The world may be entering a post-equity era

There have always been pros and cons to being a public company, but might we be at a tipping point?

It seems we’ve all been scanning the wrong horizon on the lookout for danger. In August 1979, the headline on Business Week’s front cover heralded “The Death of Equities”. The obituary was a tad premature.

The 1970s were undoubtedly a tricky decade for global markets but, three years after that gloomy edition hit the news-stands, markets bottomed out. There have been many crashes, corrections and bear markets since then (often accompanied by similar death notices). However, had you invested $100 in the S&P 500 at the beginning of 1982 and reinvested all the dividends you subsequently received, you’d have been sitting on $10,347 by the end of last year.

That’s a total return on investment of well over 10,000 per cent, or just shy of 12 per cent a year, over 42 years, which is pretty lively for a corpse.

It’s a salutary reminder for anyone tempted to write off equities. With global markets and especially those in the US touching new records this year, it’s clear that shares in publicly listed companies will outlive all of us and many will continue to thrive.

However, all this presupposes that the main threat to equities comes from valuations. We’ve been so worried that investors might fall out of love with the markets that we forgot to guard against the possibility that companies could also become susceptible to that indifference.

Something is clearly going badly awry in many developed economies. Is the publicly listed limited liability company still the optimum corporate structure, the one to which most start-ups and ambitious executives naturally aspire?

Take last week in the UK. On one level, it was all pretty meh: the FTSE 100 and the FTSE 250 basically went sideways but, on the other hand, it is hard to think how the news coming out of UK plc could have been much more disastrous.

Normally, the decision by pharmaceutical company E-therapeutics to de-list after 17 years on Aim, London’s junior market, may not have blipped up on many people’s radars (even though it was the third small biotech company to do so in just a fortnight).

However, it was accompanied by an absolutely coruscating assessment of the state of the market.

Ali Mortazavi, the company’s chief executive, said the London stock market was “completely broken and closed” arguing that “urgent reform and action was needed”.

Mortazavi’s cri de coeur posted on social media was greeted with outpourings of agreement and similar tales of consternation about a collapse in risk appetite among funds.

Couple this with Wael Sawan’s revelation that Shell is actively considering moving its listing from London to New York because the company’s shares are massively undervalued here.

This, Sawan argued, is partly the function of a morbund market and partly because fossil fuel companies are given a much harder ride in Europe than in the United States.

So, that’s an unprofitable but promising biotech firm and, at the other end of the scale, the UK’S most valuable listed company, which made a $28bn (£22.5bn) profit last year, both arguing that a London listing no longer works for them.

In the background, we have the entirely predictable and utterly fruitless debate about whether Pascal Soriot is worth the £17m he was paid last year to run Astrazeneca (plot spoiler: he is).

There will be plenty of people who see all of this as further evidence that the UK is circling the drain. This thesis is supported by the fact that both E-therapeutics and Shell are eyeing US listings.

The London stock market has essentially been treading water for years now. UK equities trade at a 20 per cent discount to the European market and a 25 per cent to US stocks on a price to earnings basis, according to Bank of America.

The UK has also cooked up a whole load of self-harming regulations that have resulted in defined benefit (final salary) pension funds shutting to new members, “derisking” and selling off all their equities and leaving fewer natural buyers of London-listed shares.

Clearly the UK has some unique issues and needs to take a long-hard look in the mirror. But that doesn’t mean it might not also be a canary in the coalmine for global markets. The latest letter by Jamie Dimon to the shareholders of JP Morgan certainly supports this theory.

Dimon, the grand duke of global finance, points out that there were 7,300 US public companies in 1996. All other things being equal, that number should have risen. Instead it has collapsed to 4,300. Meanwhile, the number of private US companies has grown from 1,900 to 11,200.

Dimon concedes that the reasons for this are complex and not fully understood but almost certainly include “intensified reporting requirements (including investors’ growing needs for environmental, social and governance information), ... costly regulations, cookie-cutter board governance, shareholder activism, less compensation flexibility … heightened public scrutiny and the relentless pressure of quarterly earnings”.

There have always been pros and cons to being a public company but there is now mounting evidence we are reaching a tipping point and the ease of raising capital on the stock market is offset by the huge cost and effort that must be spent on disclosure requirements.

A culture that increasingly assumes businesses are the bad guys and that the profit motive is questionable has led to stifling corporate governance requirements and, because there’s so much of this stuff, it has become more formulaic and less suited to the individual circumstances of particular companies.

Executives can explain why their round peg doesn’t fit into a proxy advisory’s square hole but increasingly no one’s listening. So, a box doesn’t get ticked and suddenly the company’s facing a bunch of shareholder rebels without a clue. The result is that, in Dimon’s words, “the pressures to retreat from the public market are mounting”.

The broader worry is that these developments are indicative of a society that has forgotten how to handle, far less tolerate, risk. We are spending so much time regulating and legislating against any and all potential downsides that we’re leaving very little room for any upsides.

As a result, the indexes may keep climbing but we’ll be all the poorer.

‘Executives explain why round pegs don’t fit square holes but, increasingly, no one is listening’