Holders Should Keep an Eye on Management
Much has been written about the failings of American management, and about how the big institutional stock owners are partly to blame for demanding short-term results. Now there’s a voice saying that it isn’t the concentration of ownership in the institutions we should worry about but rather the fact that ownership and control are far too diffuse.
The voice is that of William G. Ouchi, professor at UCLA and author of the popular book, “Theory Z,” on U. S. and Japanese styles of managing.
He has an equally unique view of why the Japanese do better. It’s not, as some have said, that Japanese managers can think long term because they are controlled by banks worried about getting loans repaid rather than shareholders trying to get a quick rise in the stock. Quite the contrary, he says. Japan does better because control over management is far more concentrated there.
“The problem in this country is that there is no one watching over management. The ownership is so diffuse that it is in effect disenfranchised,” Ouchi maintains. Here, it’s like having an absentee owner not paying much attention. There, it’s like having someone hanging closely over the shoulder to see that top officers run a company well.
Little Oversight
His reasoning, in more detail:
Boards of directors, with many people on them chosen by the chief executive himself, too often don’t get involved enough to provide effective oversight in the running of the company. The real owners, the people who have the stock, don’t get much say. Most of them are small holders, widely scattered. Many of the rest hold enough stock to exert some control, but for a variety of reasons are afraid to.
Banks and pension funds could provide the kind of oversight that exists in Japan, Ouchi believes, except for regulation that prevents the banks from holding equity positions and for fear of lawsuits. Getting too closely involved, the big holders and lenders contend, would open them to shareholder suits if management went bad under their tutelage.
In Japan, by contrast, the banks play an effective role of oversight. They do it not because of the debt they hold but because they are permitted to own stock. Normally, no one bank holds an overwhelming block of the stock, but by banding together and including the holdings of some affiliated organizations, these owners can exert strong influence. They generally do so by naming a lead bank to represent them all.
Such oversight, says Ouchi, is why you don’t find Japanese executives paid exotic salaries and supplied with extravagant perks. That only happens when the owners aren’t keeping close tabs.
Irony to Contrast
There’s a certain irony to the contrast he draws. It might suggest giving the banks more power over management in this country, and yet banks themselves have had serious management problems. Wouldn’t it be the blind leading the blind? Not, says Ouchi, if the same kind of ownership oversight were being exerted over the people running the banks.
Ouchi believes that the kind of oversight that’s really needed over American corporate management can come from the pension funds, once they recognize the power they can wield. The funds are rapidly amassing the biggest blocks of ownership in major companies.
The professor isn’t the first to suggest the potential of pension power. California State Treasurer Jesse M. Unruh has been urging pension fund managers to flex their muscles particularly where companies are involved in takeover battles and take defensive steps at the expense of shareholder rights and profits. Ouchi’s suggestion goes farther. It would make the funds more active on a continuing basis as overseers.
At present, management is in a defensive posture, trying to fend off takeovers. Yet the threat only exists because management hasn’t been sharp enough for the company to realize its full potential. Hence, not surprisingly, the price of the stock fails to reflect the company’s full value, Ouchi observes. That’s what gives the raiders an opportunity for a quick profit.
Maybe the system would work better if the owners found a way to keep closer track.
