TOMORROW’S ECONOMY

The rise and fall of the listed company, and where-for better or worse-private equity will lead business next

JOHN KAY

From the mid-19th century to the end of the 20th, one form of economic organisation seemed to be displacing all others-the limited liability corporation with widely dispersed share ownership. Indeed in the 1980s, partnerships-investment banks, estate agents and legal firms-converted to corporate form, enriching the lucky individuals who happened to be partners at the time, while disappointing the hopes of more junior employees (the “mezzanine layer”) who had aspired to a future share of profits. Something similar happened as mutual building societies and insurance companies also became public limited companies (PLCs). State-owned industries such as telecoms, gas, water and electricity were privatised, and even agencies such as Companies House and the Royal Mint-which necessarily remained under public control- were restructured into corporate form.

But if the 1980s was the zenith of the listed corporation, the decade also saw the emergence of a very different trend. The buyout of food and tobacco conglomerate RJR Nabisco by private equity firm KKR was at the time the largest ever takeover bid, a drama of greed and ambition that inspired a bestselling book and then a film. Since then, the number of companies with shares listed on public markets that can be bought by individuals with modest savings has fallen sharply, at the same time as private equity has grown in importance. The trend continues to gather pace. In 2020, insurer RSA, bookmaker William Hill, and telecoms provider TalkTalk have been “taken private.”

What is all this about? Is private equity another scheme for enriching financiers and executives, or a better mechanism for governing companies? A means of avoiding tax, or of facilitating long-term investment? An arrangement by which managers can function in the dark, or one which enables investors to have a better understanding of the activities in which they are placing funds? It can be all of these things, and often is.

At the same time, should we ask whether the public corporation with widely dispersed share ownership was perhaps a creature of the 20th century, whose days are drawing to a close? I think it probably was. To understand why, we need to appreciate how both business and corporate form have evolved, and how they are continuing to do so.

The history of the corporation

Corporations have a long history. The word has Roman origins. The legal doctrine of corporate personality defines an entity that can make contracts and own property, just as an individual can. The corporation has an identity that can survive changes in governance and form, and any particular individuals who might be associated with it from time to time.

“Neither Apple nor Amazon has ever raised significant equity capital from outsiders-the total is less than 0.01 per cent of the value of each business”

When the European Convention on Human Rights was negotiated in 1949, delegates debated whether a corporation could enjoy human rights; the conclusion was that it could. Until 1965, a British company was taxed as if it were a person. More recently, the US Supreme Court has concluded that corporations have rights of free speech and religious freedom. Many people find these extensions of corporate personality a stretch. In the US Supreme Court, the late justice Ruth Bader Ginsburg, dissenting from the upheld right of a corporation to express the religious convictions of its dominant shareholder, asked why incorporation seemed to allow proprietors to shed personal obligations while retaining personal rights. It is a good question at any time, and one that presses harder when business is finding new ways to shake off certain obligations-and while the relationship between business and society is a subject of debate.