Investor Insights Small Business, Big Impact

By Jeff Korenzik, Chief Investment Strategist

As the saying goes, beauty is in the eye of the beholder. It’s hard these days not to cast a judgmental eye on government at any level. Washington in particular draws considerable scrutiny. It’s understandable; there is simply too much at stake. Jobs seem to be out there, available in a wide variety of industries, but with fewer and fewer people qualified to fill them, we now find ourselves quite possibly late in the recovery/expansionary phase of our latest business cycle.

There isn’t an adult among us who doesn’t remember our last recession and doesn’t fear another severe downturn; nearly a decade on, the scars from those economic wounds are still fresh. So almost any act of public policy is going to get attention, especially from people on the front lines of the economy: the business community. Businesspeople view regulations and legislation through an inherently curious, if not downright skeptical, prism.

Who are these "beholders" of public policy?

These “beholders” of public-policy beauty are not a monolithic bunch, however, and that may actually come as a surprise. Because I am not talking about Republicans or Democrats, conservatives or liberals, Midwesterners or folks out on the coasts. We know they have a hard time agreeing. I’m referring, instead, to businesses and business people. Despite what one might think, the business community in America is far from united in its views on public policy.

Stark differences are seen in particular among large companies and smaller ones (take globalization and free trade, and climate change, to name just two issues). When we closely examine what makes each strata tick, we can see that although everyone in question surely wants to make a profit, large businesses and smaller ones come from different places in regards to certain aspects of regulation and legislation; there is a difference in their level of commitment to the cause. I’d like to take a minute here to explain why it’s worth understanding the differences in the business community’s responses to public policy, and why understanding those differences is crucial to forming effective public policy.

Differences and why they matter

For example, while a big publicly traded company may voice the same objections as a smaller business to increased regulatory requirements, it can still absorb the costs of compliance (in terms of time, commitment and dollars) to a degree smaller companies just can’t – regulation doesn’t represent an existential threat. That cost is particularly acute for small business with a sufficient number of employees to trigger numerous labor-related regulations. Moreover, most small businesses are privately owned, and often family owned. That means the regulatory burden is going to be felt in a much more personal way at a smaller company. A private business owner sees every dollar spent on regulations as coming out of his or her pocket, and that tends to make a small-business person infinitely more – reflexively more – opposed to certain regulations. It’s neither right nor wrong, but it’s a premise that has to be respected.

Diversification of product line is also an issue. If one product a small business makes suffers from an act of public policy, there might not be another product, let alone dozens and dozens of them, sold in myriad economies, to compensate for lost revenue and profit. So public policies that inhibit growth, or are simply costly, may be life-threatening to small businesses that rely on a thinner product line, which many of them do.

Sometimes it is personal

Then there’s the emotional aspect, and this comes through loud and clear when you spend time with small-business people. Many of the businesses we work with at Fifth Third Bank are second- or third-generation companies. The business owners view themselves as stewards of a family legacy. If a regulation is passed and their business fails, they fail, too. They’ve failed their ancestors, their children, and thus themselves. Yes, their net worth is drying up, but it’s really so much more than that, including the prospects of re-employment. Owners don’t often have the same reemployment opportunities as their publicly traded counterparts have available to them.

There is another point of divergence: Big businesses typically outspend, on a relative basis, small business in lobbying. Lobbying can be a powerful tool for educating legislators and the public on the issues facing businesses large and small. Disproportionate lobbying budgets can result in legislation that prioritizes the interest of one over the other… often at the expense of small companies.

While this may elicit sympathy, it doesn’t explain why the voice of small business matters as much, or, I would contend, more than that of big business. But this does:

Small business impact on the economy

Small businesses actually account for nearly half of private non-farm economic output, according to the U.S. Small Business Administration, as cited by the Small Business & Entrepreneurship Council. You wouldn’t know that by reading the papers or watching TV. Defined as those with fewer than 500 employees, businesses of this size make up 99.7% of the nearly 6 million businesses in our country, U.S. Census Bureau data show. Drop down in size to those companies with fewer than 20 employees, and the market share of these smallest businesses is 90%. This being the modern age – the so-called gig economy – you can add in the 23 million people who work for and by themselves, and then the share of the employer universe represented by companies with fewer than 20 employees increases to 98%. Now, compare that with the number of firms that make up our bellwether stock indexes: 30 for the Dow Jones Industrial Average, and 500 for the Standard & Poor’s stock index.

Here’s another reason small businesses matter: Unlike the biggest companies, which are heavily concentrated in certain areas of the country, small businesses are everywhere. That’s why they were able to account for almost two-thirds of the jobs created in America from 1993 to 2013, according to the U.S. Small Business Administration. And because they are local in nature, small businesses often have a greater, more meaningful connection to their communities. Recently, a reporter from The New York Times sat in on a roundtable I led for small businesses in Toledo, Ohio. The Times understood that for Washington to make wise public policy, an informed debate must occur that respects different opinions, particularly that of our nation’s small-business community, which thinks so differently from its bigger counterpart.

So the next time you open up your local newspaper’s business section, or listen to the financial networks, don’t just read the headlines, dominated as they are by the companies whose brand names we are all intimately familiar with: the big tech disruptors; the massive energy companies; consumer-goods manufacturers; Detroit; Big Pharma – all truly great companies that add to our economy, but they aren’t the only participants and in terms of actual job creation and economic dynamism, they may not be the most important. Also give a thought to a small-business person’s take on things, even if you have to go ask one.