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Is the Sun Setting on the Public Corporation?

7/10/2013 --

Professor Jerry Davis says the golden age of the public company, along with its income security and social benefits, may have passed and it's not clear what model replaces it.

ANN ARBOR, Mich. — The Occupy movement that emerged in 2011 to protest inequality often made large corporations the target of its ire.

But that ire was misplaced, according to U-M Ross Professor Jerry Davis. He argues that it's the collapse of the traditional, publicly traded corporation that is largely to blame for growing income inequality, decreased upward mobility, and greater economic insecurity.

The public company is fading from the American economic scene and with it economic and social stability, Davis says. The number of companies listing shares on the stock market in the U.S. has dropped from close to 9,000 in 1997 to about 4,100 in 2012. The number of IPOs per year has dropped dramatically from the mid-1990s.

In the meantime, employment concentration (the proportion of the labor force employed by the largest companies) fell while income inequality rose.

"Public corporations in the U.S. paid the bill for things like health insurance and retirement security that states took responsibility for elsewhere in the world," Davis says. "But now, it's often just too costly to be a public corporation. And many of the public corporations that remain are ill-equipped to provide long-term employment, opportunities for advancement, and benefits such as health care and retirement security."

Davis' analysis was published in the articles "The Twilight of the Berle and Means Corporation" in the Seattle University Law Review and "After the Corporation," in Politics & Society.

The shareholder rights and buyout movements of the 1980s and '90s — along with deregulation and offshoring — shifted the focus of public companies from catering to multiple constituencies to serving mostly shareholders.

"Public companies were social institutions," Davis says. "They offered health insurance and defined benefit pensions. But Wall Street told them that wasn't a shareholder-friendly model. They encouraged them to be more like Nike, which means outsourcing some or all production. So companies in dozens of industries, from electronics to pharmaceuticals to pet food, started following the Nike model. If you look at the computer and electronic products industry, for example, you would think you'd see huge employment growth. But that industry has lost 800,000 jobs in the U.S. since 2001. Chinese vendors could assemble the products cheaper."

Davis doesn't see public companies returning to historical levels. Even legislative efforts, like the JOBS Act, haven't sparked more IPOs.

"There were actually fewer IPOs the year after the JOBS Act than in the year before it," Davis says. "It's not regulations that are preventing companies from going public. It just doesn't make sense economically. Many of them are staying private because it's difficult to balance taking care of employees with the demands of shareholders. Companies in other countries don't have this burden of providing social benefits. The government does that elsewhere. "

The companies that do go public now often have a different flavor. For example, the IPOs of Google and Facebook were designed to keep most of the voting control with the founders. And the companies that are public don't employ the same number of people as the vertically integrated corporations of the past.

"Surveys show that young people want to work at Google, Facebook, and Apple," Davis says. "But to employ all the people currently unemployed in the U.S. you'd need roughly 3,000 Facebooks."

So what replaces the public corporation for jobs, career growth, and benefits? Davis isn't sure, but there are a number of trends he's watching.

For one, technology has drastically lowered the cost of starting a business. Entrepreneurs in cities such as Detroit and Cleveland are coupling the technology advantage with re-purposing unused industrial space, which dramatically lowers real estate overhead.

As for business models, co-ops and mutuals are getting another look after coming into vogue in the Progressive Era. (Land O'Lakes, for example, is a surviving co-op from that time.) The Evergreen Cooperative in Cleveland runs a low-carbon laundry where employees, after a trial period, join the co-op as a member-owner through payroll deductions and vest after three years.

TechShop aggregates high-end capital equipment, like CNC machines and laser cutters, and members pay a monthly fee for unlimited access. New technology like 3-D printing has the potential to boost localized production of a wide range of products.

Davis is spending a sabbatical in Detroit to study some of these ventures.

"Some of them will fail, but maybe some of them will be huge successes," Davis said. "What's arising out of necessity is just very interesting."

— Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu