The Chapter 11 bankruptcy
filing of Eastman Kodak, founded in 1892,
highlights the fact that you just don't see many
of the titans of 19th century commerce around any
more. Corporate lifespans in general are getting
much shorter. It goes along with the rest of life
- you can't get an appliance these days that lasts
like a 1950s Maytag - but has even more important
implications than poor appliance quality for our
economy and our careers.
The evidence for
increased corporate mortality is substantial and
startling in its extent. John Hagel III,
co-chairman of Deloitte LLP Center for the Edge,
in The Power of Pull (Basic Books, 2010)
has calculated that whereas the average life
expectancy of the
companies in the 1937
Standard & Poor's 500 Index was 75 years, the
lifespan of such companies is now around 15 years.
A similar 1983 study of the 1970 Fortune 500 found
the life expectancy of its companies to be around
40 years, with a third of them vanishing in the
intervening 13 years. Thus the progression from
75-year corporate lifespans to 40 to 15 since 1937
is clear and more or less smooth.
Most of
this corporate mortality does not reflect
bankruptcy. Mergers and acquisitions, far more
prevalent now than even in the 1970s, account for
many extinctions. Conversely, filing for Chapter
11 bankruptcy (an option only available since the
Bankruptcy Act of 1978) does not necessarily put a
corporation out of business. You only have to look
at the repeated bankruptcy filings in the airline
sector to see bankruptcies that make little change
to the company's operations, in those cases
requiring only the loss of some peripheral routes
and normally a renegotiation of labor contracts.
Technology and changes in consumer tastes
are generally thought to be the prime causes of
bankruptcy, but this is not necessarily true, as
can be seen from a couple of case studies. The
Singer Corporation, manufacturer of sewing
machines, was founded in 1851, four decades before
even Kodak, and in essence is still in existence.
For the first 110 years of its existence it stuck
to its main business (with a diversion into
firearms production during World War II),
embracing technological change as it came along
and becoming an icon of US industry - producing
also an iconic headquarters in New York's 1908
Singer Building.
Then in 1965, it embarked
on a program of diversification, buying
manufacturers of calculators and defense
equipment. Naturally, diversification turned out
to be unsuccessful, and the company was
dismembered, with the sewing machine division
being sold in 1989, effectively ending the
company's lifespan at 138 years. Nevertheless, the
operation if not the corporate shell continues in
existence today, although social change has indeed
affected its main business - few women make their
own clothes as they did in even the 1950s.
As a more recent alternative to the
long-lived Singer, you can examine the fates of
the 1960s BUNCH competitors to IBM in the
mainframe computer business. None of them are
manufacturing computers today; nor have they
diversified into PCs and tablets, as might have
been expected by a 1960s observer.
Burroughs and Sperry Univac merged in 1986
to form Unisys, 88% of whose business now comes
from services. NCR was acquired by AT&T in
1991 and spun off in 1997; it is still in
existence, but has left the computer business.
Control Data gradually faded, got out of the
computer business, and was sold to BT in 1989.
Honeywell got out of the computer business in
1991, and was acquired by Allied Signal in 1999,
although the combined corporation kept the
Honeywell name.
Thus in the strict sense
all five of the companies have "died" and all five
have left the computer business and its successors
(though a small part of Unisys' business is
servers). Two of the names still exist, but in
neither case have they had a continuous corporate
existence since the BUNCH heyday.
As well
as technological change, there are other reasons
for greater corporate mortality. One is estate
duties, introduced in 1916 but jumping to their
punitive modern level in Herbert Hoover's
economically and politically suicidal 1932 tax
increase. Once estate duties were in place,
entrepreneurs could no longer pass companies onto
their heirs in a straightforward manner, because
an impost of 40% or more on death required family
control to be relinquished.
This led
entrepreneurs to avoid creating large, long-lived
corporate enterprises that could be inherited by
their descendents, but instead to sell out during
their lifetime and convert the corporation into
liquid, easily realizable assets. In turn, this
has greatly damaged corporate governance, since
there are no longer family members with large
shareholdings available to control management and
prevent it from reckless short-termism and
looting.
A further cause of increased
mortality is the influence of leverage, and the
associated ills of low interest rates and
aggressive private equity money pools. A
definitive Shell study of 1983 identified the five
secrets of corporate longevity as being (i)
exploitation of existing capabilities before rapid
expansion, (ii) diversification, but only into
related businesses, (iii) a conservative balance
sheet and financial policies generally, (iv) a
lengthy institutional memory for mistakes and (v)
managing change in a culturally sensitive manner.
Needless to say modern management practice, with
its stock options, large short-term bonuses,
aggressive empire-building management, love of
leverage and private equity piranhas, usually
manages to fail on all five criteria.
In
the younger generation, the greatly increased
corporate mortality has now been internalized in
management practice. Entrepreneurs like PayPal's
Peter Thiel no longer seek to build a long-lasting
corporate structure, even though they have the
capabilities to do so, but instead act as serial
entrepreneurs, selling out their first venture
quickly and then acting as sponsor, financial
angel and ultimate boss of a series of further
companies - in Thiel's case such substantial
operations as Facebook and Palantir Technologies -
which use their expertise, their management and
business-creation skills and their now substantial
resources.
