The UK introduces new corporate governance codes with depressing regularity. The latest came this month, with the Financial Reporting Council (FRC) updating its guidance to put pressure on the bosses of public companies to introduce a more inclusive style of management, with more consultation with the workers, as well as restrictions on when managers can cash out of their share options. No doubt some new scandal will soon lead to a demand for yet more rules.
No one would deny there are problems. Lots of firms have been run by executives more concerned with their own pay and perks than with delivering returns for their shareholders or value for their customers. Managers and non-executive directors keep rewarding each other with more and more money.
Pension-fund managers are either too busy to do anything about it or are part of the same racket. A few firms fall under the control of ego-driven chief executives who drive them into the ground. If there are checks and balances, they fail with depressing regularity.
The slow death of the listed company
Some extra rules to fix those issues seem necessary. The trouble is, the burden of regulation has now become so heavy that the quoted company is at risk of dying out. As a recent report from the consultancy MWM argues, a public listing was once the ideal form of ownership for most major companies.
In the US the total numbers of businesses listed on the main markets rose from 3,000 in 1975 to 8,000 in 1996 and in the EU from 6,000 in 1975 to more than 10,000 in 2001. But since that peak it has been a different story. For example, the total of quoted companies in the US fell by 38% between 1997 and 2012; and the number of quoted companies in London dropped from 3,141 in 2006 to 2,590 in 2016.
Meanwhile, the most dynamic new companies don’t seem interested. The major tech stars such as Airbnb and Uber are not bothering to list their shares, and neither are their smaller peers. In the last tech bubble, in 1999, there were more than 250 internet-related floats: in the latest one, the rate has been running at a tenth of that.
There are reasons for this. The billions of dollars pouring into venture capital and private funds means it is far easier to raise capital or to sell a business without the bother of a stockmarket quotation. As Uber has shown, you can just raise a few billion privately instead. At the same time, the emerging tech firms don’t need a lot of capital in the way that companies used to. It just doesn’t cost that much money to create an app, or streaming service – WhatsApp, for example, has only around 50 staff, and even a huge business such as Airbnb only has slightly over 3,000.
Even so, regulation has played a role. The MWM survey found that board directors were significantly happier and felt they had more to contribute at private-equity-owned businesses than they did at listed ones. Why? Because there were far fewer rules. Roles must be kept separate, committees must be formed, and explanations must be provided for just about every decision a business makes. Once these rules start piling up, eventually the burden becomes too heavy.
Worthy but misguided
The FRC’s latest update is worthy enough. Sure, it would be good if management consulted their workers on major decisions, and many well-run companies already do, but it is hard to see why we need regulations to nudge them into doing it. Share options are hardly an incentive for executives if they can’t sell them, and advisory councils sound like a waste of everyone’s time.
In truth, the real problem is not that quoted businesses are not being managed responsibly. It is that we no longer have enough of them for a heathy stockmarket, or to enable everyone to share in the wealth a free-market economy creates. The only way to fix that is to repeal some corporate governance rules – not introduce yet more.