Probing the government's role in hostile takeover attempts
The business news in recent weeks has often been dominated by reports of ``raiders'' attempting to wrest control of major American corporations. The specialized terminology used by both attackers and defenders is quite colorful and often alliterative -- shark repellents, greenmail, golden parachutes, junk bonds, wolf packs, poison pills, and two-tier takeovers. Because most efforts to take over a company usually are led by a single individual, the battle often has a David-and-Goliath twist, at least in the public perception.
What is taking place, in a less dramatic but more fundamental way, is a restructuring of a significant part of American industry. It is more than a question of replacing existing top managements. Rather, the current rash of takeover battles has focused the attention of managements on a company's present stock price and, closely related to that, its current earnings.
The result of the raider's efforts -- whether successful or not -- is often a substitution of debt for equity capital. It is very hard, for example, to avoid the conclusion that the Phillips Petroleum Company is a weaker firm as a result of a series of ``raids.''
Not too surprisingly, the boards of directors of many corporations have taken steps to make it more difficult for an outsider to assume control. Increasing the term of corporate directors -- and staggering the time when their terms expire -- is one such answer. Another response is ruling out so-called two-tier stock purchases, whereby large investors sell out at the initial, higher price while smaller investors tend to wait for the lower-priced second-tier offer. Tougher ``shark repellents'' are sometimes voted in the form of ``poison pills'' involving complex stock and warrant rights to inhibit unfriendly takeovers.
All this has led to a variety of proposals to bring government more fully into these corporate governance matters. The Securities and Exchange Commission, for example, recently intervened in a Delaware court on the side of a minority shareholder opposing a ``poison pill'' voted by the board of directors of Household International. On the other side of the issue, the Business Roundtable, representing the heads of the largest corporations, urges federal legislation restricting unsolicited takeovers.
What should be public policy in this area? Many economists argue that virtually all takeovers are good for the economy and should be encouraged. ``I am the champion of the small stockholder,'' declares T. Boone Pickens, one of the better-known multimillionaire corporate raiders. Other American business leaders take, as would be expected, a more negative view of threats to their positions. They emphasize the resulting diversion of management attention from traditional business responsibilities.
But there is no need to argue either that all takeover attempts are constructive -- or that every effort to repulse them is benign. Another highly visible raider describes the effort more modestly, and likely more accurately, as ``acting in pursuit of personal financial gain and not out of altruism. . . . I do it to make money.''
In some cases, businesses and their shareholders benefit from new management or even from the threat of change. Corporate executives at some firms are more concerned with preserving their positions than with enhancing the position of the shareholders. Of course, reasonable amounts of self-interest should be expected on the part of both those attempting corporate takeovers and those opposing them.
Before seeking public policy prescriptions, however, we should keep one key point in mind: The long and intricate history of government involvement in making business decisions does not provide an inspiring basis for expanding the role of the federal government in corporate governance. Whether that intervention is made by the judicial, legislative, or executive branch, government regulation often does more harm than good.
In recent years, we have painfully and repeatedly learned about ``government failure.'' That is, the presence of some shortcoming in the private business system (often called ``market failure'') is not sufficient cause for government intervention. Study after study shows that much government regulation frequently fails to meet the most elementary benefit-cost test.
Moreover, another lesson from recent economic history is that government intervention begets more government intervention. In the present situation, for example, if government should limit defensive maneuvers by company managements, that would tilt the balance of power. Invariably, it would lead to pleas to restrict the offensive actions of the corporate raiders (and vice versa).
Surely it is legitimate for well-financed groups of investors to attempt hostile takeovers of private companies. So, too, resistance by the target company's board of directors may be perfectly proper. To ascribe the public interest to just one side of the controversy is to ignore the fundamental role of competition in the marketplace.
The visceral instinct of many is to urge the federal government, ``Don't just stand there, do something.'' But, no compelling case has yet been made for government intervention in corporate takeover battles -- on behalf of either side. Given the many instances of costly and counterproductive government intervention, the best advice in the corporate governance field is ``Don't do something [foolish], just stand there.''
A former chairman of the Council of Economic Advisers, Murray Weidenbaum is now director of the Center for the Study of American Business at Washington University in St. Louis.