Management and the Investor

In their landmark 1932 study, Corporations and Private Property, Berle and Means pointed out that ownership and control of the widely held corporation had become divorced. When management becomes more interested in diverting a portion of the stream of corporate profits to itself than in the performance of the corporate shares, shareholders suffer.

The divergence in viewpoint between management and investor is particularly evident in attitudes toward capital spending and acquisitions on one hand and stock repurchase on the other. Management often uses corporate cash flows to diversify, with the objective of growth for growth’s sake, rather than benefit to investors.

If corporate acquisitions are unsuccessful, shareholders lose the value of the corporate cash flows expended in diversification. If instead management used these cash flows to buy in shares, shareholders could be confident of an increase in both the current earnings and future discounted cash flows on their remaining shares. However, when questioned about the merits of diversification and capital spending versus the merits of stock repurchase, one company president replied: “You know which road management will take if it comes to a reasonable choice between perpetuating an organization such as ours or beginning a liquidation process.”

Shareholders once had the right to remove directors at will. Today, management often suggests that disapproving investors sell their stock. It is time that corporate managements began thinking less about expanding their personal empires and more about the interests of their shareholders.