published Sep 26, 2017, 8:21:43 AM, by Justin Fox
(Bloomberg View) —
Forbes turned 100 this month. So of course the magazine had to throw a big party, with Warren Buffett and Stevie Wonder singing a duet. And of course it had to run an article in its anniversary issue looking back at the biggest U.S. corporations of 100 years ago and ruminating on the “creative destruction” of American capitalism. The piece includes a list of the 50 largest of 1917, ranked by assets. Here are the top 15:

When I look at lists like this I’m never quite sure if I’m supposed to be amazed by how much has changed or by how much has stayed the same. The top three of 1917 are still with us, after all. U.S. Steel Corp. is of course much diminished, but AT&T Inc. and what is now called Exxon Mobil Corp. (Standard Oil of New Jersey changed its name to Exxon in 1972, No. 15 Standard Oil of New York changed its name to Mobil in 1966, and the two merged in 1999) are among the biggest, most powerful, most valuable U.S. corporations of 2017. So are No. 8 DuPont, although it recently merged with rival Dow to become DowDuPont Inc., and No. 11 General Electric Co.

Then again, the rest of the top 15 have been acquired or gone bankrupt, in some cases both. And the five most valuable corporations of today (by market capitalization, not assets) were all founded in 1975 or later, three of them since 1994. So yes, there has been some creative destruction going on.

An important question these days, though, is whether there is more or less of it happening than in the past. In the business community, especially in and around Silicon Valley, there is a widespread belief that we live in an age of mind-boggling economic upheaval and change. But economists have been churning out research for several years now that seems to show a decades-long slowdown in almost every indicator of business dynamism.

I’ve written about this juxtaposition several times before, and I’m not going to resolve it here. But I’ve been thinking it might be helpful to provide a brief history of how this age-of-upheaval story got started, and check in on a couple of the metrics that have frequently been cited as evidence for it. I’ll start with an earlier Forbes anniversary issue, the one from 1987.

The magazine’s cover for July 13, 1987, featured a giant ocean wave and, in big capital letters, the quote “Capitalism is by nature a form of change and never is, never can be, stationary.” That’s from the 1942 book that gave us the term “creative destruction,” economist Joseph Schumpeter’s “Capitalism, Socialism and Democracy.” It’s a view of capitalism that had fallen out of fashion in the 1950s and 1960s. In “The New Industrial State,” published in 1967, John Kenneth Galbraith described the U.S. economy as dominated and steered by 200 or so gigantic, permanently profitable corporations.

The Forbes 70th anniversary issue was a blaring announcement that a new era had dawned. There were pages and pages of lists showing shifts in the ranks of the country’s 100 largest companies from 1917 to 1945 to 1967 to 1987 (I think this was the first time the magazine assembled a list of the biggest 1917 companies). There was an essay from William Baldwin, later the magazine’s editor, headlined — natch — “Creative destruction” and declaring that

Now, entrepreneurs, the agents of painful change, are heroes, while bureaucrats and stay-put managers are suspect.

It wasn’t just Forbes. In 1986, Richard N. Foster, a partner at the consulting firm McKinsey, had come out with a book called “Innovation: The Attacker’s Advantage” that described how giant, successful companies were blindsided and sometimes destroyed by what he called “technological discontinuities.” In 1990, management scholars Rebecca M. Henderson of the Massachusetts Institute of Technology and Kim B. Clark of Harvard Business School published a now-classic article describing the “sometimes disastrous effects on industry incumbents of seemingly minor improvements in technological products.” And in 1995, a young HBS professor named Clayton M. Christensen gave the phenomenon a convincing story line and a name that would stick: “disruptive innovation.” As a person who writes things for a living, it is possible that I am attributing too much import to written things. Also, these theories of technological disruption weren’t necessarily theories of accelerating disruption. The biggest reason for the growing belief that a new age of corporate upheaval had dawned was probably just that, well, a new age of corporate upheaval had dawned. Corporate raiders shook up big companies in the 1980s, forcing mergers and breakups. In the 1990s, several not-very-old technology companies blasted into the ranks of biggest and most valuable corporations.

