The Faith of Fiduciaries
BROCKWAY, GEORGE P.
The Dismal Science THE FAITH OF FIDUCIARIES BY GEORGE R. BROCKWAY In a recent issue of the Wall Street Journal, Peter F. Drucker, the most prolific authority on the modern corporation, made an...
...The 19th-century invention of the limited liability company was a blessing for such people, and the blessing was magnified by the development of efficient securities markets...
...In so doing, he pursues, perhaps unwittingly, an attack on the way much, perhaps most, business has been done in this country since the invention of the limited liability corporation...
...The owners of a limited liability corporation accept no responsibility...
...He estimates that pension funds alone control between one third and one half of the stock of our great corporations...
...Nor is this all...
...It is certainly a major cause of increased speculation on Wall Street...
...They merely had some money and were eager to place it where it would be reasonably liquid and have a chance of returning something more than bank interest...
...Even John Maynard Keynes noted that "if human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation...
...We find ourselves in danger of this damnation because of the success of the limited liability corporation and the efficiency of today's security markets...
...Nor are owners, fiduciaries, financiers, managers, or workers encouraged to be loyal to each other...
...In fact, the managers of mutual funds, whose obvious interest is to maximize their gains, are acknowledged by Drucker to vote for takeovers exactly as do the trustees of pension funds...
...He would deal with that by reviving the ancient Roman understanding of property...
...In addition, it results in the demoralization of companies' employees, "from senior middle managers down to the rank and file in the office or [on the] factory floor...
...Even a slavemas-ter must not mistreat his slaves...
...This tunnel vision, Drucker holds, is a leading cause of the decline of America's competitive strength...
...The ever-present danger of a raid forces managements to concentrate their attention on the next quarter's bottom line, even though long-range development is thus sacrificed to short-term profits...
...investment bankers will put pressure on commercial bankers to give priority to the needs of such companies...
...There you have the triumph of finance over enterprise...
...Nevertheless, Drucker sees in "the takeover wave that is engulfing American industry" a threat not only to the companies being raided but also to the companies used as vehicles of the raids...
...Yet as everyone knows, in reality the stockholders have nothing to do with the corporation beyond endorsing dividend checks and occasionally signing proxies, and this indifference is particularly true of the individual stockholders, whom Drucker in the end mistakenly celebrates...
...brokers will put pressure on investment bankers to float the issues of such companies...
...The workers, including the managers, have no ownership rights and reasonably shirk the duties that might balance those rights...
...Loyalty is one of the fundamental virtues...
...Similarly, the standard picture of the entrepreneur of the early Industrial Revolution is emotionally very appealing...
...The Romans, he says, held that ownership entailed a responsibility to the thing owned...
...Since, with negligible exceptions, shares are "fully paid and nonassessable," those who hold them do not have to worry about the company's debts or legal involvements, or fear the loss of more than they paid for the stock...
...Conservatively managed companies, which have prudently written down their assets to the lowest reasonable figure, are especially attractive takeover targets...
...He suggests that the Comptroller of the Currency might forbid banks to lend money for unfriendly takeovers...
...All of these people are—in business practice and legal theory—interested only in their own gain...
...He was celebrated by Joseph A. Schumpeter as the man who gets things done...
...But these measures, desirable though they are, do not meet Drucker's fundamental concern: the erosion of the idea of property...
...But what is true in law of the trustees of pension funds is equally true of the trustees of eleemosynary institutions...
...A workman must not mistreat his tools...
...Who in the modern public corporation is willing and able to accept duties to balance the rights of ownership...
...But to be a conglomerate person or a holder of a diversified portfolio is to be nobody in particular, with no commitment to anything except the bottom line—the bottom line being, indeed, the real reason for the conglomerate or the portfolio...
...I will address that question in my next column...
...A farmer must not mistreat his land...
...The courts, it must be sadly recognized, will always look with favor on accepting the highest immediate return, because this is in accordance with the antediluvian economic notions they are possessed by...
...Today the typical corporation is itself the entrepreneur...
...Having no responsibility other than to the thickness of their pocketbooks, individual stockholders will do what is necessary to get the highest immediate return— precisely as fiduciaries and mutual-fund managers do...
