Why Public Company Ownership Is Irrelevant to Monopolies

I hate disagreeing with a guy as smart as Matt Bruenig, but a new article of his, Common Ownership And The New Antitrust Movement, is fundamentally off base. Bruenig contends that “shared ownership” of companies in industries contributes to monopoly/oligopoly behavior. Here is the core of his argument:

At the same time as the new antitrust movement has gained steam, others have been raising the alarm about the way companies are owned. Like the antitrust advocates, these folks also argue that our economy features an illusion of choice. But for them, the source of the illusion is not that massive holding companies own most of the brands we choose from. Rather, the illusion results from the fact that all public companies, no matter their size, are commonly owned by the same diversified investors.

The most popular example of this kind of common ownership has been the airline industry. There consumers can choose between companies like American Airlines, United Airlines, Delta Airlines, and Southwest. However, since the stock of these companies is all owned in significant part by the same set of investors, it hardly matters which one you choose: the money all goes to the same place.

Despite its lower stage of development, the movement against common ownership presents an interesting challenge to the new antitrust movement. If the common ownership critics are right about the source of our economy’s rot, then antitrust remedies aimed at increasing the number of firms in a given market will be inadequate. After all, multiplying the number of firms operating in a particular sector will do nothing about the fact that those larger number of firms will still be jointly owned by the same people who owned the smaller number of firms that preceded them.

I’ll go into more detail, but there are two big problems with the argument. The first is that he misconstrues what what public company ownership amounts to. Second, we see precisely the same propensity to create monopolies and oligopolies in private businesses, so why should ownership arrangements be depicted as an important factor?

On the first big problem, Bruenig ignores the vast economics and corporate governance literature on principal/agency problems with public stock ownership. The failing is not that too many of the same people own shares in similar companies (which is less true than he believes; I’ll get to that as well) but that the inmates run the asylum and the management gets to do as it bloody well pleases, save in extreme events where things get so bad that normally cronyistic boards of directors decide they must Do Something. One recent example is how long it took the Wells Fargo’s board to force CEO John Stumpf out.

This has nothing to do with the concentration in the fund management industry, which has increased greatly over the last 30 years, and everything to do with “how we do public share ownership, fund management and retirement investing” as in the US legal regime (such as SEC regulations, fiduciary duties, ERISA), and the behaviors that have developed around them.

The shareholders of public companies do not “own” them in the way Bruenig implies.

Equities are a weak and ambiguous legal promise, and public stocks even more so. They amount to, “You get a vote on a few important matters like big mergers and you get to choose among board members pre-screened by management but will favor their interest regardless, which really isn’t a choice. That vote can be diluted at pretty much any time. Oh, and you might get a dividend if we earn enough money and we are in the mood to give some of it to you.”

One of many indicators of how little power these supposed “owners” have: after the crisis, word got out that Lloyd Blankfein was going to pay himself a big bonus. Normally “don’t rock the boat” big institutional investors were so upset that the tromped into Blankfein’s office to tell him to cut it out. He paid himself his planned bonus anyhow.

The longer-form version of this argument comes in a 1994 Harvard Business Review article by Amar Bhide, Efficient Markets, Deficient Governance. A key section:

But there’s a catch: U.S. rules that protect investors don’t just sustain market liquidity, they also drive a wedge between shareholders and managers. Instead of yielding long-term shareholders who concentrate their holdings in a few companies, where they provide informed oversight and counsel, the laws promote diffused, arm’s-length stockholding.

Pension and mutual fund rules that require extensive diversification of holdings make close relationships with a few managers unlikely. ERISA further discourages pension managers from sitting on boards; if the investment goes bad, Labor Department regulators may make them prove they had adequate expertise about the company’s operations. Concerned about overly cozy relationships between unscrupulous fiduciaries and company managers, the regulators have effectively barred all but the most distant relationships.

