A Trend for the ‘90s: Shareholder Muscle-Flexing
Like old houses being restored, big companies are being stripped down to their core businesses by major shareholders bringing pressure on managements.
Westinghouse on Monday and Sears Roebuck last month have announced major shake-ups. Eastman Kodak and American Express remain on the hit lists of pension fund investors who want them to shed extraneous activities, refocus on their principal businesses and, above all, produce growing earnings to give shareholders a return on their investment.
Two powerful trends are at work here: a movement by American companies to cope with an intensely competitive global economy by returning to simpler management structures, lower costs and greater innovation. And the assertion of power by major shareholders who have concluded that just as war is too important to trust entirely to generals, corporate success is too vital to be left to the managers.
“This is the post-takeover era redefinition of the relationship between companies and their shareholders,” says Nell Minow, a Washington lawyer and co-founder of Lens Inc. The investment fund is designed to prod managements on behalf of pension fund shareholders who now control more than half the stock in practically every major U.S. company.
Pension fund shareholders, expressing concern over General Motors’ mounting losses, were behind this year’s management changes at the big car maker; it is believed that giant IBM may be their next target of concern.
Meanwhile, Eastman Kodak, the photography giant, gets their immediate attention. The Rochester, N.Y.-based company is a prime example of growing tension between shareholders and managements--and an object lesson in why the outcome matters to millions of people.
Kodak’s profit is lower now than it was 10 years ago, and so is its stock price, despite a doubling of its sales and its diversification into such advanced fields as biotech.
Diversification is the problem, say pension fund investors. They want Kodak to sell other businesses--particularly the Sterling Drug division for which it paid $5 billion in 1988--and concentrate on the picture and imaging business.
Kodak management has been unwilling to comply with such demands, although it did announce the sale of three minor subsidiaries Monday. “They won’t sell Sterling--the company’s current management was responsible for buying it,” says analyst Alex Henderson of Prudential Securities.
Kodak Chairman Kay Whitmore made the decision to buy a drug company because he feared for the long-term outlook of Kodak’s basic photography business. He knew that his company had missed a beat technologically: Young families increasingly use Sony and Panasonic camcorders and videotape to take pictures of the children, where they used to use Kodak cameras and film. The 91-year-old company’s basic business is in mortal danger.
Seeing that, Whitmore diversified. But neither new business nor old has been able to produce growing earnings. And the stock market says Whitmore’s strategy is wrong.
In the last 10 years, Kodak stock has lost more than $1 billion of market value--which means that the company’s troubles threaten not only its 133,000 employees but millions of current and future retirees in the 500 companies, unions and state and local governments whose pension funds own 54% of Kodak stock.
That broad impact is why today’s shareholder revolt is much more important than the takeover trend of the 1980s. It represents the wishes not of corporate raiders but of long-term shareholders--pension funds that hold hundreds and thousands of company shares. Such funds cannot sell easily if they are displeased with management, and in fact they don’t want to sell--they want to improve their company as any owners would.
Today’s stockholder assertiveness also reverses a longtime transfer of power from owners to corporate managers. In their classic 1933 book “The Modern Corporation and Private Property,” Adolf Berle and Gardiner Means argue that shareholders in those days were dispersed and less powerful than managers, who alone possessed the knowledge and ability to run huge corporations.
But with the growth of pension funds in recent decades, ownership has become organized and able to hire expert investment managers to oversee company business. Thus, the balance of power is shifting to owners from executives, who often want to preserve their powers and paychecks by keeping the company big.
Monday’s news that Kodak was willing to sell subsidiaries brought a quick 4% rise in its share price. And in every case in recent years in which shareholders have stepped in to push management--Lockheed, Sears, General Motors, Westinghouse--stocks have responded favorably.
Clearly, the markets will favor pension fund pressure on other large companies. It’s a big trend for the ‘90s.
