Hamish McRae: Facebook joins the club of quoted companies

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The Independent Online

Anyone who invested in Facebook will doubtless feel a little less friendly towards it than they did a couple of days ago. And I suppose if you are looking for symbolism, you could say that the fact that Facebook shares should fall by more than 10 per cent when they started trading was a signal that the social network bubble is about to burst.

Well, maybe. What happened may simply be the result of over-greedy advisers, issuing too many shares at too high a price and failing to heed the classic rule of all share floats: you leave a little fat in the deal for investors because if they lose money on this one, they are unlikely to stump up next time.

But there is a bigger story here even than Mark Zuckerberg's Facebook. It is the challenge to the whole system of shareholder-owned companies, for the publicly-quoted corporation has been the very core of the Western economic model. It is a model that has swept the world, for not only do these companies supply us with most of our daily needs, our private sector pensions depend on their performance. So it was natural that the founders of Facebook should go down the classic path once they had built up a company to a reasonable size. Because quoted companies are the dominant model of ownership we tend not to notice that this model is under a lot of pressure. Most obviously, share prices in the developed world have, at best, moved sideways since the beginning of this millennium.

The FTSE100 share index was 6930 on 31 December 1999. Yesterday it was treading at around 5400. This is a depressing performance.

There are also issues of governance. These include a catastrophic managerial failure across the financial services industry. They include the distribution of rewards to managers vis-à-vis the return to shareholders and concerns about the short-term attitudes of the investment community.

But below the radar something else has been going on that may be even more corrosive. A lot of the innovation, energy and drive in the world economy is coming from elsewhere. This is partly geographic: the quoted company is not the dominant form of ownership in the fastest-growing parts of the world in Asia. It is partly that the level of scrutiny imposed on Western public companies makes it difficult for them to operate in areas where ethical and environmental standards are different from that of the home country. Thus Chinese companies, not European or North American ones, are putting most of the new infrastructure into Africa.

It is partly that the regulatory requirements of quoted companies discourage entrepreneurs from going public. Better to stay small and avoid the hassle. That makes Facebook a particularly interesting example of the reverse, and it will be a test case as to whether it can retain its drive. So let's welcome Facebook to the club. But let's cherish the quoted company. For all its problems and imperfections, this form of ownership remains the simplest way of giving ordinary people a way to share in the global economy.