If Bruenig’s thesis were true, you would expect to see different behavior in privately owned companies. But guess what? We come to the second problem: Private equity firms, who typically own a company 100% via a fund, are if anything even more eager monopolists than public companies. 1

One popular strategy is “roll-ups” which is buying up companies in a particular line of business. The objective is to achieve both operating efficiencies and “pricing power” meaning monopoly or oligopoly status. Moreover, these are often achievable in niches that most students of monopoly power would not recognize as capable of being dominates. Medical products and services have long been a target for private equity. For instance, private equity firms have targeted kidney dialysis centers because no one can or will travel far to get this treatment. If you can buy most of the centers in a geographic area, you can influence the pricing. Another area that private equity has targeted is pet products and services. They have even moved on to rolling up animal hospitals. From a 2014 press release:

Shore Capital Partners (“Shore Capital” or “Shore”) is pleased to announce that it has completed the recapitalization of Oak View Animal Hospital (“Oak View”), Patton Chapel Animal Clinic (“Patton Chapel”), and Williams Animal Hospital (“Williams”) to form Southern Veterinary Partners (“SVP” or the “Company”). The Company provides general practice veterinary services to companion animals including vaccinations, surgery, wellness exams, oncology, ophthalmology, allergy treatment and dermatology.

“As part of our sector-focused investment approach, we’ve spent significant time studying the veterinary services industry and we are confident that the sector benefits from a number of attractive industry dynamics and is ripe for continued consolidation.”

Bruenig ignores the fact that what every MBA in business school is taught can be boiled down to creating market inefficiencies. And this behavior long predates the professionalization of management. None other than Adam Smith said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

We gave the financial services industry example in ECONNED:

But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits.

The problem is that we don’t tend to think of corporate behavior as oligopolistic or monopolistic when the results look consumer friendly. A highly differentiated product seeks to establish a market niche and appeal to a distinct set of consumers and charge a premium price for that. Apple’s celebrated iPhone is the archetypal example. A convenience store that can charge high prices by virtue of being open at 3:00 AM when all other stores nearby are closed is another example. But these practices generally take place in narrow markets and consumers perceive that even though the price is above a “market” price, the premium is justified due to the value attributed to the differentiated features (as witness how serious techies are mystified by the prices Apple gets consumers to pay for its computers). So this is the way businessmen try to change the playing field to favor them. To try to pin it on the stock market is backwards.

Bruenig’s line of thinking likely rests to a badly flawed study done years ago by a group of physicists on share ownership (I’m not going to dignify it by linking to it). I should have roused myself to debunk it then and didn’t, not that that would have made a difference. They did a network analysis and found that most shares were “owned” by remarkably few companies, such as Goldman, Blackrock, Fidelity, and Vanguard.

First, the entire analysis was garbage in, garbage out because the physicists had bad data. Retail shareholders almost without exception hold shares in ‘street name” and they would be attributed to the broker executing the trades for them, and not the actual owner. A study like this would be unable to correct for that. Retail shareholders own roughly 33% of common shares.

Those holders would most assuredly vote their own proxies. Moreover, these investors would be most likely to hold their shares over a longer period of time and be bona fide investors.

Pension and other government funds own 15% of all shares, international investors own 16%, and hedge funds own 4%. In addition, some large investors such as family offices and the larger endowments and foundations, have fund managers run dedicated funds. The sole investor would also vote its own proxy.

Second, “Blackrock” does not own shares. Blackrock manages funds, which are legal entities. They are managed by different managers with different mandates. The voting of those proxies is generally outsourced, either to outside proxy specialist firms or to in-house teams, or a hybrid. But the voting is highly rule-based, and the focus is on corporate governance matters. In other words, proxy votes, save on major mergers (and companies do tons of merger not big enough for shareholders to have a say) have very little to do with monopoly policy or not. As Bhide points out, the public ownership regime in the US (arms-length, transient investors) makes it impossible for companies to discuss their strategic plans with investors and get their input. Moreover, if a merger were to increase a company’s “market power”, an investor would favor that, regardless of whether it was a retail investor, a private equity fund manager, or a wealthy individual who owned businesses.

Third, despite the corporate governance theater of having experts figure out how to vote mutual and diversified institutional fund proxies, the reason that funds in these fund families generally vote their proxies in line with management recommendations is that they want to get the 401(k) business of big companies. They fear, almost certainly correctly, that defying them on the proxy side would lead them to getting removed from consideration for having their funds included in 401(k) offerings.

Finally, the average time of shareholding has collapsed. The average share holding time is now estimated at four months. So most investors aren’t owners, they are traders.

While I applaud the work being done by the anti-monopolists, this is a case of barking up the wrong tree. For instance, going after financial firms as monopolists or oligopolists in particular activities, like payment services, is a very important focus. But the fact that the trusts like Standard Oil, targeted by the Populists, were all created well before shares were regularly sold to large members of the public, is a strong indicator that businessmen understand the economic power of monopolies and oligopolies and will seek to create them regardless of the ownership structure. The rents they can extract are too lucrative for them to ignore the opportunity.


