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How many companies stand the test of time? Remarkably few, to judge by the average span of quoted companies on the stock market.
Just over 1 per cent of the 1,513 UK-listed companies in 1948 still existed 70 years later, according to an analysis by two Cambridge professors. Roughly half of US public companies traded for 10 years or fewer over the past century, says Morgan Stanley.
To be sure, a delisting does not necessarily mark the end of a company’s existence as a distinct entity. Private equity deals are a case in point. And a majority of delistings are due to takeovers, which can be lucrative for selling shareholders.
But shortlived companies are mostly poor investments. The majority of companies that survived less than 20 years on the US stock market had negative compound returns, according to Hendrik Bessembinder, a finance professor at Arizona State University. Bankruptcies, late filing and other regulatory failings account for about 40 per cent of departures from the US market since 1976.
It is unclear why some companies have staying power. When oil major Shell explored this question as part of a long-term planning exercise conducted in 1983, it studied examples such as Japan’s Mitsui, the US’s DuPont and Stora Enso, a Finnish-Swedish paper and pulp manufacturer that started out as a mining company in 1288. These survivors had little in common bar traits such as cohesiveness, tolerance and financial conservatism.
Small companies are highly vulnerable to setbacks. But above a certain size, scale provides limited protection. Larger, older companies tend to tie up resources in existing operations rather than potential growth opportunities, notes Rita McGrath from Columbia Business School. Moreover, established companies’ succession plans often demonstrate a “see-saw” problem. Visionary leaders are replaced with loyal lieutenants. Though skilled at dealing with operational challenges, they tend to stick to their predecessors’ strategy. Apple’s Tim Cook, for example, has yet to cement his reputation as an innovator.
Winnowing out senescent companies is not a bad thing. Zombie businesses sap productivity. Creative destruction has nearly halved the average time spent in the S&P 500 index over the past 60 years, according to strategy and innovation consultancy Innosight. Investors have disproportionately profited from US tech companies founded in the past 30 years. Yet corporate failures — and the resulting damage to wealth, livelihoods and communities — could sometimes have been avoided. The misguided pursuit of shareholder value is often to blame, according to economist John Kay.
Investors should take heed of corporate demographics. Morgan Stanley’s Michael Mauboussin points out that discounted cash flow calculations attribute a lot of value to the earnings generated after the end of the forecast period. It might be time for a rethink that takes account of a range of possible outcomes. The tacit assumption that a company will have a long, profitable life is not justified in the majority cases.
vanessa.houlder@ft.com
