The White Sharks

Nell,

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I love your Martin Stoller story. When I first started writing about business, for the Motley Fool, I mostly wrote about shareholder rights and corporate governance, and I thought the Internet was the ideal vehicle for individual shareholders to band together and exercise some influence over the companies whose shares they owned. A full-fledged realization of the Net's promise still seems far away, but Stoller's example is an excellent one.

Of course, it has occurred to me during our conversation that for many people all this talk of shareholder rights and shareholder activism will seem like a curiosity at best. After all, a bull market tends to be forgiving of even the most dubious corporate decisions, and in any case, the idea that investors should take an active interest in the companies they own is still an idea that, as you suggest, is hardly commonly accepted. And one of the many things that frustrated me about Henriques' book is that she doesn't really give her readers any way of understanding why issues of corporate governance really are important.

In the end, shareholder activism is about more than just pumping up the current stock price, even if there are many raiders who use it for just that purpose. On the deepest level, as we move toward a society in which corporations exercise ever more power, it seems crucial that there be some internal check on the people who run those corporations. I tend to be more expansive in my idea of corporate democracy than lots of people, because I think shareholders should be allowed to vote on things like whether companies do business with Myanmar or whether they discriminate against gay workers. Regardless, though, the idea that a corporation is not simply a CEO's plaything is one we can't afford just to glide over. As the title of your book with Robert Monks has it, "power and accountability" have to go hand in hand. Especially at a time when American workers are confronting an ever more competitive workplace, the spectacle of overpaid executives sitting on each other's boards and pumping up each other's salaries while assuming no real financial risk seems completely intolerable. Changing that alone would make the entire project of shareholder activism worthwhile.

The interesting question, of course, is to what degree someone like Thomas Evans is really engaged with that project. It's not an easy question to answer, even after reading Henriques' book. Evans himself ends up coming across as rather sphinxlike, cursed with a terrible temper and possessed of an unshakable faith in his own righteousness, but not especially rigorous in his thinking about how companies should be run. Near the end of his life, rather than simply retiring from the company he had created, he essentially tried to sell it without the approval of his board of directors (which included his son). And throughout his life, he never seemed to give much more than lip service to the idea that the people who run public companies should be accountable to their shareholders.

Now, we could see this as simple hypocrisy, but I think it's actually a reflection of the fact that for Evans, shareholder activism was the route he took to empire-building, and not an ethos that he tried to live by. As he said more than once, in the postwar years it was easier to buy companies than it was to build them from scratch, and buying them generally meant tossing out existing management. That doesn't mean that what Evans and his fellow raiders did was in any sense flawed. On the contrary, their willingness to take on risk (as you point out) allowed them to do a much better job of running the companies they bought than previous managers had. And their recognition that the people who ran public companies were vulnerable to proxy fights and tender offers was keen. It's just that in the end, most of these raiders didn't want anyone looking at their companies the way they had looked at everyone else's. Which, it has to be said, comes as no surprise.

In Evans' case, that was also probably a good thing, since by modern standards the company he built was a hodgepodge of enterprises that was doomed to underperform. Evans' heyday coincided with--and Evans was a key part of--one of the great merger booms of the century. But in contrast to today's merger-mania, which for the most part has companies in the same or similar industries merging with each other, that merger boom saw companies in radically different industries acquiring each other. The idea was that professional managers could run any kind of company, and that if a corporation put together revenue streams from many different businesses, it would be less risky and therefore more profitable. Of course, what this really ended up meaning was that companies lost focus and failed to develop the kind of core competencies that truly excellent companies have. Insofar as diversification makes sense, investors can do it for themselves (by buying the stock of companies in different industries). They don't need corporate managers to do it for them. Evans was so sure of his own ability that if he saw a great value, he had to take it. And certainly you can't quarrel with all the money he made. But in the long run, this was not a strategy for real success. Perhaps the "white shark" epithet really was well-chosen. For Evans, it seems, had to keep moving or else he'd die.

Thanks for talking with me this week. I really enjoyed it.

Best,
Jim

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This week, a discussion of The White Sharks of Wall Street, by Diana Henriques (click here to buy it). Nell Minow is editor of the Corporate Library, a Web site that covers issues of corporate governance and performance. She was formerly a principal of the shareholder activist LENS Fund. James Surowiecki writes The New Yorker's "Financial Page" column.

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