1 PE firms sometimes have different portfolio company ownership structures, for instance, letting some limited partners in the fund get a bigger stake in a particular company via a co-investment, or for large deals, inviting another PE fund in as a partial owner. But any limited partners who act as co-investors are not playing an active management role, and aside from a brief period of “club deals” that were deemed to run afoul of anti-trust laws, the number of private equity funds sharing ownership of a portfolio company is usually pretty small.

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    Third, despite the corporate governance theater of having experts figure out how to vote mutual and diversified institutional fund proxies, the reason that funds in these fund families generally vote their proxies in line with management recommendations is that they want to get the 401(k) business of big companies. They fear, almost certainly correctly, that defying them on the proxy side would lead them to getting removed from consideration for having their funds included in 401(k) offerings.

    Yet another reason we need pensions instead of 401(k)’s.

  2. Altandmain

    I think in general there is a huge bias against public ownership in the Anglo world. They are ideologically loyal to the idea of for-profit private capitalism.

    There is also a bias I find against co-ops, credit unions, and other organizations that work for the interests of their workers. There is also a contempt for the EUropean idea of putting ordinary worker representatives on half the board.

    It’s insane. I’d rather have a public monopoly. They generally tend to offer lower prices and better service without the profit motive. Plus employees are not screwed over. Yes they are not perfect, there is a lot of bureaucracy, but the same can be said of private companies. If you want to see bureaucracy, look at the US healthcare. I’d take a well funded NHS style system over it anytime.

    Many of the top companies are state owned enterprises (SOEs). For many years, Singapore AIrlines was regarded as the world’s top airlines. It still is to a degree, although ironically has only been challenged by other SOEs like Emirates.

    1. Synoia

      There is also a contempt for the EUropean idea of putting ordinary worker representatives on half the board.

      I know Germany does this. I was under the impression that the German arrangement was unique, but do not actually know. I’m fairly sure none of the English speaking countries encourage the riff-raff question the actions of the aristocracy, so there is little or no worker representation on boards in that world.

      Which other countries have worker representation on the board?

      1. artiste-de-decrottage

        I believe labor representation on corporate boards in Germany was required by the Marshall plan. How ironic.
        There must be a reference somewhere – I think possibly here on NC. Not sure about other countries.

        1. mark

          The idea of employee involvement in corporate affairs goes back a long time in Germany. The first codified law I could find is from 1920 and establishes employee councils with certain rights regarding social and other issues. The Führerprinzip during the NS time obviously was in stark contrast and they abolished everything. The current law, including board representatives, were first established in 1952 and updated in 1976 and 2004.
          I was not able to find any reference to the Marshall plan. Unions pushing to get back what they had lost and employers trying to prevent permanent outside control are some reeasons given.

  3. flora

    Ownership structure is a different question from regulatory capture or monopoly legally permitted (or unchallenged) abuses.

    My guess is FB and Google would behave the same way whether publicly traded or privately held.

    Thanks for this post.

    1. flora

      adding: Bruenig’s article seems accept as a given (just my uneducated guess) that corporate self-regulation is, and should/will remain, the default regulatory standard. Therefore, a “better” ownership structure will lead to better self-regulation.

      I disagree that corporate self-regulation should remain the default regulatory standard.

      1. Jeremy Grimm

        I’m with you — Adam Smith got it right about where corporate self-governance leads. Bruenig’s ownership arguments as so weak they don’t deserve even so much as being called a red herring.

    2. Adam Eran

      As someone who worked in a private software firm gone public, I can testify that the public reporting requirements often led to unproductive results, to say the least. Software release deadlines are really opportunities to recognize revenue, and for the sake of public reporting, revenue sooner is much better than revenue later.

      So…could software companies announce releases prematurely, before all the testing and problem fixing is done just to make a quarterly revenue target? And is the pope still Catholic?

      1. Yves Smith Post author

        I don’t see what this has to do with the post, which is the claim that competing public companies having shared ownership means (in some way never explained) that you still get monopoly behavior.

