“Fugayzi, fugazi. It's a whazy. It's a woozie. It's fairy dust. it doesn't exist. It's never landed. It is no matter. It's not on the elemental chart. It's not fucking real.”
Anyone who’s seen The Wolf of Wall Street will remember this line delivered by Matthew Mcconaughey - accompanied by expressive, drifting hand movements - to illustrate the ephemeral nature of the global stock market. He advises the titular Wolf, a young stockbroker played by Leonardo Dicaprio, to game the system as best he can in order to maximise his commission and not to think too much about the rest. But was he right about the stock market?
It’s true that stock price can provide a temperature check of a company’s performance, and even reflect material changes in a company’s fortunes, but also that the daily ups and downs reveal little about the future prospects of a company and are pretty much immaterial to anyone but traders and hedge funds. When a single tweet from youngest Kardashian tribe member, Kylie Jenner, can wipe billions off the stock market valuation of Snap Inc, did the valuation have much meaning in the first place? Shock stories about Snapchat or Facebook’s diving stocks grab headlines, but do they mean anything more than speculation?
Before we examine this further, let’s take a look at another, related phenomenon. This is the increasing trend for young, privately funded tech companies to postpone the process of going public for as long as possible (in some cases holding out instead for being acquired by larger tech corporations). In 2013, 50 tech companies went public, compared to just 27 in 2017. This is in spite of the fact that 171 private ‘unicorns’ are valued at over $1 billion, with Uber - currently topping a breezy $10 billion - the most glaring example.
And this trend is not solely confined to the tech world. While the average age of publicly listed companies in 1997 was a spry 12 years old, today it’s a downright decrepit 20. In the same year, more than 7,500 American firms were publicly listed, while today, the number stands at 3,618. What explains these patterns?
The answer lies within the foundations of capitalism, in the symbiotic relationship between capital and industry that has developed over decades. In the early days of capitalism, when it was consolidating and the fledgling IPO process was first developed, the western world was made up of industrial societies, with the business landscape dominated by heavy industry. These types of business would go public for a very obvious reason - to score a desperately needed injection of capital in order to buy materials and machinery, and build new factories.
Today, that business landscape looks very different. Heavy industry has been replaced by the knowledge economy, where the product is increasingly likely to be intangible - a digital service or platform, for example. This has resulted in radically different needs for capital spending within business. In 1975, US companies spent six times more on capital investments, such as machinery, than they did on research and development (R&D), such as experimenting with new products or innovations. In 2002, this shifted in the other direction for the first time. Today, spending on R&D is roughly double that of capital spending.
These factors mean that for most companies today, particularly those in tech, the injection of capital that was previously one of the most important reasons for companies to launch an IPO, is no longer as crucial. Even if a company is after capital, the vast quantities sloshing around venture capital and angel investor accounts means that they can still bypass a public offering if they wish. For example, Softbank’s $100 billion fund offers many promising startups in Silicon Valley the comfort of staying private.
What else do established tech companies have to gain from retaining their private operating status? For one, they don’t have to conform to - sometimes restrictive - regulatory rules. For example, companies filing to go public must share sensitive, confidential information about their operations and projects. This can sometimes amount to divulging information that could be useful to competitors.
But it’s not just that they’re delaying the IPO process, when tech companies do go public, they’re increasingly eager to dilute the traditional shareholder model. Google, Facebook and LinkedIn have all adopted a dual-class share model, where founders are allotted more voting power than common shareholders. When Snapchat finally debuted on the stock market last year, it went even further, deciding to offer shareholders no voting rights at all. These companies are sending a clear message about who should have control over executive decisions. Now that capital is neither as vital or as scarce as it once was, today tech companies primarily go public to allow early round investors to cash up and exit. And this fact is communicated by the derisory attitudes towards shareholder influence on a company’s trajectory.
There are good reasons why tech companies would rather not be beholden to their shareholders. Shareholders are infamous for favouring short-termist policies that guarantee large rewards in the near future, rather than accepting less money in payouts in favour of ‘capital gains’. In layman's terms, this means investing the money into research and development and forgoing some money today in the hopes of a bigger slice tomorrow as the company grows.
For a stark comparison exercise in how different approaches to shareholders can influence a company, we simply have to look to two of the highest valued tech companies in the world - Google and Apple. While Apple’s shareholders are granted voting rights, Google made moves in 2011 to increase the voting rights of founders’ shares by a power of 10, cementing the founders as the undisputed executive decision makers. These two different approaches to shareholders have radically different consequences for how the companies operate.
In a nutshell, Apple is much more likely to face - and give into - pressure to cough up to shareholders, while Google can far more easily defend ploughing surplus cash back into research and development. The different consequences resulting from the two approaches are crystallised in the period from 2013 to March 2017. During this time, Apple released $200 billion in dividends and buybacks to its shareholders, accounting for a staggering 72 percent of the company’s operating cash flow. During the same period, how much did Google distribute to its shareholders? The princely sum of six percent.
