We live in a time of mergers and acquisitions‚ and in many cases‚ the shareholders having the control of the companies with 30 percent or 40 percent of the shares want to merge with another company or privatize their company by forcing the other shareholders to agree to a takeover bid. This bid is done in most cases when the shares’ price is very low‚ after having collapsed due to market conditions‚ unexpected bad financial results or indirect manipulation of the shares’ prices. One should not forget that the market heavily penalizes companies that fall short of obtaining their forecasted results. We can imagine that the CEO of a company with the collaboration of the majority shareholders‚ who decide on his remuneration‚ give a growth forecast of 50 percent‚ which is much higher than the actual growth. The analysts take this growth in consideration and give the valuation of the company a high multiple of the current profitability that can reach even 100. The company makes a public offering and the majority shareholders who are insiders sell part of their shares‚ for example 10 percent. If later on‚ the growth is much less than forecasted and the company expects losses‚ the shares’ price may collapse by even 90 percent. The controlling shareholders or their associates make a takeover bid for all the shares at the minimum price of 10 percent in our example‚ and they buy all the shares with the amount raised at the maximum price in the shares’ offering. From the moment that the company is privatized it can again reach profitability or have a very high growth rate‚ except that by then the minority shareholders will not benefit from the turnaround and the increase in valuation of the company‚ as they were forced to sell their shares at the minimum price. Those examples are very common ... . “Insider trading‚ or the use of insider information‚ represents a special case within this category: it involves the use of confidential information about the firm’s future performances by the employee on the financial market‚ in order to realize a speculative gain for himself or for some third party. Such practices are to be condemned for two reasons: 1 - The employer is in fact robbing his or her own firm‚ since she could only receive the crucial information as a member of it. Moreover‚ he or she only received this information under the condition that s/he would use it to serve the corporate interest. 2 - Third parties have also been damaged: those agents who were deprived of the information while dealing on the same financial markets or contracting with the same firm will unjustly suffer losses as a consequence of the practice.” (Harvey‚ Business Ethics‚ A European Approach‚ Gerwen van‚ Employers’ and employees’ rights and duties‚ p.81) Insider trading is surely not a modern invention. Zola described it brilliantly in L’Argent – The Money‚ where Saccard and his colleagues commit insider trading and speculations to the detriment of the minority shareholders and remain practically unpunished. “L’Argent serait-il donc un conte moral ou les mediants sont punis et les bons recompenses? Bien sur‚ 1’escroc Saccard est emprisonne – pas pour longtemps. Mais le ‘filou’ Sabatini‚ l’ ‘adroit’ Nathanson et le malhonnete Fayeux courent encore. Et surtout beaucoup de gens honnetes dont la seule erreur a ete leur pitoyable naivete restent des victimes. C’est le cas de 1’agent de change Mazaud mais surtout de tous les petits actionnaires. Les gros s’en tirent mieux. Si la justice n’est pas retablie par la condamnation effective des profiteurs dans la diegese elle-meme‚ du moins l’est-elle par leur condamnation verbale.” (Commentaires par Therese Ioos‚ Zola‚ l’Argent‚ p. 502) “Is L’Argent a moral tale where the bad people are punished and the good ones rewarded? Of course‚ the swindler Saccard is imprisoned – not for long. But the ‘crook’ Sabatini‚ the ‘skillful’ Nathanson and the dishonest Fayeux are still at large. And especially many honest people whose only mistake was their pitiful naivete remain their victims. It is the case of the broker Mazaud but especially of all the small minority shareholders. The big ones succeed more. If justice is not reestablished by the effective condemnation of the profiteers in the story‚ at least it is done in their verbal condemnation.” Guido Corbetta‚ in one of the rare articles on the ethical questions in the relations between companies and shareholders divides the most common forms of ownership of medium-sized and large companies in four categories: “1. Family-based capitalism: ownership is concentrated in the hands of one or a few families‚ which are frequently related to one another. Sometimes one or more members of the family is directly involved in running the company... This form of ownership is particularly common in Italy‚ but there are large family businesses practically everywhere. 2. Financial capitalism: ownership is concentrated in the hands of one or just a few private and public financial institutions which‚ through a system of crossholdings‚ control companies and intervene in their management... Ownership also implies powers to appoint management and steer corporate strategy... This form of ownership (with some slight differences) prevails in Germany‚ Japan and some other countries like Holland and Switzerland; it is rapidly becoming more common in France too. 3. Managerial capitalism: ownership is shared among numerous stockholders‚ none of whom exercises any significant control over the activity of the managers who run the companies. The management of these companies therefore becomes a kind of self-regenerating structure... It is particularly important in the Anglo-American business world. 