...The profits (or losses) go to the stockholders, who own it...
...He was a textile manufacturer, a dry goods merchant, a railroad man...
...W hat is to be done...
...Financiers, fiduciaries, brokers, bankers, and speculators are totally irresponsible...
...How could they have known that the gasoline tank of the Pinto was unsafely designed...
...No one...
...Because they can sell out at any time, they need not fuss either about providing alternatives to company policies they find dangerous or unsatisfactory...
...If things are as bad as Drucker says (and they are), something should be done about it...
...They, moreover, and they alone, have the right to sell the corporation or any part of it and to take for themselves the entire net proceeds of the sale...
...Regardless of the occasional brilliance and frequent flamboyance of its managers, it is a public corporation...
...This atomization of concern is doubtless a major cause of the widely deplored decline in standards of workmanship and service...
...Josiah Royce held it to be the fundamental virtue...
...In contrast, fiduciaries and mutual-fund managers are likely at the minimum to have studied the quarterly statements and annual reports...
...The Dismal Science THE FAITH OF FIDUCIARIES BY GEORGE R. BROCKWAY In a recent issue of the Wall Street Journal, Peter F. Drucker, the most prolific authority on the modern corporation, made an impassioned case against unfriendly takeovers, suggested some ways of inhibiting them, and concluded that "none of the policies we are likely to adopt will solve the basic problem, the one created by the shift in voting power from 'owners' to 'fiduciaries.'" Drucker has worried about this problem for some time...
...Apart from the confusion that would result, they could not then protect trade secrets (whatever these may be...
...No one is or can afford to be loyal to the enterprise —not the owners, not the fiduciaries, not the financiers, not the management, not the work force...
...and all pressure will be brought to bear on the management of every public company to do whatever it can to increase the bottom line...
...Thus they will put pressure on brokers to find them companies (new or old) that will bring quick returns...
...The damned are those who are not surprised...
...Cynicism cannot cure itself...
...Encourage them to be disloyal, and you corrupt them...
...How could they have known that DES might cause cancer...
...In these circumstances, loyalty is, as Drucker observes, comprehensively destroyed...
...The stockholders assert the rights of ownership but accept no duties...
...The fiduciaries troubling Drucker are the trustees of pension funds and (though he does not mention them) of charitable endowments, churches, foundations, universities, and private trust funds generally...
...it must be surprised—happily by joy, unhappily by catastrophe...
...On the other side, the managements of those companies would claim they could not operate with participatory ownership...
...And it is true in practice of practically each individual stockholder as well as of the managers of mutual funds...
...And these trustees have, as he says, "a legal duty to accept whatever gives their beneficiaries the highest immediate return...
...Who, then, is left...
...None—in fact or in theory—has a responsibility to the corporation that happens to be, for the moment, their property...
...The classical entrepreneur defined himself through his enterprise...
...Deprive men and women of the opportunity for loyalty, and you shrivel their souls...
...The public consequences of atomization are matched by private consequences, whose severity cannot be overemphasized...
...How could they have known that exposure to asbestos could lead to leukemia 20 years later...
...For my part, in the general interest of inhibiting speculation I would forbid lending money to facilitate the purchase of any securities, I would have the Federal Reserve Board close down margin accounts, and I would try to persuade the Congress to end the special tax treatment of capital gains...
...They would not have become involved if responsibility had been expected of them...
...Assuming there was some way knowledge of this kind could be made available to stockholders, it still would be impossible for individuals holding a few shares or even thousands of shares to participate effectively in the daily operations of Ford or Lilly or Johns Man-ville...
...Drucker would cure our cynicism by barring pension funds—another successful idea with unexpected consequences —from owning shares in corporations...
...In their turn, it may be added, the Church Fathers were throughout careful to balance rights with duties, and that evenhandedness is intellectually very appealing...
...On the takeover question, legal theory and business practice are congruent...
...At least since Adam Smith, the actors in the economic drama have been supposed to seek their own gain and to be led as by an invisible hand to achieve the social end of a wealthy nation...
...Not only do the stockholders have practically nothing to do with the corporation, most of them never wanted to have anything to do with it...
Vol. 67 • December 1984 • No. 23
