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The greying of business

Wed, 13th Aug 2014

‘Like the population, the business sector of the US economy is ageing,’ says a research paper from the Brookings Institute, in an arresting phrase. It reports that firms aged 16 or older now account for 34 per cent of all US economic activity – up 50 per cent in 20 years. The share of all younger firms is correspondingly shrinking. As with jobs, housing and income for individuals, the business advantage is with the old and incumbent. With fewer startups (‘especially disturbing’), entrepreneurs are struggling across all sectors, according to the authors, with potentially unwelcome implications for productivity, innovation (where new firms have accounted for a disproportionate share of disruptive new product categories in the past) and employment.

The Brookings findings chime with other disquieting indications of sclerosis, not to mention mortality. The average life expectancy of firms is falling sharply, according to other research. This means that fewer are getting through the perilous pipeline of youth to become old and established. When they do, fading competitive vim means they have a greater chance of becoming entrenched and obese. If business is getting old and fat, ‘it appears to be getting fat because it is getting old – not the other way around,’ confirms the report. While the Brookings authors couldn’t find a direct link between ageing and consolidation, they did note that consolidation had increased over recent decades. In short, business is not only old and fat, it is also becoming more monopolistic.

Perhaps most striking of all, it is the publicly-quoted company, the central economic actor in the west, which is in steepest decline. In the US and UK, the most stock-market-oriented economies, listed corporations have been dying off like flies during the noughties. The universe of quoted US companies, at a paltry 9,500, is a whopping 50 per cent down from the all-time high in 1998. Although less in Asia, the fall is happening worldwide. As the costs of being public go up (regulation, activism, scrutiny) and the value goes down (companies nowadays rarely need outside investment), companies have been going private, not going public, or going bust, in droves. Mergers too have played a part. The quoted company, the engine of capitalism for the last 150 years, is beginning to look like an endangered species.

It wasn’t supposed to happen like this. Ironically a large part of the collapse of the corporation can be put down to the triumph of the cult of MSV, maximising shareholder value. In June, Harvard Business Review ran a special three-article ‘Spotlight’ section asking, ‘Are Investors Bad for Business?’ Two of the pieces, and a third indirectly, answered ‘Yes’. Basically, Wall Street (and especially hedge-funds and other ‘activists’) demands a high return on assets. One way to improve the ratio is to grow revenue and profits (the numerator) organically – but that’s hard and often slow work. Easier and quicker to slash assets (the denominator) by dematerialising, like Nike: outsourcing everything that moves while restricting investment to strictly efficiency-creating measures. Share buybacks, now being implemented in staggering quantities on both sides of the Atlantic, help increase leverage and force up total shareholder returns by the same mathematical tactic. The result is a weird kind of corporate anorexia: behind the apparent obesity, there’s nothing there. Corporations are auto-digesting. Under the impact of their perverse incentives, CEOs and short-term shareholders reap fabulous rewards while Innovation and job-creation rates are slumping. Meanwhile, the bulk of retail shareholders, and those reliant on companies for their retirement, are much worse off – the rates of return on assets and invested capital for US capital in 2011 were just one-quarter of what they were in 1965.

In this perspective, the monopolistic, or at least oligopolistic, tendencies at work in so many industries today – banks, retail, oil, automobiles, energy, phones, utilities, internet, to name a few – should be viewed alongside the Brookings findings as further symptoms of a damaged, unbalanced business ecology whose sustainability is now in serious question: in other words evidence of weakness rather than strength. In one compensating domain, however, giant old companies have undeniably increased their power: politics. With so much vested interest at stake, for monopolists the incentives, and returns, to political lobbying are sky high – which explains why CEOs think it’s more valuable to spend time schmoozing with government officials than selling to customers. Large single industry interlocutors suit governments too: but as the FT’s Tim Harford points out, such a cosy relationship is conducive neither to a healthy democracy nor a vibrant economy. A government in cahoots with Google and Facebook on surveillance doesn’t bear thinking about (although for the sake of prudence we should). From the point of view of the health of the economy as a whole, giving massive injections of cash to prolong the existence of wheezy overweight companies like the banks and General Motors now looks even more misguided than it did at the time.

After the south of England was hit by the hurricane of autumn 1987, the felling of 700 mostly mature trees in the famous collection at Kew Gardens was viewed as an irretrievable catastrophe. It has proved the reverse. The knowledge gained in the storm’s aftermath, say keepers at the arboretum, has revolutionised the science of tree planting and conservation, led to renewed plantations and given a vigorous second lease of life to some of the park’s most venerable growths. There’s an obvious lesson there for those whose job is tending the health of business, too.


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User comments

John Watson :: 14th Aug 14
Especially interesting final paragraph, if the moral of the article can be carried to other areas, does that mean I should vote yes in the forthcoming referendum?
Andy Lippok :: 14th Aug 14
I'll take a look at the article Simon, but I wondered whether it has anything to say about the business environment and companies in Germany or the nordic nations? Does the German model of Mittlestand and numerous local financial institutions have a better outlook? @John Watson - my reponse an unequivocal YES!
Henning Sieverts :: 19th Aug 14
I hope that Vince Cable and other senior politicians have access to these essays, and especially to this one. It's obviously correct in its analysies, and therefore most disturbing about the future of the economy, both in the UK and elsewhere.
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