Protection for Bad Managers; C. Mayer

There is simply no economic benefit to be derived from this legislation, which would put Maryland near the bottom of the list of states with regard to takeover rules. It is the product of parochial state interests and a fundamental misunderstanding of the economic role of the corporate raider. It is also another weapon in the emerging economic war between the states, along with direct subsidies and tax benefits. Such an attempt to prevent takeovers will be self-defeating because consideration of interests other than shareholder interests will result in lower productivity, lower output, and lower living standards. (The federal gov ernment already has built obstacles to takeovers.) Christopher Mayer, a commercial loan officer, is studying for his MBA at the University ofMaryland. Contact him at cwmayer@aol.com. 48 In the interest of full disclosure, I should say that I work for a bank with headquarters in Maryland and I might benefit from such a law. However, I have denounced this legisla tion at every opportunity. I believe it is a vio lation of shareholders' property rights.

Why Maximize Shareholder Value? In the United States it is an accepted fact of corporate life that a firm's mission is to increase shareholder value. Failure to do so results in pressure from the board of directors, activist shareholders, and corporate raiders. The result might be a takeover-the purchase by one person or small group of a controlling share of stock-and the firing of the man agers. That's what provides an incentive for managers to perform well. The role of the corporate raider is therefore essential. Yet the media portray raiders (and those, such as Michael Milken, who finance them) as shortsighted menaces. This makes for lurid journalism and sensationalist story telling. Recall the bestseller Barbarians at the Gate by Bryan Burrough, which chronicled the battle for RJR Nabisco. However, as G. Bennett Stewart III asks in his book The Quest for Value, uDid the 'raiders,' as the pejorative label suggests, pil lage companies solely for their personal enrichment leaving a weakened economy in their wake, or did they instead promote improvements in corporate performance and increases in market values for all to share?"!

In his book, Stewart outlines his compre hensive research on nearly 300 financial restructuring transactions completed in the 1980s. In a vast majority of cases the restruc turing led to significant increases in market values and operating performance. The restructuring is one reason for the sustained economic growth the American economy has experienced. The media home in on the job losses that often occur after takeovers. However,jobs are constantly being created as well as destroyed in a market economy.This is a mark of health, since workers are constantly moving to where they do more to satisfy consumers.2 Takeoversare generally a threat only to man agers whose companies are performing below their potential. Raiders buy stock only from willing shareholders, who surely don't regard the transactions as hostile.The managers whose jobs are at risk understandablysee a takeoveras hostile to their interests. But they work for the owners. Why are they more deserving of sym pathy than stockholders? (Stockholders are not all rich, of course, and managers make well above the minimum wage.) The potential for a takeover is therefore a strong incentive for management to pursue projects and strategies that maximize share holder value. Remove the threat of a takeover and you remove one of the shareholders' most effective means of policing manage ment. (It is curious that some of the same peo ple who decry takeovers also, on occasion, decry the lack of accountability of corporate managers.) ForeignDifferences In other parts of the world, this incentive of managers to maximize stock value is not pres ent. In Germany and Japan managers are expected to consider a more intricate web of stakeholders in the corporation, such as cus tomers, suppliers, government, employees, and even society at large. Maximizing share holder value is seen as inefficient, shortsight ed, or downright selfish and antisocial. How ever, as authors Copeland, Koller, and Murrin point out, "Shareholder wealth creation does 49 not come at the expense of other stakeholders.

Quite the opposite."3Research has shown that there is a close link between maximizing shareholder value (which requires an open market for corporate control) and higher liv ing standards and greater productivity. Maxi mizing shareholder value is especially impor tant in the increasingly global economy, where capital is generally free to seek the highest returns. Societies that do not adopt such a corporate ethic will find it hard to attract and retain investment capital. Beyond this, there is the ethical matter of property rights. Corporate managers should do what is in the best interest of shareholders because the shareholders own the corpora tion. Managers work for them. To make a law that weakens this responsibility is to under mine the property rights of the shareholders. When you hire an attorney or an accountant, you expect him to act in your best interests within the framework of the rules. Legislation that permitted your attorney or accountant to consider something other than your interests would be met with derision and disbelief. So should anti-takeover legislation.

In the Interests of State Why is the state pursuing this legislation? Richard Lewin, the secretary of business and economic development and a prime advocate of the bill, says, "We have very few headquar ters companies in this state. They're very important to us. I don't want to lose a Black and Decker or a Mercantile Bank."4 Thus, stockholders are to be sacrificed to the parochial interests of the state government (and incumbent managers). Unfortunately, the bill's supporters seem to outnumber the detractors. Supporters include the Maryland Chamber of Commerce, the Maryland Bankers Association, and the Maryland Bar Association. Lewin adds that hostile bidders are "doing it for sheer greed."5 When badly performing managers try to cling to their jobs at the expense of stockholders, it is never character ized as "greedy." Dan Abramowitz, president of the invest ment fund Hillson Partners states, "I don't 50 THE FREEMAN/IDEAS ON LIBERTY • AUGUST 1999 consider this anti-takeover legislation. I con sider it anti-shareholder legislation. I'm a money manager, this is my home state. But if [the bill] passes, I would be far more hesitant to invest in a Maryland company because of the risk that my hands would be tied if some thing went wrong."6 The legislation would further re-enforce Maryland's reputation as pro-regulation and hostile to business.

By adopting this legislation with the intent of preserving existing Maryland corporations, the state ignores the long-term dampening affect it will have on new investment in the state and on the probability of new corporate headquarters coming to Maryland. Behold the practical implications of ignoring Frederic Bastiat's great lesson about disregarding the unseen. D 1. G. Bennett Stewart III, The Quest for Value: The EVA Man agement Guide (New York: Harperbusiness, 1991), p. 477. 2. See Charles Baird, "Recycling Labor," The Freeman, April 1999. 3. Tom Copeland, Tim Koller, and Jack Murrin, Valuation: Mea suring & Managing the Value of Companies (John Wiley & Sons, 1995), p. 3. 4. Peter Behr, "Maryland's Hostile Takeover Defense," Wash ington Post, February 25, 1999. 5. Ibid. 6. Ibid. The Freeman-Reaching Out to New-Readers If you know of a friend or colleague who might appreciate a free sample issue of The Freeman,please fill out the following form and return it to us in the postpaid envelope. Make sure to include your own name-we will mention you in the covering letter we send to the potential subscriber.

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