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This Is a Fine Time to Be a Big Corporation

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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“Public companies are perishing sooner than ever before,” the Boston Consulting Group’s Martin Reeves and Lisanne Pueschel wrote in a BCG Perspectives essay last month. You hear similar assertions pretty frequently these days. Departing Cisco Systems chief John Chambers has made headlines, repeatedly, with his claim that 40 percent of companies “will not exist in a meaningful way in 10 years.” It’s part of what has become the dominant narrative in corporate circles -- that we are in an era of unprecedented technological disruption and change that only the most forward-looking companies will survive.

BCG consultants, though, have an endearing habit of backing up their claims with data. Reeves -- who heads the firm’s new Bruce Henderson Institute for strategy and economics research -- and Pueschel did this with numbers from Compustat and S&P Capital IQ. And that’s where things get interesting. Here’s their first chart:

source: boston consulting group

This shows the average age of businesses that leave the ranks of publicly traded companies. They aren’t exactly all dying -- companies that are acquired or taken private by private-equity firms are included in this count. More to the point, while there has been a marked decline in the average lifespan since the 1980s, it also appears to have bottomed out a few years ago.

This bottoming out is even more pronounced in Reeves and Pueschel’s second chart:

source: boston consulting group

So basically, there was this dramatic decrease in corporate lifespan and increase in mortality risk from the 1970s through 1990s. Then it stopped, and has even reversed a bit.

“There appears to be plateauing or cooling-off effect,” Reeves e-mailed when I asked him about this. “But the new normal has higher levels of risk and mortality than historically.” That’s definitely true in relation to the 1970s. But what if one looks farther back?

Researchers Dane Stangler and Sam Arbesman did this a couple of years ago for the Kauffman Foundation by examining annual turnover in the Fortune 500 list, the first of which was compiled in 1955:

source: ewing marion kauffman foundation

The number of companies leaving (and entering) the Fortune 500, which ranks the largest corporations by revenue, rose through the 1980s and 1990s, but is down since. There were just 26 newcomers on the 2015 list, a lower level than in the 1950s. The trendline on the above chart still slopes upward, but another few years like this and that will change.

Stangler and Arbesman cite several historical studies that seem to show that this stuff comes in waves. The 1920s was a decade of high turnover in the ranks of the country’s 100 largest corporations; the 1940s saw very low turnover. Then again, turnover in a list of the top 500 or 100 companies isn’t the same as the average corporate life expectancy. It could be that the long-run trend there is in fact downward -- veteran consultant Richard Foster’s research, in the book “Creative Destruction” and elsewhere, seems to indicate that it is.

Still, by any measure, big companies have been doing a better job of sticking around and thriving since 2000. Meanwhile, broader “business dynamism” research based mostly on U.S. Census data shows that, on the whole, bigger, older companies control more of economic activity than they did not just 15 years ago but also 40 years ago.

What's going on? It could just be the calm before a hurricane of change and disruption brought on by artificial intelligence, the rise of the robots, the gig economy or whatever world-transforming trend you prefer. It could be that big companies have gotten better at adapting to technological change, or that the particular technological changes we’re currently experiencing favor the big over the small. It could be that, for all those unicorns out there, capital markets aren’t doing a good job of financing new companies. It could even be that we’re looking at the wrong metrics. I really don’t know -- that is, I haven’t heard any entirely convincing explanation yet. But I continue to be amazed at how little attention this clear empirical evidence has gotten.

Major corporations are surviving longer and staying on the Fortune 500 list longer. The average tenure of Fortune 500 chief executive officers is also rising, according the Conference Board, with 2014’s average of 9.9 years the highest since 2002. This is a great time to be running a big company. Maybe somebody should tell this to the world’s CEOs.

  1. There’s a gap in the chart for 1994 because Fortune revamped the list that year, adding service companies for the first time. This resulted in a huge amount of turnover in the list that wasn’t reflective of actual turnover in corporate America.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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