Last month Apple raised $17bn in a bond issue. Not because it needs the money; the company currently has reserves of $145bn, and the eye-watering margins on its products generate cash at a rate that perhaps only a central bank can emulate. Apple is raising money because its money is in the wrong places and it would face tax bills if it repatriated the money to the US. The transaction illustrates a paradox in the modern relationship between business and finance. Companies have never had so little need for capital nor so much engagement with capital markets.
In the 19th century, railroads raised funds from private investors to finance costly infrastructure. Later, large manufacturing corporations raised capital in much the same way.
But only a few businesses today, mainly utilities, have the capital-intensive character typical of those early days of industrialisation. A railroad was a railroad, a brewery was a brewery, and these plants had no alternative uses. But now capital is much more fungible. The typical modern company operates from an office block, a shop or a shed, and it is now relatively unusual for a business to own the premises from which it operates. Employees today generally do not know who owns the building in which they work, or the desk at which they sit. They do not know because it does not matter. Their boss tells them what to do, not because he owns the means of production, but because he has been appointed as the boss.
A modern company, such as Apple, is knowledge-based, outsources its manufacturing and has little need of any tangible capital at all. A new business will need investment to meet its initial operating losses but can expect to become cash generative at an early stage of its life. If the company seeks a public listing on an exchange, the likely purpose is to provide a liquidity event for early-stage investors, or to reassure employees that their options have value, rather than to raise money to expand the business. Facebook took in cash from investors because it could, while admitting that it had no particular use for it. We still use the word “capitalism” when we refer to the institutions of the modern market economy but it has become a misleading term.
When large companies do access capital markets, the reasons – as in Apple’s case – more likely relate to financial engineering, or the acquisition of existing assets, than to new investment. Their corporate treasurers may be trying to make a turn on foreign exchange or on credit risk or yield curve differentials. Mostly these activities are only tenuously related to the operations of the company.
Nevertheless, company executives are far more attentive to capital markets than they were. Great industrialists once viewed markets with disdain. It is hard to imagine Alfred Sloan of General Motors or Harry McGowan of ICI making regular checks on their company’s share price, still less taking time out of their schedules to schmooze junior analysts at investor conferences.
One reason is that executives are now given incentives through share options and other remuneration schemes to attend to share prices. Of course, managers always had a financial interest in their company: Sloan was a major holder of General Motors stock and institutional ownership was less widespread, and family and founder ownership more common, than today. But the incentives of those executives were related to the long-term success of the company, not its short-term share-price performance.
These figures of the past never imagined that their positions would be threatened by unwanted takeover activity. To the extent that they had any mechanism of accountability at all, it was to an internal cadre rather than an external market. And so the relationship of capital markets to big business has undergone a fundamental shift. Corporate governance today is not an incidental feature in the relationship between companies and markets: corporate governance, not capital allocation, is the principal economic and social function of those capital markets.
When Apple borrowed, it did so not to raise funds for its business but to return to its shareholders cash secured from operations. Capital markets are no longer mechanisms for putting money into companies, but mechanisms for getting money out.