Home' Trinidad and Tobago Guardian : October 25th 2015 Contents OCTOBER 25 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
Now that Uber is muscling in
on their trade, London s cab-
bies have become even surli-
er than usual. Meanwhile the
world s hoteliers are grap-
pling with Airbnb and hard-
ware-makers with cloud computing. Across
industries, disrupters are reinventing how the
Less obvious, and equally important, they
are reinventing what it is to be a company.
To many managers, corporate life continues
to involve dealing with largely anonymous
owners, most of them represented by fund
managers who buy and sell shares listed on
a stock exchange. In insurgent companies, by
contrast, the coupling between ownership and
responsibility is tight. Founders, staff and
backers exert control directly. It is still early
days but, if this innovation spreads, it could
transform the way companies work.
The appeal of the insurgents model is partly
a result of the growing dissatisfaction with
the public company. True, the best public
companies are remarkable organisations. They
strike a balance between quarterly results,
which keep them sharp, and long-term invest-
ments, which keep them growing. They pro-
duce a stream of talented managers and inno-
vative products. They can mobilise talent and
After a century of utter dominance, however,
the public company is showing signs of wear.
One reason is that managers tend to put their
own interests first. The shareholder-value rev-
olution of the 1980s was supposed to solve
this by incentivising managers to think like
owners, but it backfired. Loaded up with stock
options, managers acted like hired guns instead,
massaging the share price so as to boost their
The rise of big financial institutions, which
hold about 70 per cent of the value of America s
stock markets, has further weakened the link
between the people who nominally own com-
panies and the companies themselves. Fund
managers have to deal with an ever-growing
group of intermediaries, from regulators to
their own employees, and each layer has its
own interests to serve and value to extract.
No wonder fund managers usually fail to mon-
itor individual companies.
Lastly, a public listing has become onerous.
Regulations have multiplied since the Enron
scandal of 2001-2002 and the financial crisis
of 2007-2008. Although markets sometimes
look to the long term, many managers feel
that their jobs depend upon producing good
short-term results, quarter after quarter.
Conflicting interests, short-termism and
regulation all impose costs. That is a problem
at a time when public companies are struggling
to squeeze profits out of their operations. In
the past 30 years, profits in the S&P 500 index
of big American companies have grown by
eight per cent a year. Now, for the second
quarter in a row, they are expected to fall, by
about five per cent. The number of companies
listed on America s stock exchanges has fallen
by half since 1996, partly because of consol-
idation, but also because talented managers
would rather stay private.
It is no accident that other corporate organ-
isations are on the rise. Family companies have
a new lease on life. Business people are exper-
imenting with "hybrids" that tap into public
markets while remaining closely held. Astute
investors, such as Jorge Paulo Lemann of 3G
Capital, specialise in buying public companies
and running them like private ones, with lean
staffing and a focus on the long term.
The most interesting alternative to public
companies is a new breed of high-potential
start-ups that go by exotic names such as
unicorns and gazelles. In the same cities where
Ford, Heinz and Kraft built empires a century
ago, thousands of young people are creating
new companies in temporary office spaces,
fueled by coffee and dreams. Their companies
are pioneering a new organisational form.
The central difference lies in ownership:
whereas nobody is sure who owns public com-
panies, start-ups go to great lengths to define
who owns what. Early in a company s life, the
founders and first recruits own a majority
stake, and they incentivise people with own-
ership stakes or performance-related rewards.
That always has been true for start-ups,
but today the rights and responsibilities are
meticulously defined in contracts drawn up
by lawyers. This aligns interests and creates
a culture of hard work and camaraderie.
Because they are private, rather than public,
they measure how they are doing using per-
formance indicators, such as how many prod-
ucts they have produced, rather than elaborate
New companies also exploit new technology,
which enables them to go global without being
big themselves. Start-ups used to face difficult
choices about when to invest in large, lumpy
assets such as property and computer systems.
