Early reports describe Facebook’s much-ballyhooed IPO as a dud. This seems to support The Economist’s worries about the future of the public company, a theme raised by Michael Jensen in a famous 1990 article. Indeed, the corporate form has been hammered lately, the victim of particularly burdensome regulation under the Sarbanes-Oxley Act and other schemes. As noted in the Economist piece, the number of public companies, as well as the number of IPOs, have declined sharply over the last decade.
I’m certainly a fan of private equity (along with proprietorships, partnerships, cooperatives, and other organizational forms). But, as Art Carden and I discussed in a recent Mises Academy course, reports of the death of the public company are greatly exaggerated. Despite the additional regulatory scrutiny, the agency problems associated with diffused ownership, and other challenges, the corporate form is still an effective means of raising large amounts of capital.
To be sure, corporations benefit from a number of state interventions (though I don’t think the corporate form itself is one of them, contrary to a widespread view in “left-libertarian” circles). So do all forms of organization. With a diminution of the regulatory state we would see a flourishing of a variety of firms, both public and private.
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I’ve often wondered why the corporate form gets so hammered by these so-called “left-libertarians” (can we just call them the socialists that they really are?). I understand their problem with limited liability to an extent, but really, unless you can prove personal involvement and/or knowledge of the problem, then how can they be personally liable for things that other people have done within the company?
Frankly, the biggest hindrance to the formation of corporations has to be that obscene corporate tax. As if raising sustainable capital wasn’t a tall enough task in this country, the government has decided to exorbitantly punish one of the greatest capital-raising means that we have.
Again, Is Facebook really worth that much?
Until now, I still didn’t believe the vigorous success of Facebook. Everything seems to happen so fast. I still remembered the day Yahoo! closed its Yahoo 36o blog in 2009. It was a little sad to say goodbye to my first blog ever. However, I was very reluctant to move to Facebook (FB) as my friends recommended. Facebook was a new trendy thing at that time. I tried it out and to be frankly honest, I hated it. My FB account was covered with dust and spiders. Even worse, I could not delete it. The truth is now, surprisingly, I spent an average of at least 1-hour to check in my FB mostly every day. Why? Because it is the only way I can connect with my family, friends, relatives, coworkers, friends of friends and even some cool strangers. The words that dance on lips every one today is “Find me/us on Facebook”. Everyone, every business, every organization has an FB account and spend tremendous amount of time on it. Even my mother has her own FB account. Although it’s hard to admit the huge success of a company that built on an old idea, even questionable authentic idea, Facebook has proven to the world the new and powerful impact of social networking.
But really, does the value of FB worth even more than Bank of America, Disney, Amazon, or McDonalds? Is it really even worth more than the value of Starbucks and HP combined? I don’t think so. Many investors also believe so. And it makes many of them think twice before crash their cash into an opening $38-a-share valuation. In the long term, I expect the value to be declined, not increasing to a somewhat $920 billions of dollars like the news has announced recently. I personally think it’s just what FB thinks and it’s quite arrogant of Zuckerburg to place his firm above all others big public firms. I think he might know what he is stepping in is the whole troublesome of going public, and I am quite exciting to see what he does next to lead FB. Maybe he has got a good strategy. In this world of uncertainty, it’s hard to predict things and impossible to say never.
The bigger story here is not just about FB, but about the ongoing controversial debate of whether to go public or remain private for any companies. Some people say “companies are like jets; the elite go private”. Is it true? Since the collapse of many big public firms like the scandalous Enron in 2001, more regulations have been placed on public firms heavily. All these hard-to-please regulations combined with the pressure making big profit have made it almost impossible for public firms to focus on long-term growth. And shareholders are not really happy either. The conflict of interests between shareholders and managers make it even a worse case to be in and deal with.
However, going public also has certain advantages. If successful, the new capital raised can increase a company’s potential for growth tremendously, bring more funds for technology, research, new product development, and expansions. As it reveals itself in vivid daylight, the public firm like FB gives ordinary people a chance to invest directly in capitalism and creating wealth. The public firm also is a center of innovation and job creation. With FB employees and contractors, it now can offer them stock options as a meaningful form of incentive compensation.
The rise of private equity has increases the wealth into only a few privileged and powerful investors. Being private, firms can avoid red tape and do whatever it wants “in the dark” with rich and sometimes unethical insiders. The Economists states in their recent article “The Endangered Public Company”: “Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors”. Perhaps Mises’ and Hayek’s argument of only market capitalism could manage a complex, modern economy is right more than ever as I think capitalism is what saved America. I support the idea of going public by FB but remain skeptical about the huge value it claims it worth.
As someone who understands “left libertarianism”, I must defend the stance a little bit. The corporate form is the state trying to approximate a market function between a new organization and it’s various creditors. The corporate form is legitimate, if all parties agree to how the liabilities of the corporation will be handled, but the state granting corporate formation willy-nilly is a subsidy to corporate debtors, who would otherwise need to bear the cost of organizing with individual creditors or an underwriter clearing house to assure the creditors that they won’t lose everything if the lend to the company.
As far as Tony’s comment that left-libertarians are all “socialist” – there are certainly libertarians who would voluntarily choose to live in private, voluntary communes, but let’s not confuse them with those who want a singular national wealth sharing scheme.
Left-Ls are just those people that think that free markets and voluntary action are the best ways to secure tolerance, peace, and social freedoms. They have traditional “lefty” concerns, but agree with you (apparently) “conservative” libertarians on the appropriate means for reaching thier peaceful goals.
Iawai,
Even assuming that you have no idea what you’re talking about, I can’t figure this comment out. What does this mean?
FYI, the limited liability feature of a corporation has little to do with creditors, who loan with the explicit knowledge that individual investors are risking only their investment, not their personal assets. Are you confusing securities and security for a loan?
A corporations assets, all of them, are collateral for a loan granted by a lendor. An individual share-holders personal assets are not part of that collateral.
And this:
Is this some kind of technical term I missed?