        1. Emma

          Agree Yves but I must also add that monopoly behavior might well still persist when a government uses them for a perverse financial purpose as opposed to the benefit of a nations’ citizenry ie. putting profit-making above public good.
          To avoid this, one might, as Amartya Sen advocates, raise public awareness of the untapped potential for participation in a country’s resources. He thinks genuine freedom entails upholding the inclusive right to a wide range of choices which encourage the development of human potential and innovation. James Robinson and Daron Acemoglu in Why Nations Fail also suggest when this is found lacking in governmental policy, there is little sustainable economic growth to be found over the long-term. It results from a nations’ financial institutions and monopolies, many conglomerates, being allowed to co-opt government to impact all major policy/decision making. They do this to halt any change or critique in their own assumptions. This is how any resemblance to a level playing field disappears entirely as everything is tilted in favor of big business. We’re already seeing the effects of this. See the piece from the WSJ (hat tip to Mohamed A. El-Erian for tweeting it): https://www.wsj.com/articles/the-new-copycats-how-facebook-squashes-competition-from-startups-1502293444?mod=djem10point&mg=prod/accounts-wsj

        2. greg

          I’m sorry, Yves. But this argument seems obvious to me.

          Suppose one holding company owns all the airlines. How can we expect other than monopoly behavior out of the airlines?

          So maybe we don’t have one holding company. Maybe we have one country club, and everybody in the club owns shares in all the airlines, and all the shares are owned by the people in the country club. Even if not formally a monopoly, they are going to want monopolistic behavior out of the airlines, because that will maximize everybody’s income.

          Now regarding your two arguments. When ownership is narrowly held, (The more concentrated the ownership, the more responsive I would expect management to them,) I don’t think the formal weakness of the position of corporate owners is a problem, because.the management of the corporations are also members of the same country club. So I think their interests are identical to the owners, at least over the short run. The principle/agent problem is not a problem, except perhaps regarding how the spoils are divided among the victors. My point is that management is just as interested, and if ownership is dispersed, more so, in screwing the public as the ownership, and monopoly is the most efficient way to do this.

          I agree with your refutation of Bruenig’s argument favoring public ownership. Clearly a voice in management would be required.

  4. Jeremy Grimm

    I’m not sure where your comment is going. You might elaborate further to clarify how the inefficiencies of reporting requirements placed on a public corporation affect the monopolistic practices of that firm versus its monopolistic practices as a private firm.

    1. Jeremy Grimm

      This should have appeared as a response to Adam Eran above. I blame the whims of SkyNet for it’s displacement.

  5. Savonarola

    Most of the study that has been done on overlapping ownership is about the propensity to behave as an oligopoly — ie, tacit or explicit collusion — not monopoly. The argument Bruenig is making conflates the two.

    The problem isn’t really with common ownership, per se. Frankly, ownership in and of itself has less and less to do with a corporation and incredibly little power over it. No, what we’re talking about here is stakes of a level that confer a board seat. The mischief involved in that is already enshrined in the Clayton Act. But honestly, even without there being an actual board overlap, or board members on competitors all appointed by KKR or Berkshire or whomever, board members all know each other and run in the same circles anyway. It’s a moneyed class that does this kind of thing professionally, as a very cursory look at the board memberships of any given corporate board will tell you.

    Monopoly is a corporation with so much market power it pushes around everything in its orbit: suppliers, customers, everyone it touches. But collusion and other means of simply deciding not to compete are much harder to spot and all around us. THAT is what we see in the spreading webs of common ownership: the veneer of competition when there is none.

  6. Savonarola

    I should also add that is the thing that “more firms” in a market is meant to address — collusion. The more competitors, the harder it is to get everyone to agree to adhere to the cartel. For an extremely long time, U.S. antitrust has essentially refused to concern itself with monopolization. They tried to do away with the issue completely during the Bush administration. The real problem in our economy seems to involve a cluster of structural problems that make innovation and real, healthy competition very unlikely. Some of them have to do with market power, some with capture, some with things like the bizarre strictures of getting your health insurance through your employer (and other stupid policy ideas like “bankruptcy reform”). There are a lot of problems. I tend to think that the overlapping ownership issue in and of itself is very minor, especially compared to things like professional board membership. But there is a bandwagon that a number of very important thinkers (VITs) are jumping onto about this issue. Big economic names in antitrust have articles out there, and the idea is that it constitutes a kind of concentration in industry. Once a critical mass of these types decides something, it is hard to speak out openly against it without getting lumped in with the mixed nuts bowl.

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