THE CORPORATE RAIDERS: NEW LIGHT ON CORPORATE OWNERSHIP VS. CONTROL
Erber, Ernest
Based on impressions gathered from the media in the course of the past year, the canyons of Lower Manhattan, in the vicinity of the Wall Street Corral, have been reverberating with the sounds of...
...Sir James indeed has been successful in taking over several American paper-products companies, divesting or selling large parts of the companies, except for their forest reserves, which he adds to his sizable accumulation...
...Indeed, all that Pickens was armed with were stock certificates...
...Golden Parachute: Contract between corporation and its upper-echelon executives for compensation if forced to resign pursuant to a successful takeover...
...The end came five days before Christmas when A. T. Massey, the nation's sixth largest producer and second largest exporter of coal, signed a National Labor Relations Board (NLRB) agreement in which it effectively acknowledged that it was a common employer at a series of struck mines throughout the Tug River Valley of Kentucky and West Virginia...
...designed to warn and scare off raiders...
...Thus they had the effect of "revolutionizing the instruments of production, and thereby the relations of production," to use the language of Marx...
...Most Americans have trouble trying to understand why Sir James does not control what he owns, or why Pickens is so feared and hated, or why takeovers are considered hostile and upset so many people...
...According to the National Center for Employee Ownership, the number of employee stock-and-bonus plans has climbed to more than 7,000, covering over 10 million workers, compared to 843 plans and 520,000 workers in 1976...
...These trends began to change with the bull market early in 1985, though the stock of many corporations and entire industries remained priced within takeover range...
...Courts, both federal and state, continue to tilt toward managements' right to use "poison pill" and other defenses against takeovers, though a federal court held that nonvoting stock could be issued to block takeovers only with prior approval of stockholders...
...o who owns the large corporations...
...To get right to the point: Pickens drew blood...
...How can 1,000 shareholders or more (scattered over the whole country and the whole world) exercise any control over the company they theoretically "own"—especially when for many of them their "ownership" is a matter of a few days or a few months...
...His picture has appeared on the cover of Time and the press has featured him as the highest-paid executive in the U.S...
...It is credited with driving the stock market to historic highs...
...It is very difficult for the layman to grasp the fact that no one owns a big corporation like General Motors," notes David T. Bazelon...
...Many on the left still conceive of capitalism— although we now speak of a present "latecapitalist" era—in images formed by reading Marx's descriptions of entrepreneurial capitalism in England over a century ago, rather than by contemporary managerial forms of capitalism— although Marx himself wrote, in The Communist Manifesto, that "the bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society...
...Phillips is maybe half gone...
...Referring to use of employee stock ownership to block takeovers, Joseph Schuchert, president of Kelso & Co., an investment banking firm specializing in leveraged buy-outs that use ESOPs from management's side of the street, said, "I think what you're seeing here is a desire of the large companies that want to maintain their independence to develop a new ownership constituency in their employees...
...ESOPs have proved financially attractive to corporations because of tax incentives adopted 202 by Congress in recent years upon the urging of Senator Russell Long, powerful crusader for ESOPs as a form of people's capitalism...
...Why, after decades (in some industries, a whole century) of virtually unchallenged managers' power and control have large corporations now become vulnerable to outsiders who buy a relatively sizable block of stock in their company and suddenly appear to challenge management for control...
...Mesa Petroleum, which he heads, has only 650 employees, compared to Mobil's 178,900, Exxon's 150,000, and Texaco's 68,088, which tells us how far down Mesa ranks on a list of American oil companies...
...And so, in addition to his outstanding salary and bonus, Mesa last year voted Pickens long-range compensation (stock options, and so on) amounting to some $18.6 million...
...Unocal's head and board chairman, Fred L. Hartley, tells reporters later that he sees no reason to shake hands with Pickens, who has indeed invested heavily in Unocal— "Not because he thinks we're a good company, but because he thinks he's gonna rape us one way or the other...
...For the same reasons there also appeared Irwin "The Liquidator" Jacobs...
...With the conventional wisdom being to didu monde (1939), which is of the same genre in form and of similar conceptualization—goes beyond corporate control to revive concepts first formulated by Michael Bakunin in the 1860s to the effect that a "new class" of owners of knowledge (intellectuals, technicians, managers, etc...
...How can one deny the reality of managerial capitalism—when over 2,600 corporations have more than 1,000 shareholders each, over 500 have more than 10,000 shareholders each, over 70 have more than 100,000 shareholders each, and two corporations (GM and AT&T) have more than a million shareholders each...
...So the nation should care...
...But so American...
...that managerial capitalism, after being dominant for between 50 to 100 years, still lacks de jure security of status...
...What is going on...
...This seems to be the direction in which the wind is blowing...
...When Adolph A. Berle and Gardiner C. Means published their classic The Modern Corporation and Private Property in 1932, its thesis of corporate control without ownership had the impact of a new revelation, though the phenomenon they described had existed for some time (new evidence shows that its origins were much earlier than they suspected...
...More generally, managements see Pickens and his type as an irresponsible threat to managerial capitalism...
...Sugar Corporation went private, with the employees owning 47 percent of the company...
...Their suffering is hardly financial, being usually alleviated by a "golden parachute" of severance pay, annuities, stock options, stock ownership, and so on...
...The target corporation, for example, gives its shareholders securities redeemable for cash when and if the company is taken over...
