Corporate Power in Civil Society

2. The Turbulence of the 1980s

The Turbulence of the 1980s Over a decade has passed since the last hostile takeovers and leveraged buyouts of the 1980s.1 More memory today than living experience , it is worthwhile to recall how disruptive this period was both for individuals and for institutional arrangements. It is also worthwhile to trace the sources of disruption. The hostile activity of the 1980s was antedated and fueled by structural changes in the American economy that continue to drive today’s corporate restructurings in some part. Equally important, these structural changes reveal why corporate managers today appreciate that the new uncertainties they began experiencing in 1983 are hardly likely to disappear in the foreseeable future, even as the immediate threat of hostile activity waxes and wanes.2 I. Structural Change Since the Mid-1960s Alfred Chandler Jr. points out six developments which began in the mid1960s that set historical precedent for corporate America, and four merit our attention because they complicated considerably the issues of corporate agency and corporate purpose for American courts.3 First, American corporations after 1963 changed their rationale for initiating mergers and acquisitions —friendly takeovers—as a means of growth. Rather than merging with other corporations or acquiring new divisions in order to consolidate existing product lines, they began undertaking these transactions in order to move into new product lines, to diversify. From 1963 to 1972, fully 50 percent of all mergers and acquisitions were in unrelated product lines. Thus, corporate officers moved their companies into markets where their existing “organizational capabilities,” including management’s own experience in operations and strategic planning, did not provide them with any obvious advantages over their competitors.4 Second, as product lines multiplied, top managers at headquarters began 2 31 analyzing operations at their increasingly diversified divisions using quantitative data contained in internal quarterly reports. They no longer attempted to analyze the performance of middle managers running these divisions more qualitatively,on the basis of on-site visits,and as a result,headquarters became increasingly detached from operations. Top managers lost touch with developments at existing divisions and never bothered to gain familiarity with operations at newly acquired divisions. Yet the divisions under their formal control kept growing in number and size. Prior to World War II, only major international corporations had as many as 25 divisions and rarely did the largest national corporations have more than 10. By 1969, however, many corporations routinely operated with anywhere from 40 to 70 divisions. Many divisions, in turn, “were often larger in terms of assets and employees” than the original corporation had been in the 1950s.5 Third, as headquarters lost familiarity with operations, top managers began treating divisions as if they were independent suppliers of intermediate products under contract. Just as they dismiss some suppliers while signing new contracts with others, so, too, the rate of divestitures began rising relative to that of acquisitions. Starting at one divestiture for every eleven acquisitions in 1965, the rate reached one in two by the mid-1970s. By the mid-1980s, “chief executives of big corporations ‘restructured’ and ‘redeployed’ assets by buying and selling midsize divisions as if they were baseball cards.”6 The rising rate of divestitures was driven by a shift in corporate ownership—or, better, in corporations’ investment structure. In the 1950s, large American corporations had financed growth largely by retaining earnings (rather than passing profits along to shareholders as dividends).7 In the 1960s, they financed mergers and acquisitions by relying more heavily on private placements of debt (often borrowing directly from commercial banks and life insurance companies).8 By the 1970s, however, they increasingly secured capital by selling shares of stock more widely to the public. Institutional investors (public and private pension funds, insurance companies, and mutual funds) increasingly displaced wealthy individuals and families as the major purchasers.9 In 1965, for instance, individuals held 84 percent of all corporate stock, institutions 16 percent; by 1990, it was 54 percent to 46 percent.10 By 1985, block trading accounted for 51 percent of all trading on the New York Stock Exchange. Twenty years earlier, it had accounted for only 3.1 percent.11 Thus, where entrepreneurs, families, and institutions had earlier been content to receive long-term returns on investments in particular companies,12 now portfolio managers sought shortterm returns in capital markets. 32 | The Turbulence of the 1980s Fourth, beyond the buying and selling of divisions, a new market...