Thursday, May 24, 2007

Publicly Limited By Scrutiny

I've been having a love-hate relationship with listed companies for some time now. My day job involves looking at investments in infrastructure with incredibly long useful lives, and long-term returns. I'm sometimes asked to recommend interesting stock tips, usually demur, and am then chastised anyway when some hot tip in an industry with which I'm familiar tanks.

The point of stock exchanges is to price and allocate capital most effectively. They can be volatile, seemingly irrational, focused on the short term, and all the critiques that your typical leftist might fling at them. We tolerate them because they've enjoyed a pretty good record in fostering economic wealth.

Take utilities. Please (Ba-dum-chah!). There are some very good arguments that the monopolies providing water and power using proven technologies have little business subjecting their cost of capital to the vagaries of public markets. Yes, management can try and squeeze operating efficiencies from labour, capital, the very wires that carry your power. But these savings tend to be fairly small, and not worth the disruptions of public listings.

[You should note that I exclude from the above - tentatively - toll roads and other bits of transport, and telecoms networks, on the grounds that these do face competitive pressures, and exhibit a fair amount of potential to benefit from technological progress]

But listed companies can, and do, produce results exceedingly pleasing to capital markets, yet exceedingly destructive to society at large. One way to rein in this destructive behaviour is to use regulations of varying degrees of complexity and application to enforce better behaviour.

Sometimes exchanges can be enlisted in this effort, either through shareholder lawsuits or through the disclosure requirements that a public listing brings. I happen to think shareholder lawsuits are a good thing (sorry, Felix Salmon), because sometimes only a good lawsuit is enough to scare the bejeezus out of poor management. Exhibit A is in this post from the Epicurean Dealmaker on the EGL takeover battle, and the salutary effect of Apollo's lawsuit. Exhibit B will arrive when mounting shareholder lawsuits force the NYT and Dow Jones managers to stop being this weird mixture of precious and incompetent.

But the disclosure bit I like especially. I'm biased of course, because corporations' willingness to disclose more of their business activities makes my job much easier. It also allows you to read the juicy details of the above nasty takeover battle at EGL. It's a trade-off. A business gives up a little of its always-precious privacy in return for the liquidity that a public listing brings.

What what if you could invent an exchange that only fabulously wealthy institutions could join? Goldman Sachs just done that. Now, I'm trying incredibly hard to keep the class-war rhetoric out of this, but the GS TRuE exchange and others like it are signs that there now exist family offices (the investment arms of wealthy individuals and families), and other pools of unregulated money that could together constitute sufficiently liquid markets for corporations to raise capital without any oversight at all.

I'm not happy about this for a couple of reasons. Firstly, I cling to this very old-fashioned view that corporations and their management enjoy certain privileges not afforded to individuals, and that public listings are one of the most effective ways (regulations be damned) to bring their activities within the public purview. The second thing is that a large number of smaller investors and smaller analysts can perform valuable oversight, to borrow from, um, Instapundit.

All I need to do is to more generally decry the habit of taking companies private, realise that this includes privately founded companies, and I'm right in the middle of an argument about the rights of society against those of the individual.

But it's a strange place to be. Just as the surge of interest in taking companies of stock markets reaches a crescendo, I realise that public listings aren't that bad after all.

so you'll be amused to know that this little epic post has taken me so long that all of the amusing links I dug up have since been blogged comprehensively elsewhere. Still, it's a start.


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