The decline of the PLC?

For most teachers and students, the Public Limited Company is seen to be the dominant type of private sector firm in the economy. But could that cease to be true? It’s not just the disappointing launch of Facebook as a PLC that has dented enthusiasm for this form of legal structure. A recent Economist article argues that the PLC may already be some way into a long term decline.

This argument might have sounded crazy through most of the last 100 years and the 1990s in particular. There is a lot to be said in their favour. According to the article, in 1997 the number of American PLCs reached an all-time high of 7,888 and even now, American listed companies are as profitable as than they have been for 60 years. Yet in 2001-02 some of America’s most prominent public companies imploded. They included Enron, Tyco, WorldCom and Global Crossing, which, before their demise, were admired. Six years later Lehman Brothers collapsed and Citigroup and General Motors turned to the US government for a rescue. Meanwhile, State Owned Enterprises (SOEs) were growing in emerging markets, challenging the idea that public companies have to dominate in the big firm arena. Private Limited (Ltd) firms flourished, challenging the idea that public companies are the best managed. And the rise of the Asian economies, with many family-owned conglomerates also threatens the idea that PLCs are always best.

Since the PLC peak in 1997, the number of PLCs has fallen by 38% in America and by 48% in Britain. The number of initial public offerings (IPOs) in America dropped from an average of 311 a year in 1980-2000 to just 81 in 2011. There are relatively complicated financial, legal, as well as practical reasons for this. The article covers them in more depth.

The alternative to PLC status has become more attractive too. Just in the last few years I’ve blogged on the subjects of Tottenham Hotspur to switch from public to private limited company, still more praise for the “John Lewis model”, (and will Blackwell’s do a John Lewis) and even asked if the Co-Op is staging a comeback. Private-equity companies have taken some of the most familiar names on the high street private, including Boots, Toys “R” Us, and Burger King (not an entirely happy story). They also bagged some of the biggest PLCs: in 2007 Blackstone bought Hilton Hotels for $25.8 billion. Partnerships, too, are thriving, reversing a long term decline since legal reforms now mean that that most can offer limited liability and tradable shares (and some tax benefits). One-third of America’s tax-reporting businesses now classify themselves as partnerships. SOEs accounted for 80% of the value of China’s market, 62% of Russia’s and 38% of Brazil’s. They include some of the world’s most important business organisations: the 13 largest oil companies, the biggest gas company (Gazprom), the biggest mobile-phone company (China Mobile), the biggest ports operator (Dubai Ports).

It’s probably far too soon to write off the PLC. At the moment, their problems are all too apparent. There’s the problem of executives paying themselves too much, although there are signs that shareholders are fighting back. The financial crisis has left them weakened, and more heavily regulated. They are accused of too much focus on making a ‘fast buck’ in the short term, rather than thinking about the long term.

The article reminds us that there are many hugely positive sides to a PLC: they produce annual reports, hold shareholder meetings and explain themselves to analysts. Private companies by comparison operate behind a veil of secrecy. One danger is that regulators are shining a spotlight on public companies, and in doing so are encouraging businesses to take refuge in the shadier parts of the private sector.