An article in the latest New Yorker talks about the effect the big investment banks going public has had on the Wall Street collapse. By putting themselves at the mercy of the stock market, they surrendered a lot of freedom and autonomy. They were pushed to keep leveraging their bets by shareholder demand for profits. And when the profits fell, so did the companies. Gone are the days when JP Morgan could assemble a few bankers and save the economy. Aside from the irony of the titans of Wall Street not understanding the market, what does this say about modern capitalism?
In a related vein, I heard an interesting interview recently about the rash of IPO’s in the dot-com heyday. The speaker said that the old purpose of going public was to raise capital for expansion, but the new purpose became for founders to cash out. As a result, capital formation didn’t go into new production but private fortunes. The result didn’t add value to the economy.
Google, perhaps the most successful company of the new millennium, held off on going public during the dot-com years and instead depended on private investors. As a result, the owners were able to plow profits back into growth and keep the company’s income and assets out of the public eye. By the time Google did go public it was much bigger than anyone thought – too big for Yahoo to catch up, too big for Microsoft to squash.
So, I’ll throw this out to the economists among us. Has the way the stock market handles new offerings outlived its purpose? Are companies going public too soon, or perhaps totally unnecessarily? Are there problems that are deeper than simple regulation can solve? And what would a better model look like?
September 28th, 2008 at 10:06 pm
I’m not an economist either, but here is my $0.02. Changing the compensation structure for executives is essential — for existing companies being traded and for companies planning IPOs.
Currently, execs of publicly traded companies tend to have a vested interest in showing profits or revenues right now, potentially at the expense of creating a stronger business in the future.
With many dot com IPOs, execs tried to make the company look spectacular over the short term, with little concern for the long term. Their plan was to pump the stock, and sell their owns shares.
Compensation generally needs to be tied to the long term performance of a company. If the executives couldn’t trade their own options for 10 years, it would change their approach, IMO.
Perhaps performance bonuses at existing companies should only payable several years into the future when a performance can truly be evaluated.
The USA and world is in a financial mess now because not enough people were thinking about the big picture — both at work and at home (the negative savings rate and high consumer spending of the past few years is a sure sign few people are thinking long term).
Oh…and I agree with you, there are some good lessons to be learned from google.