...What it has added to our knowledge is the extent of corporate managements' vulnerability to takeover raids...
...196 The emergence of the business corporation as an institution operated by a hierarchy of salaried managers was paralleled by another invention born of necessity: the capital markets— stocks, bonds, and so on, with their network of linkages—acting to facilitate the flow of investment money to where it was needed (and would accumulate most rapidly...
...And why should this be happening only now...
...The NLRB settlement is a major victory for the UMW's decision to rely on a selective strike strategy and a $70 million strike fund in its battle with Massey...
...it would go to the heart of the dilemma of managerial capitalism— power without property...
...The panic is not confined to Bartlesville...
...The $450 million surplus sitting in the Phillips pension fund was one reason that made the company attactive to raiders...
...if not, they sell it...
...In a corporation with tens or even hundreds of thousands of shareholders, with the biggest usually owning no more than 1 percent of the shares, the ability of a raider who has acquired 197 5 or 10 percent to prevail is a foregone conclusion...
...That wily veteran of California politics, Jesse Unruh, now state treasurer and head of the $24-billion California Public Employees Retirement System, together with Harrison J. Goldin, New York's knowledgeable city comptroller, are organizing the heads of public pension funds into a Council of Institutional Investors, already representing some $90 billion in investments...
...And, as has been observed, technology, over time, shifts the advantage back and forth between the offense and the defense...
...that under certain circumstances ownership of stock certificates is not an empty legal form...
...Or, at least, a threshold stage...
...Whatever the hostility that might have existed toward the old management, familiar problems are preferable to unknown ones...
...In the steel industry, the United Steelworkers, in striking Wheeling/Pittsburgh Steel, made common cause with the company's largest and second-largest shareholders against management in opposing a Chapter 11 reorganization plan that would have permitted the company to terminate its contract with the union...
...Based on impressions gathered from the media in the course of the past year, the canyons of Lower Manhattan, in the vicinity of the Wall Street Corral, have been reverberating with the sounds of shoot-outs as a puzzled public tries to make sense of reports that corporations with such household familiarity as CBS, TWA, and Phillips Petroleum are under "hostile takeover" attack from "raiders" with such intriguing names as T. Boone Pickens, Irwin "The Liquidator" Jacobs, and Sir James Goldsmith...
...Thus ownership of 0.5 percent of the company's shares can make one its largest stockholder...
...And he is superbly good at it...
...When a takeover threatens, the managers, of course, do not sit idly by waiting to have their company taken over and their jobs given to someone else...
...There are, of course, several reasons...
...collective bargaining...
...Employee capitalism...
...That depends...
...How, then, does the corporate raiding experience add to our knowledge of who owns and who controls America's large corporations...
...The coming of artillery made 199 castles vulnerable...
...Scorched Earth: Management's moves to make the company less attractive to a raider by destroying part of its potential (or, in extreme situations, all of it) by, for example, selling off profitable operations or physical assets and/or incurring heavy indebtedness...
...As a result of the NLRB settlement, the UMW's Massey miners have the legal status of "unfair labor practice strikers...
...As demonstrated over and over again by the disasters visited upon nations by the monarchal right of succession, there is no guarantee of competence for business management in lineal descent within family firms (the genius of Henry Ford was followed by Edsel...
...But it was not only Pickens with whom Phillips had to contend...
...These ownership forms acted as a brake on the growth of industry and commerce, and on efforts to exploit new opportunities for growth opened up by the railroad, the telegraph, and steam-powered machinery...
...it has led to representation on the boards of 14 companies (not including employeeowned ones...
...It is an aspect of the critical conflict between the developmental needs of the process of production and the constraints placed upon it by the social relations of capitalism...
...The difficulties facing the raider in trying to take over a corporation by buying its stock can be gleaned from the frustrations experienced by Sir James Goldsmith, the British financier now engaged in hostile takeover maneuvers of American companies...
...History has shown that employees tend to look unkindly on unsolicited offers, even considering shares that they own that could be sold [to the raider] at a premium" (New York Times, January 2, 1985...
...This could prove to be an ominous harbinger of the pension-fund artillery coming into action in takeover warfare...
...Victory in Tug River Valley In our last issue we ran an article by Nicolaus Mills reporting on the long and bitter miners' strike in southern West Virginia and Kentucky...
...They are responsive to Pickens's charge that shareholders are being shortchanged by management...
...When the president of Metropolitan Life (over $50 billion in assets) appeared before a Senate committee several years ago and was asked, "Who owns Metropolitan...
...But if the raider takes control of the company, we've asked, who cares...
...The UMW is convinced that the courts will resolve the issue in its favor and that by sending its men back to work it will gain more than by keeping the strike going...
...The same sort of concerns extend to the local community, its merchants, professionals, and institutions—all who are beneficiaries of the purchasing power based on the company's payroll...
...staggering the terms of qualifying board members...
...They also involve the industry at large, and the national economy...
...Is the interim, caretaker period of "no one owning" beginning to come to an end...
...The AFL—CIO joined with the National Association of Manufacturers and other management groups in support of the board's action, with opposition coming mainly from the financial community...
...The rail unions are fighting efforts by Norfolk Southern to take over Conrail (85 percent government-owned, 15 percent employeeowned), by joining with management to either preserve government ownership or make it an independent railroad by public stock sale...
