of ABN Amro - a move that was due to shareholders' failure to control Fred Goodwin's megalomania.
To these failings we can add that bosses plunder directly from shareholders by extracting big wages for themselves. The High Pay Centre estimates that CEOs are now paid 150 times the salary of the average worker, a ratio that has tripled since the 1990s - an increase which, it says, can't be justified by increased management efficiency. "No countervailing forces have been deployed to stop this," it says.
Failures such as these, said Professor Jensen, would cause quoted companies to be supplanted by private equity, as this permits a few well-informed investors to properly oversee managers. This is what has happened.
But there's something else. In some cases, a stock market listing is the right corporate form. Such cases, said Professor Jensen, occur when there are lots of profitable opportunities but companies lack internal funds. In such cases outside shareholders can provide necessary cash and it doesn't much matter that oversight is lacking: it's not a disaster if a company makes a 20 per cent rather than a 30 per cent return on capital.
And here's the problem. It could be that the decline in the quoted company reflects a loss of such profitable investment projects: it might be another symptom of secular stagnation. UK data, as well as US numbers, are consistent with this. In 1999 (at the peak of the tech bubble) there were almost 1,800 companies listed on the main market. There are now only 933. And, as in the US, the decline has been among small companies. In 1999 almost half of UK companies on the main market had a market cap of less than £100m. Today, only 26 per cent of them do.
It matters enormously which of these two explanations is most important. If quoted companies are in decline because they are inefficient then there is a strong case for investing in private equity - something you can do not just via venture capital trusts but through several investment trusts, some of which have done well recently.
If, on the other hand, the demise of quoted companies reflects a general loss of investment opportunities there might be less escape for investors.
Personally, I suspect private equity might be a useful diversifier for some investors, as a play upon the possibility that the best growth opportunities - insofar as they exist at all - lie outside the quoted sector.
