The Turner Blog

Are American “Investors” Killing their Golden Geese?

Posted on May 28, 2015. Filed under: SEC |

 Are American “Investors” killing their Golden Geese?

By W D Budinger

American business corporations are a lot like that goose that laid golden eggs.  Like the fabled goose, they create and distribute wealth.  They are our nation’s crown jewels, the envy of other countries, the engines that made America the most prosperous nation in the world.  But in America today they are under attack and their very existence at risk.

In that old fable, greedy villagers killed their goose and destroyed its ability to create future wealth.  Our geese—our companies — hold considerable wealth inside as necessary to fund R&D, growth, and weather a rainy day.  That wealth represents an irresistible temptation for some “investors.”  The result has been a surge in activist investors and hedge funds that attack companies and demand that the wealth be distributed to shareholders.  They harvest the internal wealth and in so doing, cripple or kill the golden goose.

This harvesting is supported by a number of beliefs—myths, actually—that make the dismemberment of companies more publicly acceptable.  These wrong beliefs have taken hold over the last four decades and are generally accepted as truths in both boardrooms and classrooms.  They serve to rationalize harvesting over building.

Here are three of the most pernicious myths:

Myth One – A corporation’s sole legal purpose is to “maximize” profits for its shareholders—even at the expense of employees, customers, the community, or the environment.

The facts:  Not so.  There is no legal requirement.  There is no law in Delaware or any other state requiring a corporation to maximize profits.  Corporations are free to pursue long-term objectives even at the expense of short-term profits.

Myth Two –When Activist Investors “unlock value” and distribute capital to shareholders, newer and more vibrant enterprises will be created.

The facts:  It may have been true once, but no longer.   According to the data, capital and “value” extracted from target corporations is not used for investment in new enterprises.  In spite of the dramatic rise in capital distributed to shareholders, new capital invested in public enterprises has plummeted.  Shareholders today trade capital among themselves.  Very few shareholders have actually contributed any capital to the enterprise itself.

Myth Three – Shareholders need more power for they are the only constituency that can act as a check on management excesses and inefficiencies.

The facts:  Back when direct shareholders tended to be founders and wealthy families, this may have been a valid argument.  Today, however, over 70% of shareholders are not principals, but rather, agents for others in mutual, pension, or hedge funds.  And as agents they have their own, often short-term, objectives and may have little interest in the long-term vitality of the enterprise.  There is no reliable data suggesting that modern shareholder activism is generally beneficial either to companies or to the nation.

Debunking these myths is important because together they are used to justify shareholder raids on corporate treasuries.  Coupled with executive stock options, they pressure managers and directors – even in firms not directly targeted – to favor short-term harvesting over long-term investing.

Indeed, the growing pressure on public companies to act short-term and distribute rather than reinvest is likely one of the causes for the precipitous decline in the number of public companies – down almost 45% in the last 15 years.  Today far more capital flows out of public corporations than flows in. Corporate profits, once a source of growth, are instead being dispensed to shareholders.  In the last 10 years, the companies in the S&P 500 have distributed 91% of their profits to shareholders as dividends and stock buybacks.  In effect, planting has been replaced by harvesting.  The business press is replete with stories of companies slashing people, research, and investment – and even borrowing – to generate more cash for shareholders.

It is time for Americans to rethink these destructive trends.  Allowing financial manipulators to kill more and more of our golden geese for short-term gain is robbing our nation of its future prosperity.  It is time to let our corporations be great again and return to planting instead of just harvesting.   Our future depends on it.

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Bill Budinger, inventor, entrepreneur, founded and served for 33 years as CEO and Chairman of Rodel, Inc., a private company that built plants around the world to manufacture products for the electronics industry.

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