...But before we continue with this story, which has a surprising twist (possibly of historic significance), let me try to make clear what the fuss over hostile takeovers amounts to, what we might learn from them—and why so many people in the business and financial community and in the media have it in for Pickens...
...more frequent recourse to capital markets, which are undergoing change with the emergence and power of the new breed of money managers...
...The Air Lines Pilots Association (ALPA) at TWA and later the International Association of Machinists (IAM) reacted by approaching Icahn for a pretakeover agreement, calling for the employees to get 20 percent of the company's stock, seats on the board, and a guarantee against selling off any parts of the airline or equipment...
...If any socially redeeming purpose can be cited for the transfer of hundreds of millions of dollars to the raiders in recent years in the form of "greenmail," it has not come to notice...
...In many industries and for many firms, market prices of stocks have tended to be undervalued compared to the liquidation value of the corporation...
...Or will it be minimal, feasible socialism within the context of American conditions...
...In this cynical and shameless competition to constantly reduce required obligations of public service and accountability as conditions of the charter, New Jersey and Delaware prevailed— and, finally, only Delaware...
...This is hardly a way to run a national economy...
...These incentives consist of tax breaks to companies that offer stock to their employees, up to 25 percent of a payroll...
...If the stock pays, they keep it...
...The most recent addition is the work of Beth Mintz and Michael Schwartz in The Power Structure of American Business (1985...
...Yet, being a corporate raider is not an easy task, guaranteeing success...
...Its employees and other townspeople close ranks around "their" company, displaying a siege psychology resembling their great-grandparents' reaction to word that "The Comanches are coming...
...But it is a blow to their egos and can wreck their careers...
...The loan will be repaid with the annual contributions Phillips will make to the ESOP over a period of seven years or more...
...But it took the recent power plays by the raiders to reveal that under certain circumstances management's awesome authority is at risk and subject to termination, a revelation that caused panic to sweep through many an executive suite...
...These people are pious piranhas, walking away with tens of millions and happy to let society collapse...
...White Knight: A friendly corporation that is induced to "ride to the rescue" of a threatened one by offering to take it over at a price and terms that are better than those of the raider...
...Other companies are reported doing this before raiders appear...
...193 The media reader and listener, absorbing all this information, has trouble making sense of it...
...Were the UMW to keep the strike going beyond 60 days, it would be an economic strike and Massey could call for a decertification election in which the replacements it has hired would be eligible to vote on whether or not they wanted a union.—N.M...
...In a "Strong Bear Hug," raider offers to buy company while simultaneously making offer to shareholders...
...In a "Superstrong Bear Hug," the offer to buy has a threat attached to it...
...It is all a matter of which yields a higher return...
...the increasing treatment of equities as short-term holdings (buy on Tuesday, sell on Friday), subjecting management to the daily pressures of volatile prices...
...Within the next year, you are going to see more and more companies using the leveraged ESOP as a centerpiece in their preparations against hostile takeovers," according to Ken Miller, head of mergers and acquisitions at Merrill Lynch Capital Markets...
...New York's recently enacted law curbing use of junk bonds in takeovers Glossary The takeover terminology of Wall Street conveys images reminiscent of the zaniness of The Wizard of Oz and the grim portents of science fiction...
...Mesa pays its shareholders rather modest dividends...
...The ordinary way of thinking about property and things produces a certain horror at the idea of anything so big and so valuable striding the earth unowned" (The Paper Economy, 1959...
...That this contradiction should exist speaks to the systemic crisis of capitalism as a social order...
...that the legitimacy of the modern business corporation, long in dispute, is still not established...
...The Phillips management, counting on the employees' determination to save the company in order to save their jobs, set up an ESOP that made the employees "owners" of one-third of the company...
...Pickens, after all, is not a gangster, a drugring operator, or the head of a Las Vegas gambling syndicate...
...The raids revealed that management's war195 rant of authority was, basically, de facto and ad hoc rather than de jure...
...failure to accept the offer will result in successive reductions of the offering price...
...It saved two textile companies last year, Dan River, Inc., and the Cone Mills Corporation, from takeover efforts of the omnipresent Icahn...
...A study shows that in most companies the shares owned by its officers and board members are under 0.5 percent...
...one might say that Phillips hemorrhaged for a while...
...How far down into the ranks of management the raider's purge extends depends upon a great variety of different circumstances, from liquidation to divestiture to merger with the raider's company, or even the infusion of new capital and expansion under a more aggressive leadership...
...For example, while Phillips was busy fighting off Pickens, the corporation's biggest problem, to which it should have been free to give undivided attention, was the collapsing seabed under Phillips's drilling rigs in the North Sea off Norway...
...These two institutional "inventions" facilitated expansion and progress and enabled corporate management to dip into anonymous, "impersonal" pools of "public" capital...
...Meanwhile, Congress and the courts recognize the managers' caretaker status but refuse to give them de jure recognition...
...Even old Frederick Engels knew this back in 1882 when he observed that the bourgeoisie was becoming a "superfluous class," with "all its social functions . . . performed by salaried employees...
...Black Book: Announcement of defensive steps management will take in event of a hostile takeover effort...
...Eight days after addressing a bold, fullpage "open letter" to Icahn in the New York Times, saying that they would not permit him "to take over our company," TWA's management, which owns little or no TWA stock (while Icahn had at that time acquired over 30 percent), ran to union-busting Frank Lorenzo's Texas Air Lines and begged to be taken over...
