Small Caps: The Jobs Machine

America’s smaller public companies hold a key to higher employment. We just need more of them. Big companies are great but they don’t do the trick proportionately when compared to smaller companies that don’t operate with the same economies of scale.

We would love to see all of our “small caps” become “blue chips”.  Blue chips, unfortunately, aren’t born that way; they started small, so we need to consider ways to encourage entrepreneurs to take risks with new ventures, and then to further take them to the public markets, after which, research shows, a surge of investment in people is made. Blue chips provide our economy with punch, durability, relative confidence, and for consumers and investors, consistently high quality products and services and a source of wealth. Their overall productivity is remarkable.  Therein lies the issue with relying on fewer large, well-oiled corporations:  they are just too efficient to absorb our supply of workers. And the impressive technology and automated processes they are employing rapidly, will make them only more so.

Just how great an impact can our smaller companies have on employment? Consider this:  World-class publicly held companies like Google, JP Morgan Chase, and Philip Morris International are great enterprises, each sporting roughly $150 billion in public market value (i.e. market capitalization less “insiders” like directors, officers and larger shareholders). And plenty of people earn their livelihoods at these corporations. Google has about 33,000 employees, Phillip Morris, 78,000, and JP Morgan Chase 260,000.  A lot of busy bees.

But compare these staff sizes with the number of people working at the approximately 1,900 publicly traded companies with a public market value of, say, under $250 million, which cumulatively totals the $150 billion in value of these three companies: 2.4 million workers in all.  That is nine times as many workers as JP Morgan and 33 times more than Google’s staff. Among these smaller companies there are 1,900 accountants, receptionists, lathe operators, nurses, researchers, IT managers, chief revenue officers, warehouse supervisors, and on. As a group of they are a punch-clock, labor-intensive behemoth.

How can regulators support the growth in number of smaller public companies? For one, the Securities and Exchange Commission has been embracing the challenge of balancing investor protection with the social and economic benefits of greater employment. The Commission last year established the Advisory Committee for Small and Emerging Companies, a group of small cap oriented entrepreneurs, regulators, public company officers, attorneys, and institutional investors. This Committee is studying ways for public companies (under $250 million in public market value) to be relieved of some of the burdens of any potential over-regulation.

Of the 1,900 sub-$250 million listed issuers, over 1,700 companies would meet the JOBS Act revenue standard of less than $1 billion to be considered an Emerging Growth Company. A sizable number of people are saying it seems reasonable then that regulations covering a group of already-public companies should be evaluated for its costs and benefits.

NYSE Euronext has hundreds of these well run smaller enterprises listed on our NYSE and NYSE MKT platforms, from biotechnology to banking, and their executives have commented on which regulatory areas might benefit from a review. Here are some of the ideas they have offered:

  • In the area of compliance costs, some executives are seeking an increase to the current $75 million public market value threshold for outside auditor attestation under SOX 404b. The GAO is studying the impact of 404b on company restatements, so perhaps there will be a new discussion on this when their findings are released.
  • Regarding capital raising, increasing - for companies under $75 million in public market value - the S-3 offering cap beyond the current limit of one-third of a company’s public float, and reducing the rule’s threshold of $75 million company valuation level is of interest.
  • For the company’s auditors, a comment offered was to consider an audit firm “advocate”, to balance the power of the Public Company Accounting Oversight Board. This could encourage the auditor to provide more objective and valuable advice to their company-clients.
  • Also, disclosure requirements should be modified so smaller companies do not have to reveal too much competitive intelligence. Many cannot take advantage of including strategic assets on their financial statements among a huge portfolio of assets, like larger companies.
  • Opportunistic and specious litigation also drains company resources of time and capital in responding to such claims. And many professional services provided to companies are embedded with the “risk-cost” of lawsuits according to our listed company executives. Perhaps an independent body can initially review claims filed against public companies before companies are forced to commit resources to it. 
  • And finally, on a wholesale-basis, an executive proposed that it may not be unreasonable to allow any smaller companies to “de-SOX”, upon the vote of two-thirds of its shareholders.  Costs and benefits would be included in the proxy for the vote.  Once done, full disclosure of the change would be required and another mandatory shareholder vote could be held every three years to reinstate the requirements of this Act.  

Should some of these or other relief-granting measures be put in place, any resulting increased risk to investors and shareholders will be borne to a meaningful extent by company insiders themselves -  the officers, directors, and large investors. Insiders own 39 percent of sub-$250 million companies, while only 14 percent of the over $250 million companies is owned by their insiders. Does having skin in the game and being more “at-risk” better align “manager” interest with their co-owners?

Several experts say that an important benefit of right-sizing the regulatory framework for smaller companies could be a more welcoming environment for entrepreneurs where more businesses will be created, more will come to the public markets, and more will seek to fill positions to support their growth.  In short, jobs will be created.