The public company is in trouble

Germany’s economic success has raised serious questions about the virtues of public companies. A decade ago investors treated the country’s middle-sized companies (the Mittelstand) as mini-dinosaurs. Why stick with family ownership when going public would provide them with more money? Today they are praised as “hidden champions”, the dynamos of the world’s most successful export economy and the companies which provide China with the complicated machines that it requires. They have thrived precisely because they are in the hands of family proprietors who are more interested in building for the long term than in quick wins.

But the biggest challenge to the dominance of traditional public companies is coming from the emerging markets—the very markets that will generate the bulk of economic growth in coming years. State-controlled enterprises, which borrow tools from public companies such as stockmarket listings but are nevertheless ultimately answerable to the state, account for 80% of the market capitalisation of China and 38% in Brazil. State-controlled companies are most prominent in the energy sector. The world’s 13 largest oil companies (measured by reserves) are all state enterprises of one sort or another. But companies with looser forms of state backing, such as Lenovo and Huawei, are also prospering in the high-tech sector.

A more subtle challenge to public companies is coming from highly diversified family-dominated conglomerates such as India’s Tata (which operates in everything from steelmaking to consultancy). Family-dominated companies account for 60% of the Indian stockmarket. Western investors continue to apply a conglomerate discount to these companies—and to urge them to focus and be more shareholder-friendly. But they are no longer listening. They argue that conglomerates are well suited to countries with weak institutions. They also argue that family companies are ideal vehicles for long-term investments. Conglomerates are particularly good at building trusted brands and attracting scarce talent.

It would be premature to write the obituary of the public company. Companies listed on the New York Stock Exchange are worth more than $10 trillion. The dream of an IPO continues to inspire Silicon Valley’s entrepreneurs. Many private-equity investors nurture private companies in the hope that they will one day go public. But it will become ever clearer, in 2012 and beyond, that public companies will have to take their place beside a wide variety of other corporate forms, from private partnerships to family companies to giant state enterprises.

*In the response to the collapse of such corporations as ENRON, WORLDCOM and others, the US Congress passed the Sarbanes-Oxley Act in 2002. It was designed to protect investors from the possibility of fraudulent accounting activities by corporations. Among other things, it regulates disclosures of transactions involving management and principal stock- holders.