...What has been said about the inadequate information given to the public-at-large in regard to the corporation's changing situation is also true of many people on the political left...
...the rise in stock ownership by institutions, mainly pension funds, and their offmarket trading of huge blocks of shares...
...It also has command of the company's treasury, borrowing power, the current knowledge of who the shareholders are, and the power to manipulate the corporation's financial structure in order to reduce the raider's power...
...Pickens responds to the snub by quipping, "That's a strange way to treat your largest shareholder...
...In Pittsburgh, a row breaks out in the upper echelons of the Mellon Bank as Jerry McAfee, retired board chairman of the now defunct Gulf Oil Company, resigns from the bank's advisory board to protest its $150 million loan to Pickens to underwrite, in effect, his raid on Phillips which, McAfee argues, is a threat to the established order of the corporate world...
...Although his majority interest gives Sir James considerable sway, it is insufficient under the company's bylaws to effect such major developments as changing the board, altering the bylaws themselves, or thwarting the restructuring plan...
...But the hostile takeover efforts have also added to our knowledge of how difficult it is to remove an entrenched management, even when the raider has billions of dollars to use in the attempt and is counseled by a phalanx of Wall Street's most skilled and sophisticated strategists and top-flight practitioners of corporate law...
...The 14 largest private money-management firms (with Bankers Trust, Morgan Guaranty, and Citicorp the top three) manage some $140 billion worth of stock...
...Greenmail: Money paid to a raider by the threatened corporation to buy back the raider's shares at above-market value, assuring him a large profit, plus reimbursement of his expenses (a vastly inflated figure) in return for an agreement by the raider to give up efforts to take over the corporation, both at present and in the future...
...Growing alarm about its possibly disastrous impact on the economy caused Paul Volcker, chairman of the Federal Reserve System, to have its board curb use of "junk bonds" in takeovers, acting by a 3 to 2 vote in the face of all-out opposition from the Reagan administration, which trumpeted its "free-market" ideology...
...The raiders, on the other hand, were operating, not only on the basis of law, but also upon the property-based traditions of capitalism...
...issuing nonvoting stock...
...In interpreting these events within the context of their image of how our economy is structured and how it functions, even otherwise well-informed persons are handicapped by lack of adequate knowledge of the large corporation as it actually exists and operates as opposed to the avowed theory of its governance, involving stockholders' meetings, proxies, boards of directors, and so on...
...Some knowledgeable sources predict that, as a result of blood loss, Phillips might not survive the chill winds of the next recession...
...Would it be socialism, given the low level of social awareness of today's employees of corporations, both white- and blue-collar...
...Similarly, management's vulnerability to corporate takeovers has always been present in the very nature of its role, partly arrogated and partly inherent in the division of labor in large institutions...
...Though heavily burdened, Phillips was among the walking wounded...
...that the property-based ethos of capitalism limits management's authority to de facto and ad hoc status, though innumerable devices give it partial protection...
...The employees served as the conduit for the $1.5 billion transfusion by means of an Employee Stock Ownership Plan (ESOP...
...Empty legal form...
...This new condition facilitated the overcoming of the restraints imposed upon productive forces by archaic patterns of ownership...
...He evidently has better uses for his money...
...Meanwhile, the company immediately has the cash from the loan to use, among other purposes, to pay for the overpriced (greenmail) shares it was forced to buy back from Pickens and Icahn and, possibly, to permit the company to buy back shares on the open market, reducing the pool in which raiders might fish anew...
...Phillips employees throughout the U.S...
...Thus Phillips emerged, bloody but alive...
...Pickens, however, did state that he had enough money ($900 million, mostly borrowed) to buy 15 million more shares—giving him another 9.7 to 14.7 percent in total...
...This was not a case of neglect...
...This was brought about largely by the courts deciding that the chartering of corporations was within the jurisdiction of the individual states under the federal Constitution, and by the competition of states to lure national corporations to seek their charters from these states for the sake of the fees this brought in...
...In Delaware, Louisiana, and Texas, courts receive suits filed either by Phillips against Pickens or vice versa (with Pickens charging Phillips with hiring private investigators who "harassed" him and "invaded" his privacy...
...When Pickens's distracting raid began, the heads of Phillips were engaged in designing and funding a $1.5 billion project to pump water and gas under the floor of the North Sea to save their drilling platforms...
...One cannot argue with Hartley when he observes, "What all this comes down to is simply withdrawing the warm blood of equity and replacing it with the cold water of debt...
...Please note: shareholders, not shares...
...This phenomenon is in line with the trend for unions to sit on corporation boards, pioneered at Chrysler in 1982...
...and, very recently, giving a high proportion of the company's stock to its employees...
...In the lifetime of Marx, who first identified and described this conflict, its existence was more easily noted, since ownership then was proprietorial, usually in the control of an extended family, and at most in a partnership...
...Though history's jury is still out on Burnham's overarching projections, a current rereading of the book gives an impression of too much contrived schemata, some obvious misconceptions, and illfounded expectations...
...And then there are the pension funds...
...But because ESOPs, even in the worst cases, are a modification of the wage relationship, their potential is enormous...
...VI, hat, then, indeed, is going on...
...Banks, after all, are in the lending business...
...203 They are the natural shareholders of the business...