4. State capitalism: through central and peripheral agencies or corporations set up ad hoc (as in the case of‚ for instance‚ IRI and ENI in Italy)‚ the state has direct control over the companies. The existence of this form of capitalism clearly stems from a certain view of state intervention in the economy. In Italy‚ France and Spain there are major groups belonging to this category... In cases of family-based capitalism and financial capitalism‚ for example‚ boards of directors are appointed by the majority shareholder or by a coalition of shareholders who are often themselves members of the boards‚ which appear to be the real organs of corporate governance. In cases of managerial capitalism‚ board members are instead ‘co-opted’ by the management itself. Save a few noteworthy exceptions‚ the choice falls on people whose most important characteristic appears to be their willingness to endorse without question whatever proposals the top managers who are also board members may submit. The board of directors thus eventually loses its role as collective organ of corporate governance and often becomes a false front used to give greater authority to decisions made by others.” (Harvey‚ Business Ethics‚ A European Approach‚ Corbetta‚ Shareholders‚ p.89-90) We have dealt at length throughout this book on the differences between the different types of shareholders‚ especially the majority or controlling shareholders who are called in Corbetta’s article the ‘governor’ shareholders and the minority or small shareholders who are called in Corbetta’s article the ‘investor’ shareholders. The characteristics of both categories are summarized as follows: “We define our shareholder as a ‘governor’ when: the percentage share of capital stock owned is high; development of the firm is substantially dependent on the economic resources made available by the shareholder and‚ likewise‚ the economic fortunes of the shareholder depend significantly on the firm’s profitability; the shareholder exercises his or her power to intervene in decision-making processes by appointing the firm’s management‚ steering corporate strategy and monitoring and appraising the management’s performance; any decision to sell the shareholding is limited by sentimental reasons‚ in the case of family businesses‚ or by complex strategic assessments which may occasionally even have implications for national equilibrium (as was recently the case with operations conducted in Germany and France). We define the shareholder as an ‘investor’ when: the (percentage) share of capital stock owned is small‚ often a fraction of a percentage point; the link between the development and profitability of the firm and the fortunes of the shareholder is not very close: the company gathers its resources from a very large number of shareholders‚ each of whom makes only a limited contribution to the firm’s needs; likewise‚ the income of each individual shareholder does not come from the dividends distributed by the firm; there is little likelihood that shareholders’ opinions about management appointments and corporate strategy will influence decisions. On a practical level a ‘shareholders’ democracy’ – i.e. effective control over management by numerous small shareholders – is not feasible; the decision to sell the shareholding is taken only on the basis of assessments of returns. ‘Abandoning’ is often preferable to ‘expressing dissent’ and‚ even more so‚ to ‘remaining bound’.” (Harvey‚ Business Ethics‚ A European Approach‚ Corbetta‚ Shareholders‚ p.92) The management of management-controlled companies are reluctant to hand over many of their autonomy to the shareholders. This increases the possibility of anti-company behavior on the part of the managers‚ who are concerned only with getting the maximum personal gain even when this puts the very survival of the company in jeopardy. Corbetta concludes that the governor-shareholder is not morally justified in using the company for his own ends‚ not even considering that his own compensation is secondary to that of other stakeholders. This article summarizes in a very efficient way all the analysis of the struggle for power and the different sets of interests between the majority and minority shareholders‚ and emphasizes the risks that the small shareholders incur from not controlling in fact the companies‚ thus enabling the majority shareholders to misuse their power and to wrong the other shareholders. It is time to describe in a few words the evolution of the control of companies in Israel. The state of Israel has come full circle in its first 50 years of establishment. In its early years (1948-1968)‚ the economy of Israel was based on companies owned by families and by the Histadrut‚ the workers’ syndicate‚ and was controlled by a very small number of people. The economy has evolved to companies owned by financial institutions and by the government (1968-1990)‚ but in the last decade of the century‚ due to privatizations‚ mergers‚ bankruptcy of many organizations‚ and the decline of the Histadrut‚ the largest part of the economy is effectively controlled by 10 to 20 wealthy Israeli and Diaspora-Jewish families. The Israeli economy is today an oligarchy‚ which could very well determine the economic fate of the country and possibly‚ in the future‚ its political fate in a small boardroom of 40 square meters. ... the present state of affairs regarding minority shareholders in France‚ Israel and the United States is to their detriment‚ in all the possible contexts. In family-owned companies‚ they cannot influence the decisions which are taken by the ‘Grandes Families’‚ the richest families‚ and which favor uniquely those families and rarely the other shareholders. The members of the family are elected