[1940] Ch. 44 IMPLICATIONS OF LIQUIDATING VALUE. STOCKHOLDER-MANAGEMENT RELATI..
5 months ago

Summary:

Stockholder-management relationships have often been problematic, with management having significant power and sometimes acting in their own interests rather than those of stockholders.

Stockholders have often been passive and docile, deferring to management even when management's interests may conflict with their own. This is based on assumptions like management knowing best and stockholders having no say in things like compensation.

But management does not always act wisely or in stockholders' best interests. Their interests can conflict with stockholders' on things like compensation, expansion, dividends, continuing unprofitable businesses, etc.

Directors are supposed to represent stockholders but often have close ties to management instead. So stockholders should scrutinize matters where management's interests may differ from their own.

Management has wrongly claimed no responsibility for stock prices, but should act to prevent mispricing. Steps can include communicating liquidation value, paying dividends, returning excess capital, or winding up the business.

Open market share repurchases often abuse stockholders by depressing share prices. Pro rata repurchases or dividends are fairer.
Stockholders need to be educated on their rights and when their interests may differ from management's. Corporations belong to stockholders, not management.

In summary, the chapter highlights problems that can occur when management's interests diverge from stockholders', and advocates more active, empowered stockholder oversight of management decisions and compensation.