The Chapter 11 bankruptcy filing of Eastman Kodak, founded in 1892, highlights the fact that you just don’t see many of the titans of 19th century commerce around any more. Corporate lifespans in general are getting much shorter. It goes along with the rest of life – you can’t get an appliance these days that lasts like a 1950s Maytag – but has even more important implications than poor appliance quality for our economy and our careers.
The evidence for increased corporate mortality is substantial and startling in its extent. John Hagel III, Co-Chairman of Deloitte LLP Center for the Edge in “The Power of Pull” (Basic Books, 2010) has calculated that whereas the average life expectancy of the companies in the 1937 Standard and Poor’s 500 Index was 75 years, the lifespan of such companies is now around 15 years. A similar 1983 study of the 1970 Fortune 500 found the life expectancy of its companies to be around 40 years, with a third of them vanishing in the intervening 13 years. Thus the progression from 75 year corporate lifespans to 40 to 15 since 1937 is clear and more or less smooth.
Most of this corporate mortality does not reflect bankruptcy. Mergers and acquisitions, far more prevalent now than even in the 1970s, account for many extinctions. Conversely, filing for Chapter 11 bankruptcy (an option only available since the Bankruptcy Act of 1978) does not necessarily put a corporation out of business. You only have to look at the repeated bankruptcy filings in the airline sector to see bankruptcies that make little change to the company’s operations, in those cases requiring only the loss of some peripheral routes and normally a renegotiation of labor contracts.
Technology and changes in consumer tastes are generally thought to be the prime causes of bankruptcy, but this is not necessarily true, as can be seen from a couple of case studies. The Singer Corporation, manufacturer of sewing machines, was founded in 1851, four decades before even Kodak, and in essence is still in existence. For the first 110 years of its existence it stuck to its main business (with a diversion into firearms production during World War II), embracing technological change as it came along and becoming an icon of U.S. industry – producing also an iconic headquarters in New York’s 1908 Singer Building. Then in 1965, it embarked on a program of diversification, buying manufacturers of calculators and defense equipment. Naturally, diversification turned out unsuccessful, and the company was dismembered, with the sewing machine division being sold in 1989, effectively ending the company’s lifespan at 138 years. Nevertheless, the operation if not the corporate shell continues in existence today, although social change has indeed affected its main business – few women make their own clothes as they did in even the 1950s.
As a more recent alternative to the long-lived Singer, you can examine the fates of the 1960s BUNCH competitors to IBM in the mainframe computer business. None of them are manufacturing computers today; nor have they diversified into PCs and tablets, as might have been expected by a 1960s observer. Burroughs and Sperry Univac merged in 1986 to form Unisys, 88% of whose business now comes from services. NCR was acquired by AT&T in 1991 and spun off in 1997; it is still in existence, but has left the computer business. Control Data gradually faded, got out of the computer business, and was sold to BT in 1989. Honeywell got out of the computer business in 1991, and was acquired by Allied Signal in 1999, although the combined corporation kept the Honeywell name. Thus in the strict sense all five of the companies have “died” and all five have left the computer business and its successors (though a small part of Unisys’ business is servers). Two of the names still exist, but in neither case have they had a continuous corporate existence since the BUNCH heyday.
As well as technological change, there are other reasons for greater corporate mortality. One is estate duties, introduced in 1916 but jumping to their punitive modern level in Herbert Hoover’s economically and politically suicidal 1932 tax increase. Once estate duties were in place, entrepreneurs could no longer pass companies onto their heirs in a straightforward manner, because an impost of 40% or more on death required family control to be relinquished. This led entrepreneurs to avoid creating large, long-lived corporate enterprises that could be inherited by their descendents, but instead to sell out during their lifetime and convert the corporation into liquid, easily realizable assets. In turn, this has greatly damaged corporate governance, since there are no longer family members with large shareholdings available to control management and prevent it from reckless short-termism and looting.
A further cause of increased mortality is the influence of leverage, and the associated ills of low interest rates and aggressive private equity money pools. A definitive Shell study of 1983 identified the five secrets of corporate longevity as being (i) exploitation of existing capabilities before rapid expansion, (ii) diversification, but only into related businesses, (iii) a conservative balance sheet and financial policies generally, (iv)a lengthy institutional memory for mistakes and (v) managing change in a culturally sensitive manner. Needless to say modern management practice, with its stock options, large short-term bonuses, aggressive empire-building management, love of leverage and private equity piranhas, usually manages to fail on all five criteria.