to the key managerial positions in the companies‚ even if they are incompetent‚ the families do all that is necessary to keep their effective control over the companies‚ even if it is to the detriment of those companies. As the families have many ramifications to their investments‚ they can cause the collapse of the price of the shares in one company and enable another company to buy it for an extremely low price. The ‘governors’ are convinced that if they are strongly involved with the companies‚ they control it and they supply it with funds‚ they have the right to do whatever they want with ‘their’ companies‚ and the minority shareholders are treated like speculators‚ who are not interested in the well-being of the companies but rather in a quick return on their investment. Even if this is true in certain cases‚ this does not decrease the rights of the minority shareholders‚ who are in many cases interested in the fate of the company no less than its governors. The cases of the managerial companies are even more dangerous for minority shareholders as the directors jeopardize the company itself in order to increase their personal benefits. The democracy of the shareholders is completely utopic‚ the shareholders can shout‚ protest‚ be indignant‚ criticize or threaten on the Internet or in the shareholders’ meetings‚ yet their influence is in most cases nil in all categories of the companies. This is the reason why they have to obtain new rights‚ even if they do not request it yet. In many cases the minority shareholders collaborate unknowingly with the majority shareholders in order to despoil their own rights. They have the opportunity to participate in shareholders’ meetings‚ which are in many instances a ridiculous circus‚ manipulated very skillfully by the majority shareholders‚ who are assisted by the management of the companies. And even if they participate in the meetings‚ which is very rare‚ they have no chance to win against the oiled machine of the owners who control the companies. The cases described in this book illustrate those statements and show how it is possible to eliminate from the protocol touchy questions and answers to minority shareholders‚ how is it possible to treat as a ridiculous Cassandra troublemakers who disclose the schemes of the owners‚ thus even augmenting the adhesion of the other shareholders‚ and how ultimately the minority shareholders cooperate unknowingly or against their wishes in the schemes of the majority shareholders. The majority shareholders manipulate the greed of the other shareholders who want to win the jackpot at all cost in the stock exchange and make them lose in many cases all their investments. One would think that he is at the court of Mantova‚ where the masked Rigoletto assists the abductors of his daughter Gilda‚ without hearing or seeing that they abducted his daughter. They take Gilda to the duke who rapes her‚ and instead of avenging herself‚ Gilda lets herself be murdered by Sparafucile in order to save the duke. It is Rigoletto who is punished instead of the duke. Monterone who is imprisoned for having insulted the duke who abducted his daughter too‚ summarizes the dilemma of the weak toward the mighty: “Poiche fosti invano da me maledetto‚ ne un fulmino o un ferro colpiva il tuo petto‚ felice pur anco‚ o Duca‚ vivrai.” (Piave‚ Rigoletto‚ Act III‚ p. 14) “And since my curse has left you unharmed‚ and no lightning or iron has cracked you skull‚ you will even though live happily.” The collaboration of the victim with the aggressor is a well-known psychological fact‚ but the purpose of this book is to eradicate this mentality which is too widespread‚ by eliminating the excessive rights of princes‚ dukes or majority shareholders to the detriment of the minority shareholders. The modern democratic evolution should not stop at the door of the business world. The kings do not amuse themselves anymore‚ as in Le Roi S’amuse of Victor Hugo‚ adapted to the opera Rigoletto by Piave‚ the tyrants have disappeared in most countries‚ it is high time that the ‘droits du seigneur’ of ‘first night privileges’ will disappear from the Medieval courts of the companies as they have disappeared from the court of the duke of Mantova. Milken‚ the indisputable hero of the financial world of the ’80s‚ perceived himself as above the legal and moral constraints and thought that they were good only for the ‘footsoldiers’ – in our case the minority shareholders‚ the less influential‚ the less creative‚ less aggressive‚ less visionary. There are therefore double standards for the footsoldiers and for the Knights‚ just as in the Middle Ages. This is the core of this book‚ how to evolve from the dark and unhealthy epoch of the Middle Ages‚ where a large part of the business world is still wallowing‚ to the Renaissance period of the years 2000‚ and to have the same standards for minority shareholders‚ as were achieved for minorities all over the civilized world‚ by Human Rights‚ the welfare society and democracy. Time is of the essence‚ as the situation is getting worse instead of improving. The world economy becomes more and more concentrated in the hands of a small number of huge organizations‚ which control the economy‚ without being adequately controlled by the governments and the citizens‚ and least of all by the shareholders. In 1994‚ 1‚300 companies have participated in mergers amounting to $339 billions. And today the mergers are even larger. The modern empires of companies are much more influential than the monopolies of the Carnegies and the Mellons. The profits of Wall Street in the last years of the century were stunning. The volume of the financial transactions of the ‘90s is 40 times higher than the productive economy of the US‚ while the volume of transactions of CS First Boston is higher than the GNP of the US. The SEC has not the necessary funds to control effectively those giants and the only safeguard against them is ethics. Are all business ethicists preaching in the desert or is the majority of the population really conscious of the serious situation which predominates in the business world? What is very indicative in this respect is the level of trust of Europeans toward the institutions‚ like Church‚ the Army‚ Education‚ Law‚ Press‚ Trade Unions‚ Police‚ Parliament‚ Civil Service‚ Social Security‚ the EC and NATO. The most striking feature is that the level of mistrust or lack of confidence of the French people toward the Major Companies is only 30 percent‚ the lowest in all Europe. 