Can all the world have a share?

Mongolia now has a stock exchange. But this ubiquitous form of capitalism has significant flaws
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The Independent Online
One of the smaller items of news this week was the opening to public trading of the Mongolian Stock Exchange in Ulan Bator. Go back 15 years and the idea that there would be a functioning stock exchange in Outer Mongolia would have seemed absurd. Even enthusiasts for the capitalist system of company ownership would have reservations as to whether it could be applied to developing countries, and hardly anyone could conceive that almost the entire communist world would abandon its economic system and grab the capitalist one.

Yet it has happened. That little news item is one more milestone on a path of intellectual conquest. The idea that companies should be owned by shareholders, and that their shares should be traded on stock exchanges, has conquered the world.

The joint-stock company is more than 400 years old, and the oldest stock exchange nearly that: the Amsterdam exchange was founded in 1602. What we have seen in the past decade is the sudden and rapid expansion of a tried and tested form of commercial organisation. In a way it is less surprising that Ulan Bator should now get its stock exchange than the fact that it has taken it so long to do so.

That it took so long was partly because the economy needed to develop to a certain stage before an exchange was necessary, but it was also, this century, a result of the imposition of communism, something we now know was a blind alley. Britain developed the mechanism - privatisation - which enabled state-owned enterprises to be converted into shareholder- owned ones. And that programme happened to come along at just the right time to give a model for communist countries.

Some people crow at the way in which privatisation has become Britain's most important intellectual export for a generation: everybody is copying us. Others bitch at the rough edges of privatisation: the fortunes "earned" by directors of privatised companies from share options, the fees to City advisers, the fact that some share issues have been underpriced.

Both responses seem a bit immature. There is a much more important and interesting issue and it is this: the entire world is adopting a single form of commercial organisation.

I happen to think the shareholder-owned company is a wonderful invention. It is enormously flexible, yet tremendously robust. You can use it as an institutional mechanism for running a giant family-controlled enterprise like Sainsbury's or BMW; for taking over a public utility like BT and transforming it into a hi-tech communications group; or for nurturing a fledgling entrepreneurial company, like Body Shop, and helping it grow into a multinational chain. But to dump on it all the problems of state- owned industries - not just the commercial problems but the need for political or democratic input - is asking a lot of its powers of adaptation.

True, the system is versatile. In the last 25 years it has had to adapt to the rise of institutional share ownership: mechanisms such as the annual general meeting, which were designed to give a direct relationship between shareholder and company, are increasingly anachronistic when three-quarters of a company's shares are owned through large investment institutions. Small shareholders' worries are different from those of professional fund managers.

The difficulties of making this shift should serve as a warning to anyone who thinks that joint stock companies can automatically adapt to running public utilities. And if such change causes problems in Europe, with nearly 400 years' experience of a stock-market economy, how much more so in countries with no such background.

In any case, there is a further concern. The entire world is making a bet on one system of company ownership, with the inevitable danger that other perfectly valid forms of ownership will be neglected. British experience of nationalised industries has been a disaster, but we've done lots of other things right: co-operatively owned organisations like the building society movement, the mutual life assurance groups, the John Lewis partnership and the development of the TSB. Other successful enterprises have been municipally owned, with everything from the water and sewerage companies to the Hull telephone service and Luton airport.

Others have operated under royal charter, such as the science research councils, the Post Office or the BBC. Charities can be effective custodians of anything from medical research (the Wellcome Foundation) to the countryside (the National Trust). Yet if the present trend continues, in another 15 years most large enterprises everywhere will be owned by shareholders and quoted on stock exchanges.

The reaction of most people who are worried about this is to try to fight a rearguard action: to protest at the privatisation of British Rail, or whatever. But this is to spit in the face of a hurricane. Even if the process were checked in Britain, it would continue elsewhere around the world and eventually we would be carried along with it. Surely the more effective response is to try to make sure that we are not putting obstacles in the way of the creation of other forms of corporate organisation.

For example, we penalise the family firm. There is a strong tax incentive for anyone who has built up a firm to sell at least part of it and invest the money in other companies, rather than pass the firm on intact to their heirs. The partnership, another long-established way of people associating together for some commercial task, has also been discouraged by taxation.

We have no mechanism to encourage the creation of co-operative enterprises. We have so little faith in the business acumen of local authorities (admittedly with reason) that we do not allow them to embark on any new commercial activities at all. And the idea of the state now setting up a new communications monopoly like the BBC is almost unthinkable.

Does this matter? Yes, for two reasons. The first is that other forms of organisation such as those mentioned above have qualities which shareholder- owned companies do not. The BBC is a good example: it is qualitatively different from, say, the three large US networks. The second reason is that just at the moment of this triumph of capitalism, access to capital is becoming a less important aspect of economic life.

To explain: with a car company or a telephone system, the physical ownership of expensive assembly plants or telephone system is the main asset. But the fastest-growing businesses are those where skilled people are the main asset: financial services, entertainment, many media, computer software. As buyers of investment banks and advertising agencies have found, you can take over the company but key staff may simply walk; the buyer finds it has only bought a brand name of diminishing value.

This is really serious. The West's ageing population needs to save for its retirement: it needs to find assets which give it a stake in future economic growth. Yet the standard mechanism for making such an investment seems unsuited to ownership of the fastest-growing companies. We can encourage other forms of ownership by removing tax barriers, allowing modest enterprise initiatives by central government and local authorities, and maybe by specific tax help for things like co-operatives. But finding a way of "owning" people businesses is a tougher task.

So we have arrived at this stage where every country has a stock exchange and where just about everyone has the opportunity to become a shareholder. But we cannot become shareholders in the most vibrant parts of the world economy. We will be able to buy shares in the Outer Mongolian telephone operator, but we cannot buy them in Andrew Lloyd Webber.

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