...Some companies are using ESOPs to replace pension plans in whole or in part, because a pension-fund surplus is cash that attracts raiders who plan to use it to redeem "junk bonds" given for stock to take over the company...
...Some 37 states now have antiraider legislation of varying effectiveness, with efforts to strengthen them found unconstitutional by federal courts...
...Pac-Man Defense: A counteroffensive move by a threatened corporation: making a tender offer for the shares of the raider's corporation—to frighten off the raider by threatening control of his own corporation...
...Volcker's victory might be short-lived, however, since the two board members who voted with him are to be replaced shortly by Reagan appointees...
...The surprise transfusion saved Phillips and permitted it to undergo surgery in the form of major capital restructuring...
...And Crown Zellerbach's executives have gone to court, to sue Sir James for confusing and manipulating the firm's shareholders...
...This move also locked the gates against further raids...
...his shares in the company hardly exceed 2% of its outstanding stock...
...q 198 seems to portend a new round of such laws and their passage by the states at the behest of major corporations within their boundaries...
...What has changed to bring this about...
...Growled Unocal's Hartley, "Gulf got destroyed, it's gone...
...James Burnham's The Managerial Revolution (1941), though making no claim to be a scholarly work, is doubtless the best known and most widely referenced work on the subject, largely because of its historical and global sweep and brilliance of argumentation...
...Bear Hug: Raider offers to buy company at fixed terms before going public with offer to buy shares from stockholders at an above-market price...
...He has forced some corporations to take refuge in the arms of competitors, as a lesser evil, and he has inflicted such severe financial wounds on others that they might bleed to death in the near future—but, so far, all have escaped his grasp...
...Full partnership "in decisions from the shop floor to the executive levels" is called for in the new GM—UAW contract for the Saturn plant to be built in Tennessee, according to Owen Bieber, UAW president, who calls it "a degree of co-determination never achieved in U.S...
...the best-known example is union support of the successful effort of Icahn to take over Trans World Airlines...
...Clergymen organize 24-hour prayer vigils...
...Icahn, however, settling for what he could get ($50 million), departed when his prospects dimmed as Phillips received an unexpected blood transfusion ($1.5 billion...
...Who should care—and why...
...Junk Bonds: Old Wall Street term for high-risk bonds with little or no collateral but calling for an unusually high rate of return...
...Compensation usually runs into millions of dollars in the form of severance pay, bonuses, stock options, paid-up insurance policies, annuities, etc...
...If this is to be the American road to socialism, how odd that one of its catalysts should be named T Boone Pickens...
...He has noted that paper is used lavishly when Americans eat, blow their noses and perform other bodily functions, making paper the badge of our civilization (from the Stone Age to Bronze, to Iron, to Paper)—and that it takes a lot of trees to keep them supplied...
...When capitalism moved from family ownership to corporations, it also moved from property-based ownership to no ownership...
...Subsequently, Crown Zellerbach's management agreed to accommodate his interests, which seem to be control of the company's vast forest holdings...
...They were not street fighters," Pickens observed...
...Why Pickens is detested by his peers in management would be clear if you were the head of a large corporation, busily dreaming, scheming, and working on a long-range strategic plan to double production and sales, and had to do this while constantly looking over your shoulder to see what Pickens or some other raider, who is eyeing you, is up to...
...This is especially true of the unique attributes it assumed in the United States, where courts could not decide for a long time just what the corporation was and what it was empowered to do...
...If Picken's could draw upon resources of this scale, the walls would come tumbling down...
...And if so, what are its prospects, especially in view of the recent, unprecedented emergence of the corporations' employees, both where organized and where not, as players of a key role in deciding takeover battles...
...Corporations in the U.S., in contrast to those in Europe (especially on the Continent), were eventually given carte-blanche authority by statute and by case law to engage in every type of activity legally permissible to a person...
...If denied, he threatens to go to court...
...But since stockholders have become almost meaningless to the governance of a large corporation, this answer can apply to the status of every large corpora201 tion...
...At this point Massey's obligation to live up to the Bituminous Coal Operators Association agreement that covers an estimated 40 percent of the coal industry remains in dispute...
...now used by raiders to designate I.O.U.s, partly or wholly, in lieu of cash when buying shares of a targeted company...
...This was attributed to the fact that Metropolitan, a mutual, has no stockholders...
...When Pickens announces, as reassurance, that he doesn't intend to liquidate Phillips, that he and his wife will be glad to move to Bartlesville upon taking over the company, he is told that they won't be welcome...
...q 204...
...Capitalism's form and mode of operation surely has been "revolutionized" several times since 1848, with only the vaguest awareness on the part of the general public...
...There just has to be one of Art Young's pot-bellied gentlemen with stovepipe hat and diamond stickpin in there somewhere...
...Work by Thorstein Veblen, William Z. Ripley, and the ubiquitous J. M. Keynes preceded the Berle and Means classic, while in its wake came work of such scholars as J. A. Schumpeter, J. K. Galbraith, Arthur S. Miller, Alfred D. Chandler, Jr., Herman Daems, James Willard Hurst, Edward S. Herman, Edward S. Mason, John Lintner, Robin Marris, Paul Baran, Paul Sweezy, R. Lamer, Walter Werner, David Kotz, and, I am sure, others...
...The public's perception suffers most with regard to those swiftly moving developments affecting corporations as a result of technological breakthroughs and the consequent institutional restructuring needed to take timely advantage of them, and enabling a corporation to compete and survive...
