Does Business Need a New Model?

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Does Business Need a New Model?

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Publication Date:
January 01, 2021

Critics charge that in today’s heavily traded capital markets, executives are increasingly incentivized to manage in tiny, short-term windows, with an eager eye on their stock-based compensation and a fearful one on activist hedge funds. In any case, something isn’t working: The number of public companies in the United States declined by half from 1997 to 2015, while the number of companies with a dominant shareholder or a dominant group of shareholders in the S&P 1500 increased by 31% from 2002 to 2012. In “It’s Time to Replace the Public Corporation,” Roger L. Martin tracks the decline of that model and explains why its most important shareholders–retirement investors–and the most critical part of its workforce, namely knowledge workers, are ill-served by it. He proposes a new structure, which he calls the “long-term enterprise” (LTE): a private company in which ownership is limited to those two groups of stakeholders, who have the greatest interest in long-term value. The LTE, Martin argues, would also diminish the ability of activist hedge funds to extract gains at their expense. In “Don’t Let the Short-Termism Bogeyman Scare You,” Lucian A. Bebchuk argues that concerns about the perils of short-termism–and support for measures that would insulate corporate leaders from the outside pressures that allegedly make them myopic–are long on alarming rhetoric and short on empirical evidence or economic logic. Furthermore, he writes, the threat of hedge fund activism should be expected to discourage managerial slack and underperformance, thus playing an important disciplinary role and incentivizing leaders to enhance shareholder value.

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Does Business Need a New Model?

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