In the younger generation, the greatly increased corporate mortality has now been internalized in management practice. Entrepreneurs like PayPal’s Peter Thiel no longer seek to build a long-lasting corporate structure, even though they have the capabilities to do so, but instead act as serial entrepreneurs, selling out their first venture quickly and then acting as sponsor, financial angel and ultimate boss of a series of further companies – in Thiel’s case such substantial operations as Facebook and Palantir Technologies – which use their expertise, their management and business-creation skills and their now substantial resources.
In some respects, this is an advantage. Looking at nineteenth century business titans whose corporations grew to great size, Isaac Singer was detrimental to his creation in his later years, and diversified into adultery and high living. Andre Carnegie and John D. Rockefeller took little part in their business creations after the first 15-20 years of their existence. Henry Ford remained fully involved in management – and was for his last 25 years a menace to his company’s future. Only J.P. Morgan of the giants remained a huge asset to his financial empire after its growth – and that reflects the different demands of finance compared to industry.
Serial entrepreneurship may well produce faster technological progress than the attempt to create corporate behemoths, the management of which in any case requires different skills to those of the entrepreneur. Steve Jobs’s Apple may appear to be a counterexample – but in that case Jobs was forced out of the company for 13 years, returning only when premature bureaucratization threatened to bring the company down. It does however remain to be seen whether the entrepreneurs’ creations are capable of maintaining their independence after the founder’s departure. Such examples as Yahoo, Cisco and Microsoft suggest that corporate senescence comes early to such creatures, and that none of them may see their fiftieth birthday as independent operations. Even Apple’s $100 billion in cash and overwhelmingly dominant product range doesn’t make it a slam-dunk to be around on April 1, 2026, its fiftieth birthday.
While faster technological creation may be a positive effect of high corporate mortality, there are clearly negative effects. For one thing, companies no longer need to maintain exceptional reputations for integrity and product quality – the payoff from such reputations is too long-term to balance the short term gains of a quick but flawed profit. When manufacturing is outsourced to third parties in China or elsewhere and products are replaced every 2-3 years, a Mercedes-type reputation for product durability and trouble-free operation is neither possible nor profitable. Even Maytag, for decades the quintessence of products that lasted far longer and with less maintenance than was strictly necessary to sell them, is said to have compromised in recent years. Where companies cut corners, regulators will naturally step in to protect the consumer – but costs and inefficiencies will thereby be added and the consumer will be far less protected than he would have been by a corporation taking a 100-year view.
Investment is a much more difficult business in a world of short corporate lifespans. Companies in the first years after their IPO serve primarily as vehicles for allowing their founders to cash out, so dodgy accounting and short term profit maximization are the rule. Once the founders have cashed out and gone elsewhere, companies may become dead husks, living off minor iterations of past product lines and their accumulated borrowing capacity, and hoping to be bought out by some behemoth. Throughout the corporate lifecycle, traditional “value” investing will be very difficult because values themselves will be so fleeting. While interest rates remain ultra-low, stock prices may be propped up, but in the long run they will drop to a level that values stocks as the unstable short-term annuities they have become.
Higher corporate mortality will be even more disruptive to careers than to business practices. If companies are only to last 15-20 years (even if in some cases they remain a part of some larger operation after their death) then the traditional career, with qualifications at the start, 40 years loyalty to an employer and a pension at the end, is as dead as the dodo. Some of this change has already happened; traditional final-salary pension schemes, now abandoned by most companies, had the advantage of trapping employees into working lifetimes for a single employer, normally without receiving their full market remuneration. Modern money-purchase schemes leave most employees with an old age of poverty, but without 40-year tenures, each of their employers can feel that this is not its responsibility.
In this area, employee adaptability has much further to go. There will be no point in spending close to a decade acquiring top quality credentials, in the hope of a long term high-level career, because such careers will not exist. Instead employees will have to become accustomed to frequent job changes. If the employee is loyal, those changes will be unexpected and involuntary. Only if he is thoroughly disloyal, acquiring showy short-term achievements and networking like a maniac at all times, will he be able to control the process and thereby avoid long financially and psychologically draining periods of unemployment.
We are already seeing this in Silicon Valley. If a youngster gets an opportunity to work in a “hot” area before he is ready to graduate college, he is much better off taking the job and leaving college for later. Conversely, in later life he is likely to have to reinvent himself several times to move into new fields; college and postgraduate degrees in middle life will be excellent vehicles for doing so. The overall level of education may be the same, but it will be more evenly spread in bursts through the career. Colleges will need to adapt to this new reality. Without doting parents to pay for them, much of their current bloated administrative infrastructure and politically correct courses will be useless and unaffordable by a student body with an average age of 35, and a large age spread either side of that.
You may feel the era of corporate centenarians was a more comfortable one, and that the costs of the new chaos outweigh its benefits. Tough! It’s what we will all have to live with.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)