Andrew asks, "What do you think of the George Gilder's idea (roughly
paraphrased) that Michael Milken financed management buyouts through junk
bond financing which shifted some of that power from foreign and domestic
institutional investors to company management?"
Any time you take a company back to private ownership you are insulating
it from the demands of public stock ownership.
Milken's approach did not, however, ease the short-term perspective. At
least as I understand it -- perhaps others have better knowledge. Yes, it
raised huge amounts of money that allowed managers to buy out
stockholders, and thus 'go private'. On the other hand, the bonds either
had to be paid off or defaulted. Pay-off required huge amounts of money
to be taken out of the company, in many cases, more brutally and more
short-term than when the company was owned by stockholders. Default led
to chapter 11 which in many cases led to breaking up the company, loss of
ownership by management, and another disastrous transition from private
ownership to either break up or some other alternative. None of these
choices are very appealing, certainly not better than the short-term
focus.
Probably some companies succeeded with this strategy, and never regretted
taking this route. Most that I am aware of did regret it, and many failed
anyway.
I think there is a more effective route to relieving the stockholder
pressure on companies. The reality is that management does not have to
kowtow too much to stockholders as long as the company manages to attain
reaasonable levels of profitability over the long run. Stockholders
rarely throw management out for average performance. Management gets
thrown out for poor performance.
Management does not, within broad limits, need to worry overly about the
stock price. The company's fortunes do not change much when the stock
price changes. There is no short term impact. If the price drops too
much, it can affect the interest rate on bonds, but even here there is not
much impact within broad limits.
The real reason managers want the stock to perform well is very simple.
They get stock and stock options as part of their compensation package.
In other words, they too are stockholders. They have a vested interest in
stock performance not as employees, but as stockholders. If they were not
stockholders they would be a lot less susceptible to the pressures of the
stock market.
Therefore, it appears to me that the best way to reduce the short-term
mindset of publicly-held companies is to develop management compensation
packages that reward long-term profit performance, and are not tied to
stock performance.
What does anyone think?
--Rol Fessenden LL Bean 76234.3636@compuserve.com
Learning-org -- An Internet Dialog on Learning Organizations For info: <rkarash@karash.com> -or- <http://world.std.com/~lo/>