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A rock or a soft place?
Taking care: companies make love and money (if
their shareholders let them)
Here are three things that you don’t often see together: caring for
the community and the environment; shareholder value orien-
tation; and takeover protection mechanisms. Surely they can’t
have much to do with one another, can they?
Well, they have quite a bit to do with one another, or so it
appears. Let me explain.
First of all, do we like it that rms can adopt takeover protection
mechanisms (such as poison pill constructions)? “No, we don’t!”
shareholders proclaim in chorus, because the threat of a potential
takeover is a great way to make sure that CEOs don’t do anything
that does not maximize value for shareholders. Remove that
possibility and these bloody CEOs will do all sorts of silly things
that are not in our best interest.
And I am afraid that is at least half-true . . . And one of these
silly things is attending to issues such as caring for the natural
environment and the community. We – the wider public – may
like it if corporations do that kind of stuff, but it is not clear that
shareholders do; after all, caring for such soft stuff comes at the
cost of the hard stuff: cash.
Aleksandra Kacperczyk from the University of Michigan
examined this issue in a clever way. She examined 878 public
rms in Delaware between 1991 and 2002. The interesting
thing about Delaware is that in the mid-1990s, due to a series
of court decisions, hostile takeovers suddenly became a lot
more difcult. And what Aleksandra found is that, after that
fact, Delaware companies started to pay a lot more attention
to caring for the community and the natural environment.
All of a sudden, it was safe for companies to do such things,
without the threat of punishment hanging over them, by
means of a hostile takeover by another company that thought
it could make more money by getting rid of all that expensive
soft stuff.
Business Exposed214
Did shareholders like it? Well, they didn’t applaud the court
decisions (to say the least) and the fact that now corporations
could divert valuable cash to such silly things, but they had to
accept it. But were they right: was it going to cost them money?
Well, not exactly.
Aleksandra also measured what happened to the long-term share-
holder value of the corporations that started to engage in the
“uffy” stuff. Shareholder value actually went up! The long-term
market-to-book ratio of these rms started to rise as a result of
these actions. The shareholders, in spite of their doubts, were
better off.
A classic win–win situation appeared; being freed from the threat
of hostile takeovers enabled rms in Delaware to do nice things
for the community and the environment, which actually paid off
in terms of hard cash in the long run. But there was one catch . . .
Aleksandra had a brainwave and decided to also look at what
happened to the levels of executive compensation (in the form
of salary, bonuses, and other annual remuneration perks) of the
companies that found themselves shielded from the threat of
hostile takeover: CEO remuneration went up! Apparently, now
immune to takeover threats, top executives not only started
attending more freely to the interest of the wider community but
also to their own private interests. They let others share in the
wealth, but they didn’t forget themselves either.
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