...0 POSTSCRIPT • The takeover wave shows no signs of diminishing...
...They might extend to the distributors of the company's products, and even to the ultimate users...
...A mass meeting of nearly 4,000 citizens hears Phillips executives, local businessmen, and politicians upbraid Pickens, and the audience joins in belting out anti-Pickens ballads...
...The outstanding characteristic of the changed "relations of production" was that power to control the corporations passed to the upper strata of managers, and ownership was reduced to what came to be viewed as an empty legal form represented by stock certificates...
...And how does an understanding of this process add to our knowledge of who owns and who controls large corporations...
...he startled the committee by answering, "Nobody...
...union contracts may be terminated or renegotiated...
...his salary and bonus for 1984: $4.223 million— while the second highest is $2.866 million...
...Employees also have gotten into takeover fights on the side of the raider...
...Since Marshall held that the corporation was immortal, an attribute not granted to humans, he probably viewed this last point as moot...
...This refers, obviously, to management's independence of hostile takeovers...
...This truth is denied today only by some primitive apologists for capitalism, like George Gilder, and by some equally primitive Marxists who think they speak in Marx's name...
...During this period the ESOP shares will be under trusteeship, with employees receiving their shares in increments as the loan is retired, but not being permitted to vote them until the loan is retired...
...Meanwhile, over 2,000 miles away, a shock wave of fear hits Bartlesville, Oklahoma, headquarters of Phillips, upon news that the dreaded Pickens has announced a takeover raid against the hometown company...
...This new law, however, has yet to be tested in the courts...
...Is there really a "managerial revolution" in progress...
...No one accuses Pickens of criminal conduct...
...David T. Bazelon's The Paper Economy (1959) is, probably, the best popular treatment of corporate ownership and control...
...plants might be closed, product lines or services discontinued...
...If managerial capitalism is only an interlude, what do we call what follows...
...And, in the case of Phillips Petroleum, he had only enough of them to vote 5 percent of the company's shares...
...Although Pickens controls Mesa, he does not own it...
...What does Sir James want with all those trees...
...The business corporation was itself an adaptation of the corporate form devised originally for ecclesiastical, educational, eleemosynary, municipal, or other public-serving institutions— going back to the Middle Ages and conceived as a privileged form granted by the sovereign and limited by the terms and obligations of its charter...
...upon the death of a principal, the oldest son usually succeeded him...
...No one owns the large corporations, but they do have caretakers...
...The managers have not succeeded, either through legislation or adjudication, to resolve their ambivalent, contradictory status of power without property...
...It is unlikely that, if there is a trial, a landmark decision will result...
...But even under those conditions of technological disparity, castles were taken...
...What, exactly, are hostile takeovers anyway—and how do they work...
...How else describe it when General Motors has 696,000 employees and 1.36 million "owners...
...After a hostile takeover, they are usually let go...
...Although the concentrated holdings of rich families are decreasing, further dispersal of stock ownership is being offset by growing blocks owned by institutional investors...
...in return the unions will take a cut in pay and benefits averaging about 20 percent...
...So long as there is work available at Massey and they report within 60 days of the end of the strike, they must be rehired unless it can be proved they engaged in illegal strike activity...
...These concerns also affect the company's suppliers and subcontractors and their employees...
...Godfather Offer: An offer so adequate in price and terms that the target company's board cannot refuse it without laying itself open to a shareholder suit for dereliction of fiduciary responsibility...
...One such adaptation was the invention of the business corporation, beginning with the early joint-stock companies that were originally simply enlarged and glorified partnerships, leading in time to the development of the modern, "public" corporation...
...versify one's portfolio, rather than putting one's eggs into one basket, there is a tendency to avoid committing too much investment to any one corporation...
...Also, and we can only touch briefly on this big and important subject here, the American corporate world is undergoing a major, technologically driven transformation and restructuring, perhaps the biggest since the turn of the century, causing management to retain more earnings and take on more debt to spend on new technology, meanwhile being forced to allow their stock to drift downward...
...Even Pickens, for all his recognized brilliance as a raider, has never succeeded in taking over a company (assuming that was his objective...
...He doesn't break laws, but he does break tradition," says the head of Chevron, to whom tradition probably ranks higher than the law...
...Phillips managed to survive when, in a surprise move, it turned to its employees to save it...
...Although the studies of a handful of scholars and serious publicists concerned with the institutional status of the corporation concluded that stock certificates have joined the halberd and the battle-ax as archaic instruments of warfare, today's corporate raiders, such as T. Boone Pickens, have proved otherwise...
...The courts are not yet ready for that...
...The facts are clear...
...control of corporations is contained in a voluminous literature going back to the early decades of this century...
...Capitalism, however, is not only beset by contradictions, it also possesses an ingenuity for contriving a seemingly endless number of institutional adaptations to resolve its contradictions in whole or in part (and invariably triggering new ones...
...When Pickens had drawn enough blood ($89 million) and departed, Carl Icahn appeared on the scene, drawn by the smell of blood and sure that he could finish off the weakened Phillips...
...The ESOP borrowed $1.5 billion, using company assets as collateral, to buy an estimated one-third of Phillips common stock, with which the employees will be counted on to vote against raiders...
...But Mesa's board—which Pickens selects, in standard corporate practice—has been fair in compensating Pickens, recognizing that the $800 million he brought home from his raids was the product of his personal genius...
