Thursday, December 11, 2008
Bring back hostile deals
Being a corporate tool and naturally sympathetic to, well, me, I was prepared for the worst when I read Jonathan Macey's column in Tuesday's Wall Street Journal, "Holding CEOs Accountable." After all, Macey is a professor at the Yale Law School. Say no more.
Most of the column reinforced my prejudice. The first nine paragraphs basically generalize the incompetence at General Motors to the rest of corporate America. This is a little unfair, even if backed by Macey's academic work. General Motors may not be unique in its failures, but it is hardly typical of an economy that systematically grows faster than the rest of the OECD. American corporate governance may offend the popular sensibility, but it generates a lot of economic growth.
That said, having wound me up for a big statist "solution," Macey concludes thusly:
We need to encourage market solutions -- not bureaucratic ones -- as the best strategy for addressing the corporate governance failures we face today. Hedge funds and activist investors like Carl Icahn are the solution, not the problem. The market for corporate control should be deregulated and the SEC's restrictions on all sorts of equity trading should be lifted at once.
Exactly. And preempt those aspects of state corporation law that protect managements. Oh, and let Michael Milken back into the securities business. It is hard to think of anything that would put discipline back into corporate America more quickly than the threat of hostile takeovers backed by a robust market for junk bonds.
9 Comments:
By 
, at
Thu Dec 11, 01:05:00 PM:
I may be the only guy in America who is kind of sick of hearing how badly managed the Big Three are. These businesses have been completely over a hump for 20+ years. Most of the guys running these companies had nothing to do with the most fundamental problems that were created 30 years ago.
My father worked at a GM Car Dealership for 30 yearas and he would come home from work each night and tell of a new story about how the Unions screwed the company again. The pay & benefit packages for a line worker were so unbelievable that there was no way for this to be sustainable. Case in point, Michigan has far and away the highest number of Interventional Cardiologists and Radiologists per capita in America. The reason for this is that a UAW member used to be allowed an Angiogram every six months! By the way, no angiogram ever goes without a little angioplasty too, so the bills would pile up, every six months! In the Cardiology community they used to call it "occular stenosis" meaning if they see any kind of blockage they would blow it away whether the patient needed it or not.
Thirty and forty years ago when the Union negotiations were held, the Unions would go nuclear at the drop of a hat. Back then the car companies were printing money and any disruption in production would stop that print machine.
If you were to talk to these CEO's and managers of the big three today, in their private moments I bet they all say that they wish for Chapter 11 so they can get a fresh start to manage the right way.
One could probably pick out four or five key strategic things a particular guy should have done; I would bet that every one of those options would have a significant hole in it because of some union restriction or limitation.
I am not saying these guys are geniuses (although Alan Mullaly is no slouch). As a matter of fact, when I think of my business school (Kellogg) almost none of my graduating class and almost nobody that I knew went to work at a Big Three company. However, I don't think the average pundit has any idea how impossible a situation the Big Three have here in America. Quite frankly if they were allowed to run their companies like they do Internationally we would not need a bail out...
By 
Escort81, at
Thu Dec 11, 01:08:00 PM:
TH (and your co-bloggers Mindles, CP and 'Villain) - is there "a robust market for junk bonds" now or in the near or medium term future?
Also, someone will have to rebut and debunk "The Predator's Ball" before Milken is reinstated. Nobody disputes his intelligence as a financial innovator (getting access to the credit markets for companies that couldn't do so previously), but my recollection of that book is that at his peak, it became clear that Milken tried to rig the game, getting his bond issuing clients to buy the junk of his other newer issuing clients, in the fashion of a self-perpetuating money machine, or Ponzi scheme.
I suppose the other way of looking at it is that once he is back at work (assuming he is healthy enough), he would be under such scrutiny that he would not even let a parking meter expire without putting another quarter in. Not to diminish the good works Milken has been involved with in the past 15+ years, including prostate cancer research, but lifting his lifetime securities industry ban is a stretch. I guess, hey, if Mark Rich can get a pardon, why not?
By , at
Thu Dec 11, 01:37:00 PM:
The concept of "hostility" is important. Just think of a major industry dispute a year from now with the Presidents of the Big 3, the UAW and the "Car Czar" sitting around the table.
