There are times when profound changes to our economic system proceed without notice. This might be one of those times. Capitalism is once again doing what it does best--adapting to change. That's what the wheeling and dealing of those billionaire private equity funds is all about. But the emergence of a class of nouveaux très riches entrepreneurs, with lifestyles that make investment bankers look underprivileged, has Congress considering new tax rules to stem the tide of private equity deals by raising the tax on profits earned by private equity entrepreneurs from the 15 percent long-term capital gains rate to the ordinary income tax rate of about 35 percent.
As Andrew Roberts points out in his masterful History of the English-Speaking Peoples Since 1900, the development of the limited liability company--the modern corporation--"opened up the modern capitalist system that has brought prosperity to every society that has ever properly adopted it." That system has gone through many phases. During the 19th century, huge corporations, many having acquired monopoly power using methods that could not long pass muster with the public, made their appearance. The result was a reaction that produced the antitrust laws, stripping what Theodore Roosevelt called "malefactors of great wealth" of that power and establishing the rules that linked competition to capitalism, creating the socially mobile meritocracy for which America is admired and envied abroad.
In the 20th century these companies grew by raising huge sums in small amounts from widely dispersed shareholders. This allowed corporations to garner economies of scale,
but it also created a managerial class independent of the scattered shareholder-owners of the business. As Adolf Berle and Gardiner Means pointed out in 1932 in their classic, The Modern Corporation and Private Property, "The separation of ownership from control produces a condition where the interests of owner and of ultimate manager, may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear."
Unlimited and unaccountable power inevitably produced abuses: executive salaries that bore no relation to performance; mergers that aimed more to aggrandize the executives of the acquiring company than to obtain efficiencies; more attention to executive perks (golf-club memberships, luxurious corporate apartments) than to enhancing shareholder value.
Enter Michael Milken and his corporate raiders, sharks, predators, greenmailers--pick the pejorative of your choice. In the 1980s, Milken created the "junk bond," a perfectly sensible debt instrument that allowed entrepreneurs who did not share a country club membership with their bankers to borrow money to finance the takeover of badly managed companies. These takeover artists ended up both owning and managing the companies they acquired. Faced with the burden of servicing the enormous debt they had incurred, they grounded corporate jets and sold off company wine cellars in order to increase profits and the value of their holdings.
Once again there was a reaction: Highly leveraged balance sheets fell from favor. Corporate managers regained control of their companies, relying, as in the past, on the dispersion of ownership to engage in practices that at minimum did not enhance shareholder value, and at worst landed those executives in jail.
|