...For reasons only somewhat obscure, this type of Marxist is convinced that the theory of managerial capitalism is some kind of dirty trick perpetrated to conceal the "real" capitalists who manipulate the strings from behind the scenes...
...Saturday Night Special: A sudden offer that is cheap and goes off quickly...
...Though this pattern of stock ownership is becoming increasingly typical, it is by no means universal...
...This warfare has revealed that management possesses the equivalent of a medieval castle, while the raiders command the equivalent of a rock-propelling catapult...
...The hectic scrambling now underway to create the de jure defenses for management is not likely to resolve this contradiction (providing perhaps a few strands of barbed wire, but no Maginot Line...
...There was dancing in the streets of Bartlesville, much welcomed by those who had been on their knees in those 24-hour prayer vigils...
...The difficulties are inherent in management's contradictory and ambiguous status: wielding autocratic power over property (specifically, over the large corporation), without ownership of it—within a social system (capitalism) that, historically, has made ownership of property (specifically, owership of capital) the basis of power and control...
...Unruh's and Goldin's public statements on takeovers are on the shareholders' side, not that of management...
...Burnham's book—written either contemporaneously with or immediately after Bruno Rizzi's La Bureaucratisation 200 The reality is that America's large corporations are controlled lock, stock, and barrel by "hired" managers...
...Managerial capitalism is a prolonged era of "caretaker government" of the economy...
...If Ted Turner could have made a deal with Unruh and Goldin, CBS would now be in his hip pocket...
...What Pickens is doing (or trying to do), buying companies and then selling them whole or in parts, seems to be what all the business executives are into these days...
...It stands up well on current reading, containing a vivid description of paper entrepreneurship, a theme recently revived in Robert B. Reich's The Next American Frontier (1983...
...It is worth noting, though, that this method of determining industrial leadership causes a terrible waste of talent and accumulated experience...
...Thus capital could flow throughout the nation and throughout the world, to areas promising development and opportunity, and to growing industries...
...These terms provide an insight, not only into today's takeover practices and defenses against them, but also into the outlook and value system of the practitioners...
...Among such new developments are: the increasing pressure upon executives to use the company's earnings for modernization and expansion of productive facilities, leaving less for distribution of dividends...
...To make share-owning even more meaningless, an increasing number of companies, including GM, are issuing shares without voting rights...
...As the New York Times reported on July 23, 1985: Sir James, who has bitterly opposed a restructuring plan that would carve the company into three entities, said yesterday that he had acquired 51.3% of Crown Zellerbach's shares, placing in doubt whether the company would go ahead with its plan...
...This might also be a clue as to why the raiders find it possible to get bank underwriting...
...the invention by Drexel, Burnham & Lambert, hottest takeover specialists on Wall Street, of "junk bonds" (I.O.U.s payable after the takeover, using the company's assets...
...And when he appears on Capitol Hill to testify before a congressional committee, his outstretched hand is rejected by another witness, the head of Unocal, an oil company also threatened by him...
...What (or whom) are they waiting for that might resolve this dilemma...
...Will large-block, institutional stock ownership prove to be the artillery of this warfare...
...One of the problems with family-owned enterprise was that of succession...
...Employees' involvement in determining ownership and/or control of companies was all but unheard-of until recently...
...In the beginning Congress was uptight about takeovers and was leaning toward antitakeover legislation," reports Forbes (which advertises itself as "The Capitalist Tool"), "but Pickens's effective testifying has reportedly changed the mood back to laissez-faire...
...Teenagers don "Boone-buster" T-shirts...
...Or, if the company avoids being taken over by going deeply into debt to pay "greenmail" to the raiders, who should care...
...Phillips is likely to tap this pension money to pay for ESOP shares for its employees...
...Most investors make little distinction in principle between "buying into the company" (stocks) or lending it money (bonds...
...It is unlikely that he is a secret conservationist out to save the wilderness...
...It is not a dispute over facts or, at least, it should not be...
...Not entirely...
...This was not the first time that an ESOP was used to ward off a takeover...
...Obviously, the executives of the target company care...
...The answer, in the words of the ballad, is "blowing in the wind": Nobody owns the large corporations...
...As a result, the typical shareholders today do not see themselves as part owners of a company, but only as investors...
...The agreement put a halt to Massey's strategy of trying to break the UMW by insisting that each of its mines is an independent operation, free to hire union workers without regard for their seniority and pension rights at other Massey mines...
...Why the hostility from his corporate peers, and from most of the media...
...Raiders contribute to this trend by diverting earnings from asset building for capital improvements to debt service...
...An ESOP also became the means by which the U.S...
...The full import of this development is not yet clear...
...Managerial capitalism is filling in between proprietorial (or entrepreneurial, if you prefer) capitalism and . . . and...
...will use it as a new form of capital for the control of the economy and, eventually, all of society...
...Here Mills adds a postscript on the results of that strike.—Eds...
...Shark Repellent: Management's defensive measures to make a takeover more difficult, stipulating, for instance, that major decisions affecting the corporation require approval of at least 75 percent of shares...
...Society," of course, in Hartley's eyes, is the appropriate management of corporations by their executives, undisturbed by money-hungry raiders who galvanize shareowners to interfere with management's prerogatives...
...Invariably changes ensue that affect them, and rarely for the better...