In a 2001 bestseller titled — you may sense a theme by this point — “Creative Destruction,” Foster and Sarah Kaplan, a former McKinsey consultant who now teaches at the University of Toronto’s Rotman School of Management, documented this upheaval with a striking chart showing the “Average Lifetime of S&P 500 Companies” declining from more than 75 years in the early 1930s to between 25 and 35 years in the 1960s and 1970s to about 15 years in 2000.I remember scratching my head when I first saw this. How could the average S&P company of the early 1930s, barely half a century into the modern industrial era, possibly be 75 years old? It turns out that’s not what the chart showed — it’s about time spent on the S&P 500, not corporate lifetime, and it’s calculated simply by taking the inverse of the churn rate of the index (the percentage of companies entering and leaving each year) to arrive at an estimated average tenure. This is common practice in industries that depend a lot on repeat customers, and it’s a perfectly valid approach, but it delivers an imperfect forecast, not a measure of how long companies actually stick around. I’m also dubious that the managers of what was then called the Standard Statistics Composite Index, and had a lot fewer than 500 companies on it, were as diligent and systematic about adding and removing companies in the 1930s as they have become since.

It is true, though, that the corporations that survived the terrible 1930s went on to rule the economy for decades. And the downward trend in S&P 500 tenure is apparent even if you start in 1960, as Foster did in a 2011 report (“Creative Destruction Whips Through Corporate America”) for Innosight, the consulting firm founded by Christensen. This striking chart from the report is still making the rounds:

Still, if you look closely, it’s apparent that not a lot had changed since 2000. When Innosight redid the chart for a report last year, it became apparent that average tenure had actually risen since then. The people at Innosight were nice enough to update the chart data for me with 2016’s numbers (29 companies were added to the S&P), so here’s what it looks like now:

The overall trend line is still down. But for more than 15 years now, even as the talk of disruption has gotten louder, companies have been staying on the S&P 500 for longer. It’s not just the S&P 500, either. Turnover on the Fortune 500 — a list of the largest U.S. companies by revenue published since 1955 by Forbes’s rival (and my former employer) — is also often cited as an indicator of corporate upheaval. Here’s a chart of the number of companies entering and leaving the list each year (the inverse of the implied tenure charted above, with no multi-year smoothing):

Turnover rose, in fits and starts, from the early 1960s through 2000. Since then, it’s down. One caveat is that before 1994, the Fortune 500 consisted only of industrial companies, and the addition of service companies after that makes before-and-after comparisons a little suspect. But another examination not plagued by this quirk, a look at turnover among the 50 biggest corporations assembled by Victor Manuel Bennett of Duke University’s Fuqua School of Business and Claudine Madras Gartenberg of New York University’s Stern School of Business, shows a similar pattern (I’ve published this chart before):

It’s hard to look at these charts, especially the last two, and not get the sense that perhaps an era has ended. The great wave of upheaval that began in the 1960s has given way to a period of corporate consolidation and relative stability.That’s not the only way to look at it. Scott Anthony, the managing partner at Innosight, portrays the past 10 to 15 years as the calm before another technology-induced storm presaged by Silicon Valley’s surfeit of billion-dollar startups and an increase in mergers-and-acquisitions activity. “I do think that companies are doing what feels natural, which is to seek safety in size, merging, etc.,” he wrote in an email, “but they are only increasing the perch from which they will fall.”

Foster, with whom I discuss these matters on a pretty regular basis, also thinks the rise in S&P tenure in recent years is more likely a pause than an end to the upheaval. Still, he adds, “It’s not relentless and there is a limit. We’re not going to get to the point of 100 percent turnover every day.” The 15-year estimated average S&P tenure of 2001 and 2002 may be about as turbulent as things can get, he says.

In a 2012 paper for the Ewing Marion Kauffman Foundation from which I got much of the data for my Fortune 500 chart above, startup and technology researchers Dane Stangler and Sam Arbesman also question whether the kind of turnover we’re talking about here really is all that reflective of economic change and progress. Departures from and additions to such lists are often driven by waves of mergers and acquisitions that are more about rearranging corporate assets than creation or destruction. “Turnover is less a broad economic trend,” they write, “than a discrete temporal and sectoral phenomenon.” They also cite historical research showing waves of corporate churn in the 1920s and the turn of the 20th century that seem to have been at least as disruptive as those of the 1980s and 1990s.

So yes, modern capitalism produces and probably requires a lot of creative destruction. But this isn’t a relentless, ever-accelerating process. It goes in waves. For about 15 years now we’ve been in a lull, and it’s not at all clear when or how it will end.

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

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.”
To contact the author of this story: Justin Fox at justinfox@bloomberg.net To contact the editor responsible for this story: Brooke Sample at bsample1@bloomberg.net

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