Whose company is it, anyway?

Abstract

T hree developments of real significance have taken place in the business segment of United States society since the end of World War 11. The first is the transition from founder/family management to professional management in most publicly held U.S. companies. The second is the globalization of most large successful US. business enterprises. The third is the institutionalization of the capital allocation process through the rapid growth of public and private retirement funds and mutual funds supervised by professional investment managers. And these three developments mean that we live in a wonderful world where huge corporations with market values of $10 billion or $20 billion or $50 billion are managed by professionals with no meaningful ownership positions. Shares in turn are held and proxies voted by professional money managers of huge portfolios, also with no significant ownership position. It seems logical to ask the question: “Whose company is it, anyway?‘. How often have you seen the following sequence of events in recent years? A company we’ll call ABC Manufacturing has been conducting its business with reasonable success. It has achieved average sales growth and an average return on its investment. Its shareholders have received an average reward. The shares probably sell around stated book value, which, in view of the inflation of the past fifteen years, means that they are well under replacement value. Suddenly, along comes a so-called corporate raider who has accumulated between 5% and 10% of the stock who makes an offer for the balance. ABC stock has been trading at around $30 per share for some months; the corporate raider‘s aggressive buying program and accompanying information leaks have pushed the stock up to $36; the tender offer is at $48 per share. After a few hours of deliberation, ABC‘s management and board of directors announce that the company is declining the offer because it is “inadequate.” The first thing that I, and probably many other investors, do at this point is pull out the company’s proxy statements of the past several years. Almost invariably I discover two things. First, members of management and of the board of directors own very little stock in most cases, less than 1% of the total. Second, there have been virtually no open market purchases of ABC stock by either management or directors for years. In many cases, management may have exercised options when the market price was 100% or so above the option price, but this is the extent of purchase activity. Further, management sales of stock usually have exceeded purchases through the exercise of options. The obvious question is, “If ABC stock was selling at less than 60% of a price that is ’inadequate,’ why weren‘t insiders buying aggressively and even mortgaging their houses to finance stock purchases?”.