Today they can expand quickly by buying serv-
ices as and when they need them. They can
incorporate online for a few hundred dollars,
raise money from crowdsourcing sites such
as Kickstarter, hire programmers from Upwork,
rent computer-processing power from Ama-
zon, find manufacturers on Alibaba, arrange
payments systems at Square and immediately
set about conquering the world. Vizio was the
best-selling brand of television in America in
2010 with only 200 employees. Whatsapp
persuaded Facebook to buy it for US$19 billion,
despite having fewer than 60 employees and
revenues of US$20 million.
Today s start-ups will not have it all their
own way. Public companies have their place,
especially for capital-intensive industries such
as oil and gas. Many start-ups inevitably will
fail, including some of the most famous.
However, their approach to building a busi-
ness will survive them and serve as a striking
addition to the capitalist toolbox. Airbnb and
Uber and the rest are better suited to virtual
networks and fast-changing technologies. They
are pioneering a new sort of company that
can do a better job of turning dreams into
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
In the coming week, government statisticians in America
and Britain will release their initial estimates of economic growth
for the third quarter of the year. Markets will leap or sag, depend-
ing on the news. Investors are wrong, though, to see the releases
as a moment of statistical insight. They are merely the first
round in a high-stakes game of pin-the-tail-on-the-donkey.
Take January-March last year in America, when an icy winter
kept shoppers at home. The initial estimate of GDP growth
from the Bureau of Economic Analysis, an annualised gain of
0.1 per cent, was disappointing but not disastrous. The second
estimate, a decline of one per cent, made things looks bleaker.
By the time the third and final estimate came in, at -2.9 per
cent, it was clear that the quarter had been the worst since the
depths of the financial crisis.
Statistics are revised for years, but their relevance soon fades.
The bureau recently reviewed its data for 2012-2014 and dis-
covered that the American economy had grown more slowly
than it previously had thought. At a stroke it removed US$70
billion, equivalent to Sri Lanka s entire output, from its figures.
No one noticed. It is changes in the early estimates that move
markets and influence policy.
Balancing reliability and timeliness is hard, however. The
bureau releases its advance estimate about a month after the
quarter has ended. By its own admission, it relies on incomplete
data and projections of trends to meet this deadline. The second
and third estimates follow at monthly intervals.
Other offices operate more slowly: The Australian Bureau of
Statistics waits three months before issuing its first numbers
and does not release regular revisions.
A recent study by Jorrit Zwijnenburg of the Organisation for
Economic Cooperation and Development compares the size of
GDP revisions for 18 rich countries between 1994 and 2013. It
shows that, whereas other agencies initial estimates were
typically too low, the Bureau of Economic Analysis tended to
be too high. However, the average size of the bureau s revisions
was comfortably mid-table, larger than those in Canada or
Spain, smaller than those in Finland, Japan or Norway.
Alarmingly, though, the bureau appears to have become less
accurate of late. The average revision from the first to the third
estimate was 0.6 percentage points between 1993 and 2013,
but has risen to 1.3 points since the beginning of 2014.
That may reflect greater volatility in the economy itself. In
the past six quarters, growth has bounced around, rising to 3.9
per cent or more three times and falling below zero twice.
There may be other problems too. Between 2010 and 2014
first-quarter GDP averaged only 0.6 per cent, a full two percentage
points below the other quarters. The bureau has admitted that
it may not have fully allowed for the seasonal effects of holidays
and the weather. It has promised a "multi-pronged action plan"
to fix the issue.
An alternative would be to release more data, in the hope
that the overall picture this provided would be more accurate,
if fuzzier. In addition to GDP, for instance, the bureau also pub-
lishes figures on gross domestic income. GDI, like GDP, is a
broad measure of economic activity, but it tracks income instead
of expenditure. GDP and GDI rarely match exactly.
The bureau s solution is to publish an average of GDP and
GDI along with the quarterly GDP data. This average should
reduce the influence of errors. It also gives investors another
number to pore over. The Economist
Funny numbers: Making sense of economic statistics
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