Investor Rights Only a Part of the Big Picture


If it weren't so wasteful, it would be awe-inspiring. In a few short years of this decade, the takeover phenomenon has reduced the great American corporation to a bobbing cork in a sea of speculation.

Not only has the takeover game caused the merger or liquidation of once formidable companies, but it has ruined others by despoiling their balance sheets with debt. And it has forced virtually all company managements to pay inordinate attention to the stock market. The effect has been destabilizing.

Now, inevitably, reaction is setting in. To prevent a takeover, more and more managements are altering corporate charters to dilute shareholder rights, reports Michael Hiltzik in a series of articles in The Times. Unfortunately, the reaction is likely to have consequences as unsound as the takeover wave it is designed to quell.

There are better ways to handle the problem. What is needed, after all, is stable ownership that would encourage productive activity in U.S. industry. What we have now is ownership by stock traders who appear to insist on the power of ownership without its concomitant responsibility.

$1.5 Trillion in Pensions

Institutional ownership has been a disappointment. The pension funds, which today control $1.5 trillion in capital, were set up in 1951 as a way for the retirement funds of the American worker to own American business. Because their mission--earning income to meet retirement obligations--is long term, it was assumed the funds would be long-term investors. They turned out to be quite the opposite, turning over investment portfolios with fruitless rapidity, buying and selling a corporation's stock on the basis of a quarter's earnings or the rumor of earnings.

They have provided opportunity for the corporate raiders of the 1980s, speculators who are taking advantage of the fact that stock prices in this decade--following the inflation of the 1970s--have generally lagged behind the replacement costs, or liquidating value, of corporate assets.

The speculators have made the bizarre demand that wherever possible the liquidating value of a business should be realized immediately. And the vast world of investment management has fallen in behind, trading blocks of stock as if the entire purpose of a business corporation were to achieve a certain stock price on a given day.

Means to an End

It is not. Adolf A. Berle, one of the seminal thinkers on the nature of modern corporate ownership, defined the business organization's purpose in "The American Economic Republic" in 1962. "It is a means to an end," wrote Berle. "Primarily its function is to supply the jobs, materials, goods and services from which civilization is built, under conditions and on terms which offer the greatest opportunity for civilization and thereby give outlet for human endeavor."

The corporation, in other words, is a productive tool of society. It is useful to keep that in mind these days, when institutions that invest free of tax consequences, and raiders who benefit mightily from the regulated banking system and the tax deductibility of interest, claim that no power national or local should interfere with their speculating.

What can be done to achieve stability in ownership? We could do worse than look to Warren Buffett, of Omaha, who is recognized as America's champion investor. Buffett, through Berkshire Hathaway Inc., which he controls, invested $517 million last year in Capital Cities Communications, enabling it to purchase American Broadcasting Cos. (ABC's founder and builder, Leonard Goldenson, 79, said he sold the company to keep it from being broken up and liquidated by raiders.)

The new Cap Cities/ABC will have some problems near term. Buffett, who owns 18% of the company, knows this. "This bothers us not an iota; we can be very patient," Buffett told Berkshire Hathaway shareholders.

But Buffett, recognizing that a valuable company going through a rough time is vulnerable these days, went further. For an extended period of time, he gave Cap Cities/ABC management voting power over Berkshire Hathaway's block of stock--"so that our block does not get sold to anyone who is a large holder, or intends to become a large holder, without the approval of management."

That way, said Buffett, "the managers can focus their efforts on running the business and maximizing long-term value for owners--without distraction from 'revolving-door capitalists' hoping to put the company in play."

To monitor the managers and his investment, Buffett has become a director of Cap Cities/ABC.

Which may be the best example owner-investor Buffett can set for today's institutional investors and the corporate managers who employ them to manage the pension funds--all of them stewards of other people's money. Investor membership on the board of directors just may offer a way out of the dilemma of corporate governance.

Reaction won't do it. The corporate managers are dreaming if they think they can reduce the power of shareholders without arousing a check and balance from some other quarter--the government, ultimately. And the investing institutions should realize that they can't claim the rights of ownership unless they are willing to stay around long enough to act as, or choose, company directors.

If both sides backed off from the headlong demand for speculative stock market "performance," they might see that stability in ownership would serve the interests of all. Certainly, this speculative whirlpool is getting us nowhere.

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