An excellent piece by Michael Malone in the WSJ today (thanks S. Berger):
Given a fate of living under the magnifying glasses of SOX and FD, who in their right mind would want to sit on a corporate board these days? The smart board-level people I know in Silicon Valley now reduce their involvement to being merely corporate “advisers.” Thus, the intellectual capital of America’s high tech company boards is falling by the month.
It is often noted in dismay that military academies teach the last war, not the next one. The same can be said for business regulation. In the zeal to punish the excesses of the dot.com boom, the federal government, with the tacit approval of the electorate, sought to not only punish the small number of real evildoers but also build the perfect universal plugs for all of the perceived holes in existing business practices.
The result was Sarbanes-Oxley, Regulation FD and stock option valuation — three great lessons in the law of unintended consequences. Let’s do our own accounting: Thanks to this troika, fewer new companies are going public; economic power is being concentrated in the hands of fewer companies; competition is reduced; new wealth is less widely distributed; the rich are getting richer; fewer talented people want to join entrepreneurial ventures; and corporate boards are getting stupider and more paranoid. And, please note, one of the crucial triggers for economic booms — a burst of young tech company IPOs — has now largely evaporated.
Just curious, but is this really what federal regulators, Congress and shareholder rights activists had in mind?
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“Just curious, but is this really what federal regulators, Congress and shareholder rights activists had in mind?”
The sad truth is: yes. Not explicitly, maybe they didn’t know it. They could have known and chose not to, to blank-out. Whatever they professed they had in mind, they have apparently not taken the trouble to think through to the end how much their course aids in achieving their professed goal, and how much it might harm its achieval. Per the mentioned law of unintended consequences, maybe they could not predict exactly *what* unintended consequences would happen, but *that* they would occur and *that* these would be consequences they not only would not intend but would want to avoid. However, even a politician can not be as stupid as not to foresee the main unintended consequence: “Given a fate of living under the magnifying glasses of SOX and FD, who in their right mind would want to sit on a corporate board these days?” He can, however, choose not to see it.
What is worse: “In the zeal to punish the excesses of the dot.com boom, the federal government” … it must not be forgotten that in a central-banking system, it is the FED and artificially fixed interest rates that create the extent of such “booms” and “busts” in the first place.
Government officials seek to maximise the utility (not their use to others, as they proclaim) like everyone else does—fair enough. Only they have the power to force others to “fail”, then “punish” them for their “failure”.
And the exit strategy for smart people building new companies is going to be skewed more heavily towards selling them to existing larger companies instead of considering taking them public. There will still be people willing to start businesses. It is thrilling to build a company. And when you have skin in the game and stand to get rich (or richer) if you succeed, that adds to the experience. What the regulators have done is eliminate the possibility of the average investor getting a piece as the company goes public. Instead, those opportunities are now even more the province of venture capitalists and the mergers and acquisitions people.
It is actually worse than what you have described. Entrepeneurs who are afraid of the burdensome regulations of capital markets have taken to venture capital firms. These firms charge a heavy price to the entrepeneures. And now we are seeing other firms owned by pension funds and the like jumping in to provide capital to business.
The most unfortunate part of this whole process is that individual investors have fewer choices in investements and those choices are becoming less innovative and more risk adverse.
In simple terms the people the regulators are trying to protect are hurt the most in the end.
Here’s what pump-and-dump is all about:
“The recent deal to buy, and then sell, the car-rental company Hertz Global Holdings Corp. nicely illustrates the current state of play in that relationship [between the public and private equity markets]. In December 2005, a pair of private-equity firms, Clayton Dubilier & Rice Inc. and the Carlyle Group, bought Hertz from the Ford Motor Co. — which is to say they bought it from the sorry souls who own shares of Ford. Eleven months later, in November 2006, they turned around and sold Hertz back to the proles in an initial public offering. In buying the company they put up $2.3 billion in equity capital. By the time they sold it they had gotten $1.3 billion of their money back, and held shares — which they no doubt plan to get rid of as soon as they can — valued at another $3.5 billion or so. In less than a year they had netted a fairly clean $2.5 billion profit.”
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_lewis&sid=aA2teSlZKNRM
In other words, why go to all the toil and trouble of creating wealth in the real economy when you can profit from the illusion thereof in the financial economy?
Entrepeneurs who are afraid of the burdensome regulations of capital markets have taken to venture capital firms.
Afraid? Heh, they are all but flat-out prohibited from seeking public investment. If you want to get non-institutional funding for your small business you are prohibited from soliciting general public, you are prohibites from taking money from non-qualified investors who are not your family, and the allowed number of investors is limited.
All in the name of protecting stupid from themselves – so they can spend more money on booze and buying penis enlargers on the Internet.
I don’t entirely see why companies are supposed to go public anyway? Why would you want your company suddenly dictated to by outside shareholders who want only want to see the price rise without any consideration of where that rise is expected to come from. Why also would you risk your company being susceptible to takeovers?
Perhaps the big argument FOR private company ownership is that the owners and directors are one and the same. Hopefully this mean profitability would come from sensible long-term decisions. Whereas owners/shareholders are very distant and only want short-term profits. Whilst the directors are employees hired to do the actual work. It is not suprising in such cases the directors pay millions to themselves even though the share prices have plummeted. It is at this point that mutual fund holders are told their loss is due to ‘market forces’.
Sam,
Sad but true, most private investors are only barely more long-term oriented than investors in public companies. Look at most private equity deals: leverage the company to the hilt, take the cash out, and flip it back onto the public markets in under 2 years. Look at most VC deals: an exit in under 5 years. No one’s interested in long-term profitability, just in finding the next sucker to dump shares onto. High time preference is pervasive in today’s society.
Sam and Sol:
Surely the time preference factor as it relates to investments is affected by the overtaking of the real economy by the financial economy. That is, as the latter increasingly exists for itself and not to provide (savings-based) capital for the real economy, pump-and-dump, get-rich-quick schemes replace honest, long-term investment.
But that is to be expected from the corruption of money, which is itself a pump-and-dump, get-rich-quick scheme.
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