In some respects, this is an
advantage. Looking at 19th century business titans
whose corporations grew to great size, Isaac
Singer was detrimental to his creation in his
later years, and diversified into adultery and
high living. Andrew Carnegie and John D
Rockefeller took little part in their business
creations after the first 15-20 years of their
existence. Henry Ford remained fully involved in
management - and was for his last 25 years a
menace to his company's future. Only J P Morgan of
the giants remained a huge asset to his financial
empire after its growth - and that reflects the
different demands of finance compared to industry.
Serial entrepreneurship may well produce
faster technological progress than the attempt to
create corporate behemoths, the management of
which in any case requires different skills to
those of the entrepreneur. Steve Jobs's Apple may
appear to be a counterexample - but in that case
Jobs was forced out of the company for 13 years,
returning only when premature bureaucratization
threatened to bring the company down.
It
does however remain to be seen whether the
entrepreneurs' creations are capable of
maintaining their independence after the founder's
departure. Such examples as Yahoo, Cisco and
Microsoft suggest that corporate senescence comes
early to such creatures, and that none of them may
see their 50th birthday as independent operations.
Even Apple's US$100 billion in cash and
overwhelmingly dominant product range doesn't make
it a slam-dunk to be around on April 1, 2026, its
50th birthday.
While faster technological
creation may be a positive effect of high
corporate mortality, there are clearly negative
effects. For one thing, companies no longer need
to maintain exceptional reputations for integrity
and product quality - the payoff from such
reputations is too long-term to balance the short
term gains of a quick but flawed profit.
When manufacturing is outsourced to third
parties in China or elsewhere and products are
replaced every two to three years, a Mercedes-type
reputation for product durability and trouble-free
operation is neither possible nor profitable. Even
Maytag, for decades the quintessence of products
that lasted far longer and with less maintenance
than was strictly necessary to sell them, is said
to have compromised in recent years. Where
companies cut corners, regulators will naturally
step in to protect the consumer - but costs and
inefficiencies will thereby be added and the
consumer will be far less protected than he would
have been by a corporation taking a 100-year view.
Investment is a much more difficult
business in a world of short corporate lifespans.
Companies in the first years after their intitial
public offering of shares serve primarily as
vehicles for allowing their founders to cash out,
so dodgy accounting and short-term profit
maximization are the rule. Once the founders have
cashed out and gone elsewhere, companies may
become dead husks, living off minor iterations of
past product lines and their accumulated borrowing
capacity, and hoping to be bought out by some
behemoth.
Throughout the corporate
lifecycle, traditional "value" investing will be
very difficult because values themselves will be
so fleeting. While interest rates remain
ultra-low, stock prices may be propped up, but in
the long run they will drop to a level that values
stocks as the unstable short-term annuities they
have become.
Higher corporate mortality
will be even more disruptive to careers than to
business practices. If companies are only to last
15-20 years (even if in some cases they remain a
part of some larger operation after their death),
then the traditional career, with qualifications
at the start, 40 years loyalty to an employer and
a pension at the end, is as dead as the dodo.
Some of this change has already happened;
traditional final-salary pension schemes, now
abandoned by most companies, had the advantage of
trapping employees into working lifetimes for a
single employer, normally without receiving their
full market remuneration. Modern money-purchase
schemes leave most employees with an old age of
poverty, but without 40-year tenures each of their
employers can feel that this is not its
responsibility.
In this area, employee
adaptability has much further to go. There will be
no point in spending close to a decade acquiring
top-quality credentials, in the hope of a
long-term, high-level career, because such careers
will not exist. Instead employees will have to
become accustomed to frequent job changes.
If the employee is loyal, those changes
will be unexpected and involuntary. Only if he is
thoroughly disloyal, acquiring showy short-term
achievements and networking like a maniac at all
times, will he be able to control the process and
thereby avoid long financially and psychologically
draining periods of unemployment.
We are
already seeing this in Silicon Valley. If a
youngster gets an opportunity to work in a "hot"
area before he is ready to graduate college, he is
much better off taking the job and leaving college
for later. Conversely, in later life he is likely
to have to reinvent himself several times to move
into new fields; college and postgraduate degrees
in middle life will be excellent vehicles for
doing so. The overall level of education may be
the same, but it will be more evenly spread in
bursts through the career.
Colleges will
need to adapt to this new reality. Without doting
parents to pay for them, much of their current
bloated administrative infrastructure and
politically correct courses will be useless and
unaffordable by a student body with an average age
of 35, and a large age spread either side of that.
You may feel the era of corporate
centenarians was a more comfortable one, and that
the costs of the new chaos outweigh its benefits.
Tough! It's what we will all have to live with.
Martin Hutchinson is the author
of Great Conservatives (Academica Press,
2005) - details can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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