PART II
WHY THE AMERICAN CORPORATION IS DISAPPEARING

FOR MOST OF the 20th century, American corporations sought growth. This often meant merging with competitors or, after World War II, acquiring companies in unrelated industries. The conglomerate merger movement of the 1960s left the biggest firms highly diversified. ITT became one of the biggest corporations in the world by buying insurance companies, bakeries, auto suppliers, hotel chains, trade schools, copper mines, and hundreds of other businesses. But the pursuit of sales growth often came at the expense of shareholders, who preferred profitability. Ronald Reagan’s election in 1980 changed the rules for how corporations could and should operate. The hostile takeover wave of the 1980s, activist investors, and the growth of stock ownership by the broad public ushered in an era of shareholder value dominance. This represented a major shift in how scholars and the public thought about the corporation and its responsibilities, and brought about substantial changes in how corporations were managed. Where corporations in the postwar era aimed to balance the interests of many stakeholders, by the end of the 1980s shareholders had emerged as the corporation’s dominant constituency.

The outsourcing movement of the 1990s metastasized into a broad hollowing-out of the American corporation. Following a model popularized by Nike, American corporations increasingly hived off the production and distribution of their goods and services to focus on the higher value-added tasks of design and marketing. Surprisingly few goods are actually produced by the company whose brand is on the label, from iPhones to cat food to blood thinner. The result has been disastrous for American employment, even in “high-growth” industries such as electronics. It has also resulted in a conundrum about “corporate responsibility,” as supply chains are increasingly dispersed around the world and illegible even to the companies owning the brand. Few sectors are immune, whether in manufacturing or service.

The growth of generic manufacturers and distributors and the widespread availability of cloud services mean that barriers to entry have collapsed in many industries. Anyone with a credit card and a Web connection can create an enterprise, from incorporation to production to distribution. The economies of scale that gave birth to the modern corporation have disappeared in many sectors. Lightweight entrants can scale up or down rapidly by renting rather than buying capacity, and their low cost means that in many domains they are a superior choice. These lightweight firms with modest time horizons have little rationale for bearing the costs of going public. Meanwhile, incumbent firms face existential threats requiring substantial and uncertain restructuring, which often requires exiting the stock market. The decline of the public corporation does not mean that business per se is collapsing. There are many ways to organize enterprises, legally and financially, and the current era has seen a flowering of alternative forms. Thanks to low barriers to entry, new ways of organizing business are emerging almost daily.

The range of activities for which the most economical format is to organize as a corporation and sell shares to the public is rapidly diminishing. Firms that have gone public since the dot-com collapse of 2000 often flout standards of corporate governance (e.g., by giving founders permanent control via super-voting shares). Their rationale for going public—to pay off employees and early investors, rather than to raise capital to invest in long-lived assets—suggests that such firms are not sustainable as public companies for the long term, although demand for returns by investors may sustain them for some time.