Hamish McRae: The cautionary, curious
tale of Facebook's public flotation

Our Chief Economics Commentator on a week that

didn't go quite as Mark Zuckerberg had planned


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 the fact that Facebook shares fell 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 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 – not only do these companies supply us with most of our daily needs, our private sector pensions depend on their performance. Just about everywhere, state-owned companies have been sold off or are being sold off to shareholders.

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. Reasonable size? Well, the valuation is huge but remember this is a company that right now has fewer than 3,500 employees.

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 6,930 on 31 December 1999. Yesterday it was trading at around 5,400. 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 they include 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. It is that 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 (maybe rightly) on Western public companies makes it difficult for them to operate in areas where ethical and environmental standards are different from those 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 from now on. At any rate, in financial markets private equity companies have a flexibility to do things that public equity ones can't.

Whatever the balance between these elements, the fact remains that the global footprint of the quoted company, rising for 30 years, seems now to be shrinking. That makes it hard for savers to share in the wealth generated by global growth. China has become the world's largest car producer but it is hard to invest in the industry; you can buy General Motors shares, but perhaps you might not want to. 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.

We're not all grumbling

The OECD, along with the IMF, has been opining about the state of the UK economy. But the little thing I noticed was the OECD's update of the Better Life Index that they have calculated, trying to analyse the things that make people happy in different countries, and creating an app for people to identify the things that make themselves feel they are having a better life.

The inputs include the usual ones of income, housing, education, health and so on, but they also have softer ones, such as safety, the environment and work-life balance. The general results seem to be that Americans, Swiss and Scandinavians come top of the league, with most other developed countries, including the UK, a little below them. This should serve as a nudge for policy-makers: Britons would like to feel safer than they do, for example. But the big point is that most people in most rich countries are pretty happy on most counts. That, in these difficult times, surely comes as a comfort.


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