It’s Time to Replace the Public Corporation

We need a model that truly focuses on the long term.

by

Roger L. Martin

by

Roger L. Martin

From the Magazine (January–February 2021) · Long read

Andrea Stone

01

It’s Time to Replace the Public Corporation

02

Don’t Let the Short-Termism Bogeyman Scare You

Summary.

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 this article the author tracks the decline of the public corporation and explains why its most important shareholders—retirement investors—and the most critical part of its workforce, namely knowledge workers, are ill-served by this model. 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.

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Idea in Brief

The Problem

The public corporation is no longer fit for purpose, and its popularity as an ownership model is declining.

Why It Happens

In today’s capital markets, the model incentivizes executives to manage in tiny, short-term windows, thus failing to satisfy the primary needs of its critical stakeholders: retirement investors and knowledge workers.

How to Fix It

Switch to a model in which the owners are an employee stock ownership plan (ESOP) and one or more pension funds—thus focusing governance on ensuring real long-term performance rather than on short-term stock price fluctuations.

The professionally managed, widely held, publicly traded corporation has been the dominant structure in business for the past 100 years. It came to prominence in the wake of the Great Depression because it was effective at mobilizing capital from private investors—who by the 1960s held more than 80% of company stock—for productive ventures. The model enabled executives to focus on long-term growth and profitability, to the benefit of the many individuals who owned shares in their companies.

A version of this article appeared in the January–February 2021 issue of Harvard Business Review.

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Don’t Let the Short-Termism Bogeyman Scare You

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Roger L. Martin is a former dean of the Rotman School of Management, an adviser to CEOs, and the author of A New Way to Think (Harvard Business Review Press, 2022).

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