The car Presidents don't care how it's resolved because they can always point fingers and then beg more government cash. The Czar works for the government which means he works fir the Congressmen owned by the UAW. This allows the UAW to extort just as it always has and resolves nothing. The bankruptcy court must strip most of the fat from the UAW agreements, public and sidebar, and Congress MUST ensure that the Car Czar will be able to smack either party.
By Cardinalpark, at
Thu Dec 11, 02:51:00 PM:
Escort81, great questions. Unfortunately, the notion of unsilicited or hostile bidding for corporations is largely a dead letter at this point. It's not just the credit market - while dead now, it will reawaken. But so many legal devices have been put in place (like the poision pill); and the market is generally so fully valued; and the equity funding requirement for a deal so large; that it is extraordinarily difficult to find any Company worth buying for a premium to where it trades.
As for Michael Milken, in the end, Milken didn't do very much wrong, other than simply get too big, make too much, and become an exceptional target for an aspirational prosecutor. The allegations upon which Milken's conviction were based were relatively minor infractions around "parking securities", pretty tiny stuff that was ordinary, unenforced course back in the day. No insider trading, no RICO convictions (thought the threat of them blew up Drexel). S&Ls went bust because they had fundamentally mismatched assets and liabilities (um, see today's banks and their real estate and liability structure issues), not because they necessarily reached for yield with junk bonds per se. The fact that the junk bond market has grown by leaps and bounds and it is much cheaper to finance there than it was then is testament to the value of financial innovation.
I wouldn't be too hard on Milken. He was and is simply brilliant and made important and vastly positive contributions to society. Andhe personally isn't nearly as venal as so many other marekt participants.
By , at
Thu Dec 11, 08:30:00 PM:
It may be the shareholder rights provisions prevent the type of takeover that was classic, but could a good usurpation of interstate incorporation agreements get a good deal of the job done? I have in mind standardized provisions regarding transparency in accounting, shareholder nominations to a review board, etc. As it stands, it seems the incentive is for states to have low standards for restrictions following an incorporation, which become trying for shareholders when a company grows.
By Viking Kaj, at
Thu Dec 11, 08:40:00 PM:
I don't think the Big 3 are badly managed. They seem to do just fine with their foreign operations.
The problem is domestic operations. And before we speak too quickly here let's all consider how well we could run, for example, a medium sized medical device company with the UAW as a no-so-silent partner.
I happen to think Daimler-Benz are pretty good managers but the problems with Chrysler's US operations were so severe that it actually caused them to loose focus and mess up German domestic operations as well.
As long as the UAW is looking over your shoulder I don't all the junk bonds in the universe could induce anyone to take over the domestic operations of a US automaker.
Milken would be the first to go chapter 11, he's way to smart to get messed up with the UAW.
By Viking Kaj, at
Thu Dec 11, 09:09:00 PM:
Forgot to add that Macey's column is the usual lame a44 b1tch1ng about corporate governance that we have been hearing for years. I wrote a paper on this in law school proposing a fix I call the 10 % solution.
If you want to fix this, make it a requirement that every member of the board be required to invest 10 % of their personal net worth in the common stock of any board that they join, restrict them so that they can not sell the share for at least three years after they leave the board, and to sweeten the pot, allow them to do this free from all Federal and State taxes.
This would make boards act a lot more like stakeholders, since they would be. 10 % of anyones net worth should be enough to make sure that they pay attention. Three years post ante would also make sure that they make decisions which are targeted at generating long term value in the corporation. Finally, 10% in theory would place a limit on how many boards people would reasonably be able to serve on.
Of course this is too practical to ever get adopted.
By , at
Thu Dec 11, 11:25:00 PM:
I've been complaining all along about the complete absence of new money, debt or equity, in these companies. If a private investor came forward and tried to sponsor a trip through Chapter 11 I think the government would do everything possible to make sure he/she made lots of money, as a salutary example if not because the investor relieved the Congress of a massive and unwelcome problem.
By The Leading Wedge, at
Fri Dec 12, 07:35:00 PM:
As support for Viking's comments, there was an article at e24.no (in Norwegian) telling about how Ford has increased their sales in Norway by 15% this year in a market that has fallen in aggregate by 14%.
