In our continuing series, Corporate Governance Expert David Beatty offers insights on the trends in publicly traded markets.
Trends in Publicly Traded Markets
I want to share some information about publicly traded companies on both the American and Canadian and the United Kingdom markets. You would expect, I think, as in most parts of the economy that the markets have been characterized by the growth in the number of issuers over the last, say 20 years. The fact is the number of publicly traded companies in the United States has dropped by 50% in the last 20 years, five-oh, and the same in the United Kingdom. That’s pretty dramatic. We have the Venture Exchange in Canada, which does keep a lot of little things cranking along, but by and large, the attractiveness of public markets has declined precipitously and may well go to zero, I don’t know.
There are a couple of reasons for this. There’s a couple of pushes and a couple of pulls. On the push side, there’s something called short-termism and a something else called activism. This makes it really awkward for an operating company to keep its eye on the company’s ball. Short-termism means you’re looking at the next quarter. Forget the long-term. Long-term is maybe a half a year. A survey was done by an institution called the Focus Capital on Long Term, F-C-L-T, created by Dominic Barton when he was the head of McKinsey and Company and by Mark Wiseman when he was the head of the Canada Pension Plan Investment Board. They thought this push to short-term results was so harmful to companies that they created this institution, and if you look at that website, you will find some very prominent people on the board and you will find a staff of really quite dedicated and wonderful human beings.
So activism is the other side of the coin, and that’s the desire of people to shake the bag, to look at a company and say, “I could do better if I was running it. I could do a lot better, and if I was in control of the cash and the people, the financing and the strategy, we could do a lot better than the current market price is indicating they’re doing.” In the United States last year, there were over 600, 600 separate campaigns against operating companies.
So you put the pressures of short-termism together with the pressures of activism, there’s a huge, huge push not to be in the public markets, or indeed to get out of them. Michael Dell of Dell Computers, he quit the publicly traded markets, saying, “I don’t want to be held captive by short-term traders who have no long-term interest at all.” Subsequently, he quintupled the value of his company.
So those are the push factors. On the pull side today, basically there’s free money for everybody and there’s a huge growth of an industry called private equity, firms that grow up to take companies public or to take them private in some cases, firms that are financed by the large asset managers, because the returns to private equity over the last decade have proven to be really very substantially above the returns to the stock market. So private equity is growing on top of venture capital, and if you want capital as an entrepreneur, you no longer have to go to the public marketplace. You can be satiated with capital in the private equity marketplace.
So the combination of those two push factors and the free money and the growth of private equity as a pull factor have really, really meant that there’s tremendous pressure on bringing your company public, and so a lot of people are deciding not to do it. Last year, 2019, there were only 110 new public issues, and the average for the decade earlier would be over 500. So will private companies dominate? Yes. Are public companies dead? Not yet, but they might be.
David Beatty is an adjunct professor and Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management. Over his career, he has served on more than 39 boards of directors and been chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.