Now it's true that neither of these companies are short of a bob or two. In fact, arguably one of the most vexing problems afflicting modern capitalism today is that there is simply too much cash (at the top of the pyramid anyway). Pre-1991, there wasn’t even a billion dollar company in existence, now there are 2,208 individual billionaires in the world (and no, it’s not an issue of inflation). Minimal operating costs of today’s companies mean that $2 trillion in surplus cash has racked up on corporate balance sheets. And it’s no surprise that this problem is particularly exaggerated for tech companies - with four, Apple, Alphabet, Microsoft and Amazon - currently the highest valued companies in the world.
So, when it comes to where to direct all of this surplus cash, whose model is better? Apple’s approach has the benefits of drawing opinion from a larger group of invested parties. This - theoretically anyway - offers a tighter control over executives making managerial decisions that benefit themselves at the expense of the wider company - such as investing in pet projects or indulging in lavish perks - over decisions that make the most business sense. However, these investors are mostly motivated by immediate rewards, meaning they often encourage a short-termist approach that compromises the company’s potential for long-term growth and evolution.
So, if shareholders are less necessary for the injection of capital they can offer and tech companies are less willing to grant them voting rights on the company’s decisions, what are the other options to tech unicorns besides remaining private forever? One alternative is the Long-Term Stock Exchange (LTSE), an idea for a non-traditional stock market which will take companies public within a structured set of guidelines designed to privilege long-term thinking over short-termism. The idea comes from entrepreneur and author of The Lean Startup, Eric Ries.
“I don’t really understand what people’s plan is if this trend continues,” he says, in reference to the tactic of small tech companies to wait until they are bought up rather than go public. “We’re going to wind up with, like, seven public companies that are mega-conglomerates, and everything else is private. That’s a terrible policy outcome.”
In response, the LTSE would aim to combat the aspects of a traditional IPO that can be off-putting to small companies. For example, prohibiting the release of quarterly earnings, and increasing the power associated with shares the longer they’re held by individuals. Although not fully realised yet, Ries wants the LTSE to operate as a fully functional stock exchange, offering companies an alternative to the NYSE.
But while this might sound revolutionary to some, there is another way in which companies are responding to the same problems that conflicts with the core values of the reigning economic order. Firstly, let’s back up for a moment and talk about capitalism. Capitalism is a system under which gross inequality has grown into a yawning crevasse separating those at top from those at the bottom. In 1978, CEOs earned an average of 30 times than that of a typical worker. Today, that figure is 271 times more. The most obscene examples involve CEOs paying themselves up to 800 times what their employees earn. Meanwhile, wealthy investors skim off the thickest bits of profits, while some of the remaining amount is distributed to workers below. This is the economic model that has caused 90% of wealth to become concentrated in the richest one percent of society.
Tech innovators, despite often painting themselves as mavericks beholden to utopian ideals, have proved themselves no better than their Wall Street predecessors when it comes to redistributing wealth, if the likes of Uber or Amazon are anything to go by. Take Jeff Bezos, CEO of Amazon, as an example. His personal wealth is worth $135.8 billion, yet he’s reluctant to create humane working conditions, grants poverty wages to his staff, or help to improve the provision of affordable housing by paying tax in an area he received ample tax cuts to locate in. Meanwhile, all of the top tech conglomerates are determined to dodge tax by any means, depriving the communities they lodge in of reaping any rewards beyond their gracious provision of employment. Is there a better way?
One approach would upend the current system and simultaneously solve all of the problems surrounding tech IPOs. This is the work cooperative model. “Americans are getting closer and closer to understanding that they live in an economic system that is not working for them, and will not work for their kids,” says Richard Wolff, an economist who’s been lecturing on anti-capitalism for 50 years. The work cooperative model involves shared ownership of the company by employees, democratic decision-making and fair distribution of wages. It might be catching on. There has been double digit growth in the number of work cooperatives since 2010 in the US. Although this number still only stands at 350 for the whole nation, it’s certainly progress. Ten cities in the US have launched programmes helping to increase the number of work cooperatives, including New York and Austin.
And challenging the oft-drawn dichotomy between capital and employee welfare, research on employee-owned businesses indicates they have between four and five percent higher productivity levels and that profit can increase by as much as 14 percent. They are also more stable and have greater potential for growth. However, unlike traditional, publicly owned businesses, it’s the workers, rather than the shareholders, who reap the rewards.
Will this ever catch on in big enough numbers to represent a legitimate challenge to the ruling capitalist orthodoxy? “Whether these experiments – which is what we have to call them at this point – will congeal into a massive social transformation, I don’t know,” says Wolff. “But I do know that massive social transformations have never happened without this stage.” In the last few years, he has been asked to speak to a number of CEOs at top financial firms, who seemed concerned for their future in the current climate.
With just 19% of Americans aged 18 to 29 identifying themselves as capitalists and only 42% claiming they support the current economic system, the time may well have come for change. Capitalism was the mode of production for an industrial age, does the knowledge economy call for a new economic order? Tech pioneers are eager to disrupt any number of markets and industries. But maybe what is most ripe for disruption is capitalism itself.