Secession, Wall Street style
It is generally accepted on Wall Street that breaking up bloated and unwieldy companies is a good thing. Division makes them easier to manage, more accountable and allows them to deliver greater value to their many constituents. On the eve of Scotland’s historic vote on independence, it’s worth considering whether the same logic might also be applied to nations.
Scotland will vote on Thursday whether to spin itself off from the United Kingdom. Catalonia is planning a similar, but not legally binding referendum on leaving Spain in November. If both go their own way, other European nations could end up splitting into smaller new political units.
There are few precedents, at least in the developed world, for them to emulate. The history of corporate finance may provide some useful insight. Of course, it is hard to imagine any legislator anywhere in the world exhorting voters to stake their futures to a Wall Street construct. But the philosophical underpinnings to breaking up companies and countries share many similarities.
In the corporate world, the logic starts with the premise that these actions will, first and foremost, benefit shareholders. The gains include allowing management to focus on what it is best at and improving the ability of the organization to respond to the needs of customers and the marketplace. These can outweigh the economies of scale that companies often hope to extract from greater size.
It can all work out well. After U.S. oil giant ConocoPhillips split in two – a refiner and an exploration and production company – it bested more diversified rivals in the stock market sweepstakes. Fortune Brands converted from a conglomerate into three distinct businesses, whose value appreciated tremendously.
There have been nearly 1,000 of these sorts of deals in just the past five years, according to Thomson Reuters data. Though many spinoffs eventually become targets for larger rivals, they generally prove their worth by concentrating on their comparative advantages and by giving their managers more accountability to owners and more effective incentives for success.
Now, companies may be people in the eyes of the U.S. Supreme Court, but they are certainly not countries. They have different duties, and their constituencies are more broadly defined. Yet there are similarities to the way they are managed. That certainly has been the pitch from Republican business leaders running for office, whether it’s Bain Capital boss Mitt Romney for U.S. president or HP Chief Executive Meg Whitman for California governor.
That’s because, left to their own devices, bureaucracies – whether they are corporate centers or central governments – over time tend to distance themselves from the people or customers they serve. In the corporate context, activist shareholders can perform the role of revolutionaries, imposing discipline on wayward managers. Think Bill Ackman of Pershing Square popping into Fortune Brands’ shareholder rolls and precipitating a peaceful breakup.
Governments don’t have shareholders, they have voters and taxpayers. And the extent to which these stakeholders are fed up with the services performed by the institutions of government will help determine their own willingness to break up or spin off. Scotland and Catalonia have other longstanding historic and cultural reasons to separate that may overshadow economic ones.
But should Scotland and Catalonia manage to break free, and actually prove capable of creating prosperous independent nations, they will embolden other developed economies to consider the arithmetic of secession. That, anyway, is the view of separatists on the American side of the pond. A group of them got together a couple of years ago to issue “The Montpelier Manifesto,” a document outlining their grievances against Washington and their rights to self-determination.
The signers of the manifesto, named for the capital of Vermont, the New England state that governed itself as a republic before becoming the 14th state, argued that the federal government is “too big, too centralized, too undemocratic, too unjust, too powerful, too intrusive, and too unresponsive to the needs of individual citizens.” It’s like something out of a Dan Loeb letter.
Kirkpatrick Sale, a South Carolinian who signed the document, says the corporate analogy is apt, as the ultimate goal in both cases is to create more manageable and accountable bodies. From his vantage point near Charleston, overlooking Fort Sumter, the site of the opening engagement of the Civil War, the ideal country has about 5 million people, or about the population of Scotland, and a land mass about the size of South Carolina.
“Whether it’s a country or company, at a smaller level you are able to make swifter changes,” says Sale, who runs the Middlebury Institute, a think tank devoted to separatism, secession and self-determination. “All you need to do is look around to see how poorly a state with 315 million people is able to respond to the changes that need to be made.”