Texaco Stresses the ‘Share’ in ‘Shareholders’
Texaco--the big oil company that in the last two years has endured bankruptcy, a $3-billion lawsuit settlement and sale of about $5 billion worth of its assets--made really important news the other day.
At the suggestion of the California Public Employees Retirement System, one of its major shareholders, Texaco appointed a new director to its board--John Brademas, president of New York University and formerly a powerful member of Congress.
Why is that news? Because it establishes a precedent of pension fund shareholders acting directly to influence policy in a major company and thus marks an evolutionary step in the development of U.S. corporations. It could well be a healthy development, leading to greater stability and long-term investment vision among U.S. corporations.
But a bit of background is needed to understand why. For years the stock of America’s companies has been increasingly owned by the retirement funds of other companies, state and local government agencies and nonprofit institutions such as universities and hospitals. Employees, in other words, own American business. Which was precisely the intent of one of the originators of the pension system Charles E. Wilson, a president of General Motors. In 1950--according to “The Unseen Revolution,” by Peter F. Drucker--Wilson devised a plan for an employee pension fund that would invest in the common stock of other corporations.
The idea caught on. Within a year after Wilson introduced his plan at GM, 8,000 similar pension funds were set up. And today, according to Columbia University’s Center for Law and Economics, the pension funds have almost $1.8 trillion invested, own more than 20% of all the company stock in the land and more than 33% of the 50 largest corporations. They are potentially what Wilson saw them as, a great, stable and democratic source of financing for U.S. industry.
New Cooperative Spirit
But only potentially. Unfortunately, as the pension funds grew they acquired a reputation as indifferent owners that sold company stock at the first sign of faltering profit, and that jumped at buyout offers from corporate raiders. Studies showing massive short-term trading by pension funds reinforced that reputation, and the irony emerged of an employee ownership system being cursed for putting employees out of work.
By contrast, Texaco’s agreement with the California Public Employees Retirement System (CALPERS) is being hailed as evidence of a new cooperative spirit. Dale Hanson, chief executive of CALPERS which owns 763,200 Texaco shares, had asked Texaco President James W. Kinnear last spring for the right to nominate a director and otherwise press shareholder concerns. Texaco, of course, had made mistakes costly to shareholders, among them its takeover of Getty Oil which had resulted ultimately in bankruptcy and a $3 billion payment to Pennzoil. Even as Hanson and Kinnear conferred last spring, Texaco faced a proxy fight from takeover artist Carl C. Icahn--so Kinnear agreed to Hanson’s request. Thereupon, CALPERS and other pension funds backed management in the proxy fight, and on Monday, Texaco management kept its part of the bargain by nominating Brademas to the board.
The stock market was immediately displeased, seeing management-shareholder cooperation as lessening chances of a renewed takeover battle for Texaco, a company that according to several analysts is now rich with cash and oil properties worth more than the market price of its stock. Texaco’s stock fell at news of the agreement.
Is the market perspective correct? Will cooperation condemn shareholders to undervalued stock and eliminate chances for takeover bonanzas? No, of course not, says Hanson of CALPERS, which has $47.2 billion in pension assets and share ownership in more than 1,300 companies. “We’ll consider all offers,” he says--while being careful to separate real offers from illusory ones, like Icahn’s, with more talk than money behind them.
Texaco, for its part, is going to make a distribution to shareholders of $1.7 billion, or $7 a share, to make up for dividends they lost during its bankruptcy.
The reality is that increased participation by major shareholders could produce more intelligent communication between owners and managers and a vast improvement on the jumpy, nervous system of today. In any event, we’ll see more of it.
Having won their point at Texaco, the big pension funds such as CALPERS are sure to carry their quest for direct influence to other big companies.
The special irony is that it was the same Texaco, with a 1984 blunder, that sparked the new shareholder activism. At that time, with Texaco selling for about $35 a share, the wealthy Bass brothers of Ft. Worth started buying the stock.
Texaco’s management at the time, fearing a takeover move, paid the Bass brothers $50 a share to sell their stock and go away. CALPERS and other pension funds were enraged at such “greenmail,” and thereupon formed the Council of Institutional Investors to fight for their interests.
Their first big victory was Brademas’ appointment on Monday by Texaco--corporate America’s unwitting pacesetter.
