Why we’re right to worry about the Facebook IPO
The bad news is that the Greek stock market is down 58% over the past year; the good news is that it’s up 7% today. So far, so uncontroversial: while it’s possible to quibble with the standard CNBC convention that rising stock prices are always good and that falling stock prices are always bad, in the case of Greece it’s much harder.
In the U.S., for instance, investors with a reasonably long time horizon should like it when they can buy shares in productive companies at low prices, and dislike it when they’re forced to pay through the nose for such things. In Greece, by contrast, the level of the stock market gives a very good indication of just how bad the outlook for the country really is.
Which brings me to Andrew Gelman’s blog post yesterday, taking issue with Jim Surowiecki’s latest column, on Facebook. Surowiecki says that “there’s reason to be concerned at the spread of the dual-class structure”, on the grounds that companies with dual-class share structures tend to underperform the market. Gelman replies:
Who’s supposed to be “concerned” here? As a New Yorker subscriber, am I supposed to be concerned that dual-class firms underperformed the market? I just don’t get it. Why should I care? If the shares underperform the market, people can buy a piece of Facebook for less. That’s fine too, no?
I’m with Surowiecki on this one. For one thing, the stock market is the means that capitalist economies use to approximate what old-fashioned socialists like to call common ownership of the means of production. Surowiecki’s point here is that when you’re dealing with companies which have dual-class share structures, ownership is divorced from control, and a small group of self-selected owner-managers seize control which rightfully belongs to the majority owners of the institution. And when that happens, society as a whole loses out, because the company doesn’t generate as much value as it would or could under a more conventional ownership structure.
As for the discount which the stock market will give to companies under a dual-class structure, that’s not “fine too”. Sometimes, such discounts are OK. For instance, when I wrote about B-corps, I said that there is no reason that shares in such companies shouldn’t perform like normal shares. If company X trades at a constant discount to company Y, and both grow at the same pace, then shares in X will return just as much as shares in Y. But Surowiecki’s point is that companies with dual-class structures don’t grow at the same pace as the companies in the rest of the market. Which in turn means that the discount will go up and not down — and that, in turn, means that buying shares in such a company is not fine, and that you’d be better off not doing so.
And yet, in a world where more and more of us simply invest in index funds rather than picking our own stocks, the vast majority of us have an increasing amount of exposure to Google and Facebook and other relatively new-vintage companies with dual-class share structures. Insofar as those companies underperform their single-class peers, they’re dragging down stock-market returns for all of us.
The reason to be concerned about the rise of companies with dual-class share structures, then, is not all that dissimilar to the reason to be concerned about the rise of big private companies more generally. The stock market is no longer the common ownership of the means of production: it’s a place where early-stage investors can exit to a group of muppets and high-frequency traders. Here’s what I wrote just over a year ago:
At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years. Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check. With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.
Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns. The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.
And here’s Surowiecki:
Public companies aren’t going to disappear, but we are witnessing a significant shift in power from shareholders to entrepreneurs and managers, one that may make the stock market less central to American capitalism.
What we’re saying here is that there’s a significant shift going on, and that it’s worth examining and worrying about. Insofar as the stock market is a dog-eat-dog world governed by caveat emptor, maybe there’s nothing to worry about. One person’s loss is another person’s gain. But insofar as it’s bigger than that — insofar as it’s an engine of capitalism and of capital formation and of efficient capital allocation — there are reasons to be less than ecstatic about the Facebook IPO. Because Facebook is Exhibit A in any thesis proposing that all of those things are broken right now.