Philadelphia Reflections

The musings of a physician who has served the community for over six decades

Related Topics

Investing, Philadelphia Style
Land ownership once was the only practical form of savings, until banking matured in the mid-19th century. Philadelphia took an early lead in what is now called investment and still defines a certain style of it.

Put Corporate Raiders to Some Good Use?

Henry G. Manne

Henry G. Manne just made an interesting proposal for re-setting the balance of power between corporate executives and their bosses, the stockholders. It appeared on the Opinion page of the Sept. 27, 2005 Wall Street Journal. In essence, Mr. Manne, a resident of Naples, Florida and Dean Emeritus of the George Mason University School of Law, suggests we forget about giving stockholders and independent corporate directors more oversight power. Instead, make things easier for corporate raiders, who will be glad to terrify rambunctious executives with a credible threat of having raiders for bosses. It's an interesting thought.

Whoever puts headlines on articles submitted to the

hedge fund

Journal called this one The Follies of Regulation. We can presume the headline writer prefers corporate raiders to Sarbanes-Oxley, or to the 1968 Williams Act, or a variety of state (read, Delaware) takeover laws, or the Investment Act of 1940, or potential regulatory curbs for Hedge Funds. Although he seemingly agrees with that, Mr. Manne's case is somewhat weakened by having a political spin applied. Regulation isn't the solution, regulation is the problem.

The case is stronger than that, because the main origin of the so-called "Agency Cost" problem appears to lie in the relentless growth in size of international corporations,

to a point where shareholder power is necessarily diluted too thin to be effective. If you exclude founders of corporations and maybe a few families of founders, the dilution of stockholder power has long been an inevitable feature of the dilution of stockholder ownership. If you want their money you must meet their terms, which are overwhelmingly tilted toward passive investing. It's going to get even worse; John Bogle at Vanguard has convinced just about everyone that index investing is the most cost-effective way to invest in equities.

And since the underlying issue is the servant betraying his master (read, Agency Cost), it does not help much for stockholders to ally themselves with new agents.

grease sale

That would include the managers of Hedge Funds (read, Private Equity), or New York Attorneys General, state employee union presidents, mutual fund managers -- or revolving-door employees of regulatory agencies. There's a rumor around that investment bankers were the ones who first suggested bribing the managers of acquired companies to grease the sale. Where agents of any kind are concerned, particularly elected representatives, you dare not turn your head to spit.

The interesting thing about Mr. Manne's proposal is that his suggestion of trusting the corporate raiders might just work. You can trust them to work hard and play hard, and be utterly remorseless about the poor beleaguered corporate executives, those home town boys who have worked so hard on your behalf. Or who "live like monks, and give all the company's wealth to worthy causes."

Let's hear more specifics about how to do this, and expose them to the anguished howls of those they might injure. The hubub alone would do some good.

Originally published: Thursday, June 22, 2006; most-recently modified: Monday, June 03, 2019