Sebastian Mallaby, author of “The Man Who Knew: The Life & Times of Alan Greenspan,” is the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations and a contributing columnist for The Post.
While President Trump challenges the settled rules in Washington, a different disruption looms on the West Coast. Snap, the parent company of the social messaging app Snapchat, is preparing to sell about a fifth of itself to the public. Except that it’s not really selling itself. Evan Spiegel, the highly snappable founder of the company, is turning the normal rules of capitalism on their head.
Handsome, poised and situated at the intersection of art, technology and commerce, Spiegel invites comparisons with the late Steve Jobs. But he is evidently determined to avoid the ups and downs that Jobs went through: He will never be ejected from his own company, as Jobs was from Apple; he will never be forced to mature painfully in the wilderness before returning, in a majestic second coming, to rescue the company he created in his youth. For Spiegel, unlike Jobs, is conducting a kind of pseudo-public offering. Buyers of his shares will get no votes at shareholder meetings. They will have no way of influencing who is chief executive.
Roughly 30 years ago, a debate raged about who should rule over public companies. The American view was that shareholders should hold top managers accountable; if they failed in this duty, a limp share price would invite a takeover from a corporate raider who would discipline the CEO. In contrast, Japan accepted chief executives as sovereign. Japanese corporations were financed by cozy banks more than by demanding shareholders. Complex webs of cross-shareholdings protected them from hostile takeovers.
When Japan descended into deflationary stagnation, this debate appeared to have been settled. Shareholder-led capitalism, with its circus of contested takeovers and initial public offerings, seemed to deliver world-beating companies and faster economic growth. But a funny thing has happened recently. Within the United States, the most dynamic and innovative part of the economy is also the most Japanese. California’s tech ecosystem is dominated by companies with weak or passive public shareholders. There are no corporate raiders. The managers of big companies are monarchs.
Snap is an extreme expression of this tendency, but it is not alone. Google’s 2004 flotation offered investors shares with limited voting rights; since 2012, a fifth of U.S. tech firms that went public did so with dual-class voting structures. Meanwhile other tech superstars have put off the whole business of dealing with shareholders: As recently as 2010, only a handful of companies had attained a valuation of over $1 billion without going public; now more than 200 have passed that milestone. But Snap is still a ground-breaker. By issuing shares with no voting rights whatever, it is proposing a new model of “ownership” without control.
Perhaps this Japanese-style switch to manager empowerment is good? Running a public company involves regulatory costs, so there’s a case for staying private as long as possible. Chief executives complain that public shareholders are short-termist, and although they exaggerate, they have a point. Shai Bernstein of Stanford University has shown that newly listed tech companies are less innovative than comparable ones that remain private. Apparently, public shareholders prefer dividends — simple cash in their pockets — to speculative R&D spending whose probability of pay-off is hard for outsiders to judge.
Changes in the supply and demand for capital are reinforcing the logic of the Japanese model. On the supply side, an aging population and inequality have boosted saving; on the demand side, it does not take much capital to launch a new-economy start-up, so the need has declined. The scarce resource today is not financial but human capital, which makes it only natural that control over new companies is shifting from the providers of finance to the talent inside firms.
Meanwhile, shifts within finance are pushing the same way. Ever more company shares are held in passive investment funds that don’t even try to act like proper owners: They employ no analysts to evaluate company strategy, so CEOs who want to make the case for far-sighted investment have nobody to talk to. In these circumstances, concentrated private ownership — whether by company founders, venture-capital groups or private-equity funds — may well deliver superior corporate performance.
And yet even reasonable trends can be overextended, and Snap’s forthcoming flotation is a bridge too far. Other company founders who have demanded super-voting rights have conceded at least some power to public shareholders; most have accepted that their control should be extinguished if they choose to quit working or sell a chunk of their stock. But Spiegel and his co-founder, Bobby Murphy, have proclaimed their right to retain control of Snap even if they retire from the company, and even if they liquidate a large portion of their shares. Their control will only lapse when they both die, or both sell 70 percent or more of their ownership. Hypothetically, an octogenarian Spiegel could retire to a Tibetan monastery and still call the shots.
Inspired entrepreneurs are rightly celebrated, and Spiegel has built a red-hot social network. But checks and balances still matter — in California as in Washington.