The End of Public Companies

Capitalism has been turned upside down.  The traditional model is that owners hire managers to oversee employees.  The assumption is that employees will not act in the best interest of the company unless managers keep an eye on them. The owners are the people with skin in the game, and management theory attempts to solve the "agency problem" of getting managers to do the owners' bidding.

Today, with the advent of public companies and liquid stock markets, the owners have almost no skin in the game.  Often, the owners are only owners for a few seconds in the Wall Street casino.  The board of directors is asleep at the switch, and only wakes up when an "activist investor" forces them to break up the company or lever up to pay out dividends.  While the directors sleep, management has free rein to take care of themselves and then jump to a new company when the host organism finally succumbs to their incompetence or malevolence.

In the final analysis, the employees are the only ones with skin in the game. They are faced with high switching costs when starting over at a new company. Relocation disrupts their families.  They often have to accept a lower position, salary, or benefits at the new company.  The reputation they have worked hard to build at the old company is left behind.

Over time, we will see the end of the traditional model of public companies, because companies embracing new models will outperform them.  Google is one example of this evolution. When Google went public, it kept control with the founders and offered the public the opportunity to come along for the ride. Traditional corporate governance experts howled, but Google has performed well, both in financial terms and in providing useful services.  One key to the success of Google's approach is that it was transparent. The typical shareholder has no say in how a business is run anyway, but Google was explicit in its direction.

Other successful models will include employee owned companies and privately owned companies, as well as hybrids. We also see successful non-companies, such as the open source software community.