70 percent of the French believe in Major Companies! The level of lack of confidence towards those companies is 37 percent in Italy‚ 47 percent in Ireland‚ 49 percent in Belgium‚ 50 percent in Spain and Great Britain‚ 51 percent in the Netherlands‚ 53 percent in Portugal‚ 62 percent in Germany‚ and on the average is – 47 percent. Surprisingly enough the British are much less credulous than the French toward the Major Companies and the most mistrusting are the Germans with a level of mistrust of 62 percent. This is completely opposite to the preconceived ideas about the Europeans‚ or it may indicate that the French Major Companies are much more trustworthy than the British or German ones… Majority shareholders‚ executives and members of the boards of directors benefit from insider information‚ which is not accessible to minority shareholders. If the insiders utilize this information to buy or refrain from buying shares of the companies‚ they commit a despoliation of the rights of the minority shareholders. They risk nothing in buying the shares‚ as they know in advance that their prices will increase as a result of good financial results‚ a merger or a scientific discovery. On the contrary‚ if they sell their shares before the publication of negative financial results‚ they do not incur losses from the collapse of the shares’ price. ... “The game‚ then‚ like the manipulated market that is the outcome‚ is unfair – unfair to some of the players and those they represent – unfair not only because some of the players are not privy to the most important rules‚ but also because these ‘special’ rules are illegal so that they are adopted only by a few of even the privileged players.” (Rae‚ Beyond Integrity‚ Werhane‚ The Ethics of Insider Trading‚ p. 518) Even worse‚ the insiders register their companies in Delaware‚ which enables them to benefit from a complete freedom of action in the governance of their companies. “Delaware‚ for example‚ has few constraints in its rules on corporate charters and hence provides much contractual freedom for shareholders. William L. Cary‚ former chairman of the Securities and Exchange Commission‚ has criticized Delaware and argued that the state is leading a ‘movement towards the least common denominator’ and ‘winning a race for the bottom’.” (Rae‚ Beyond Integrity‚ Jensen‚ Takeovers: Folklore and Science‚ p. 530) If this is the case‚ does the SEC advise the shareholders of the risks that they incur when they buy shares of companies registered in Delaware? Does it try to change the corporate laws of this state? In a case of this book we shall see how majority shareholders have rendered almost impossible an organization of minority shareholders against their wrongdoing by relying on the corporate laws of the State of Delaware and how the SEC has not done anything to remedy the situation. The present state of affairs is unfortunately like in the Fables of Aesop and La Fontaine‚ as human nature has not changed since those ancient times. The mighty always find reasons to abuse the rights of the weak - weird‚ legitimate or even moral. This is why there is a constant abuse of the rights of the weak by the powerful‚ and the weak have to suffer the consequences of their ‘crimes’‚ as they trouble the water of the wolves‚ they speak ill of them‚ and they have too many brothers. In order to punish their crime to want to drink in the same waters as the wolves‚ they almost always lose‚ as they are allowed to invest their money but they are prohibited from sharing the profits with the mighty. This is why they almost always lose in court‚ and they are even fined for the “arrogance” they showed in trying to sue the powerful‚ as in the case of the French company in this book. La Fontaine illustrates this state of affairs in the moral of his fable Le Loup et L’Agneau – The Wolf and the Lamb: ‘La raison du plus fort est toujours la meilleure’ – Might is Right. The fable of Aesop‚ which La Fontaine adapted‚ can summarize in the best way this chapter: “Wolf‚ meeting with a Lamb astray from the fold‚ resolved not to lay violent hands on him‚ but to find some plea to justify to the Lamb the Wolf’s right to eat him. He thus addressed him: ‘Sirrah‚ last year you grossly insulted me.’ ‘Indeed’‚ bleated the Lamb in a mournful tone of voice‚ ‘I was not then born.’ Then said the Wolf‚ ‘You feed in my pasture.’ ‘No‚ good sir‚’ replied the Lamb‚ ‘I have not yet tasted grass.’ Again said the Wolf‚ ‘You drink of my well.’ ‘No‚’ exclaimed the Lamb‚ ‘I never yet drank water‚ for as yet my mother’s milk is both food and drink to me.’ Upon which the wolf seized him and ate him up‚ saying‚ ‘Well! I won’t remain supperless‚ even though you refute every one of my imputations.’ The tyrant will always find a pretext for his tyranny.” (Aesop’s Fables‚ The Wolf and the Lamb) Cory
Posted on: Fri, 31 Oct 2014 04:34:53 +0000
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