...decreased or even skipped dividends, especially during the deep recession of 1981-83...
...The business corporation is remarkable for its institutional versatility...
...Poison Pill: A defensive move by management to make a threatened takeover so expensive that the raider loses interest...
...such terms almost always include continued satisfactory employment for the threatened firm's executives...
...anxiously await word on the outcome, as do those working in foreign countries, on drilling platforms in the North Sea, and aboard tankers on the high seas...
...In the midst of Pickens's raid on Phillips, Unruh and Goldin summoned Pickens and the Phillips management to appear before them at the Investment Council's New York offices to present their arguments and appeals for support...
...We have also asked, Is the "managerial revolution" for real...
...Though he had bought over 50 percent of the shares of the Crown Zellerbach Company, producer of paper products and owner of extensive harvestable forests, control of the company has eluded him...
...A number of factors account for this —among them: the high interest rates that have caused investors to buy bonds and shun stocks, depressing their value...
...The local Chamber of Commerce organizes phone banks to convince Phillips shareholders to turn down all offers by Pickens— regardless of how lucrative—to buy their stock...
...Mentioning Pickens's testifying on this question brings to mind that, before ending this article, we'll want to see how his shoot-out with Phillips ended...
...It is a matter of theory: How does one interpret the facts?* * Both factual information and theoretical interpretations of ownership vs...
...finally, and the subject of this article, management's search for protective devices to insulate its control from "outside" interference—that is, from raiders who emerge as owners of large amounts of the company's stock...
...Another tax break makes dividends tax-free that are paid on stocks held by a company's employees as part of an ESOP Misuse and abuse of ESOPs by management to save its own neck is rampant...
...And this, in turn, introduced the institution of managerial capitalism, which soon became the dominant form...
...new personnel policies instituted with regard to pensions, vacations, work rules, seniority, or promotions...
...Simply put, the successful managerial revolution had failed to legitimize itself in law...
...True, Pickens receives this obscenely big salary from a modestly sized company, as oil companies go...
...drops in the price of oil and other natural resources (timber) making them attractive to acquire toward future price rises (Pickens said, "It is cheaper to drill for oil on the floor of the New York Stock Exchange than out in the field...
...Thus America's productive forces were catapulted far beyond those of any other nation...
...Often the worst is expected because of the raider's appeals to shareholders before the takeover that the change will result in more cost-effective management, tougher bargaining with labor, elimination of jobs, closing-down of facilities, and payment of higher dividends...
...and management's failure to install antiraider devices...
...They also know that other companies, such as Supron, Superior, and General American, have paid Pickens millions in "greenmail" to leave them alone...
...They all have heard of Pickens by reputation: "the scourge of the oil patch," an accolade (or epithet) earned for having driven such giant companies as Gulf and Cities Service out of business, selling out to avoid being taken over...
...With a reappearance of ownership with control, will it be that of the employees...
...But they have not found a way to give management the kind of protection it wants without violating basic property rights...
...More likely, he has observed how Americans use and misuse paper products, and he would like to control as much of the ultimate source of all that paper as possible...
...This is, to use Engels's formulation, in "partial recognition of the social character of the productive forces" or, as more frequently put, "the socialization of production...
...As a consequence of so many of the largest corporations being chartered in Delaware, its courts have fashioned much of the case law controlling corporate governance and thus figure prominently in management's current efforts to seek de jure protection from the raiders...
...This continued to be the case even after Chief Justice Marshall's classic finding in 1816 that the corporation was a person in the eyes of the law, having all the attributes of a person, except— as old-time socialist soap-boxers delighted in pointing out—possession of a soul...
...the increasing ratio of debt to capital...
...Sir James makes a simple claim: that the owner of the majority of a corporation's shares 194 should have the right to control it...
...Though this vast literature contains theories that vary from conservative to radical perspectives on the development of corporations, the fact of managerial control is assumed...
...Management has a wide range of options for defensive moves and is sure to avail itself of them...
...In the wake of their forays are only debt-ridden and weakened companies...
...This highly complex and extensive subject is beyond the scope of this article, as is management's recent intensified drive to secure protective legislation at federal and state levels...
...The headquarters might be moved to a distant part of the country...
...With all the types of suffering in the world, to be sure, their plight can have little claim on our already sorely taxed compassion...
...The nation's total corporate debt, warns a worried Paul Volcker, is rising faster than even the spiraling debt of the federal government...
...his efforts have netted more than $800 million for Mesa and its associates in the past three years—not bad for a company whose total oil sales did not gross much more than that...
...Banks and other lenders to ESOPs do not have to pay taxes on half of the interest on such loans, permitting ESOPs to borrow at 80 percent of the prime rate...
...Fifteen months after it began, the longest strike ever run by the United Mine Workers (UMW) is over...
...The company's lower-echelon employees, whether salaried or wage-earners, are always concerned and frequently hurt by a takeover...
...Even company presidents, who are given stock options to buy into their own company, tend to sell them as soon as possible to buy into a wide range of investments...
...Decisions by the courts, congressional legislation, state statutes, and SEC and Federal Reserve regulations aim for even-handedness in protecting the corporations from the worst dangers of raiding, mainly by requirements that slow down the raiders...
...The wellpublicized buy-out of National Steel in Weirton, W.Va., by its employees also went the ESOP route...
Vol. 33 • April 1986 • No. 2
