The Corpocracy's Last Gasp

The raiders accuse corporate managers of incompetence. The managers accuse the raiders of greed. In this case, they're both right

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In a recent supplement, The Wall Street Journal told the story of the young president of a Wall Street investment firm who walked into the offices of the chief executive of Tenneco Inc. and threatened to put the company into play if Tenneco didn't initiate a major corporate restructuring. Although the executive ignored the threat and Tenneco never became a takeover target, the vignette was used to highlight what the Journal saw as a profound and growing cultural clash between Wall Street's traders and raiders and Main Street's managers.

Indeed, hardly a week goes by now that a corporate takeover isn't announced by some raider who points an accusing finger at company managers for letting corporate performance decline while outfitting themselves with excessive bonuses, lavish perks, and golden parachutes. To hear it from the likes of Sir James Goldsmith or Ronald Perelman or the folks at Kohlberg Kravis Roberts, the raiders raid out of an abiding concern for the neglected shareholder and the future competitiveness of the U.S. economy.

For corporate executives, of course, this is the insult added to decades of injury inflicted by the truly greedy on the truly gifted. If it had not been for Wall Street's incessant demands, they complain, they might have been managing their companies for the long pull all these years rather than slavishly squeezing out meaningless increments of quarterly profits. Now the executives see these same Wall Street charlatans pulling down multimillion-dollar salaries by doing nothing other than speculating in paper and distracting them from the business of actually producing something of value.

I don't know about you, but I come away from this shouting match with the firm conviction that these folks richly deserve each other. For years they've conspired to feather each others' nests at the expense of stockholders, consumers, employees -- and eventually the entire nation. Now that the Japanese have proved a company can do very nicely without investment bankers and executive dining rooms, their cozy little scheme has been exposed. The ensuing squabble over the loot has turned rather nasty.

But listen carefully, for everything they say about one another is absolutely true. After all, who should know better about the inflated compensation of corporate executives than investment bankers who can pull in as much as $50 million or $100 million in a single year? And is anyone better qualified to comment on the coldhearted manipulations of Wall Street's traders and arbitrageurs than the corporate executives who spent the preceding decade buying and selling divisions, whose plants they've never visited, products they've never tried, and employees they have never met?

Even while they squabble in public, however, the two factions are quietly working their latest scam -- taking companies private. Under this scheme, the top executives of a public company, anxious to fend off a potential raid, and/or secure lifetime employment, and/or increase their personal wealth, offer to buy the company from its shareholders. The first thing they do is call in their Wall Street investment banker to "structure the deal" and arrange the debt financing. Then a second Wall Street firm is engaged and offered millions of dollars to issue an ambiguous one-sentence opinion saying that the price offered for the stock is fair. Stockholders, tempted by a 25% premium on their depressed shares, invariably fall for the line, and the leveraged buyout is consummated. Then, a year later, they read in the newspaper that the company has been broken up into pieces, and, in a series of deals, sold off for two or three times what they were paid for it. It's not too surprising that the sell-off is often arranged by one or both of the original investment-banking firms.

If a similar set of back-scratching transactions were to take place among the Teamsters, a mozzarella company, and a group of local pizza parlors, it would be called racketeering. In this case, it is called corporate restructuring, a perfectly legal activity that last year robbed the American economy of $173 billion in capital badly needed for modernization, product research and development, or customer service. Indeed, so dependent have corporate executives and Wall Street raider/traders become on each other that it would require a finely calibrated moral sensibility to determine which party occupies the higher moral ground. The differences between them are hardly worthy of distinction.

Take insider trading, for example. No sooner had Dennis Levine and Ivan Boesky been collared than dour-faced executives lined up before the cameras and business press to express their shock that illegal gambling was going on within the corporate establishment. And yet is there even one of these executives who had not himself bought and sold his own company's stock over the years on the basis of hundreds of bits of important and relevant information not available to the investing public -- information about market forecasts, imminent research breakthroughs, production problems, or likely personnel changes? In practice, none of that is considered inside information, and people who trade on it aren't prosecuted. It's only when you're stupid enough to buy or sell stock a few days before a quarterly financial statement is issued that they call it insider trading.

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