For those hoping for a return of a vibrant market for corporate control (last seen in the 1980s) and the discipline it brings to corporate governance, hope may be on the way. First, some background:
The fact pattern for my exam in Corporations last year was Oliver Stone’s fabulous movie “Wall Street.” This isn’t as cute as it seems. The movie, despite being sloppy with the law and largely mixing up the villains and the heroes, is a perfect snapshot of the market for corporate control that prevailed in the 1980s. From 1982 until the collapse of the high-yield (“junk”) bond market in 1989, approximately 60% of large U.S. firms were either takeover targets or restructured on their own. While all LBOs, MBOs, and corporate takeovers did not succeed, the threat of a hostile raider was so real and so scary for management, that it provided unprecedented discipline on managerial behavior. Executives no longer sought to build empires, like the synergy-free conglomerates slapped together in the 1970s, and executive compensation, instead of being based on firm size, became linked to shareholder value through the use of options and other equity compensation. A related outgrowth of this takeover activity was the creation of shareholder activist organizations and movements, such as Council of Institutional Investors and Institutional Shareholder Services. Very often, the public motives of these “good guy” activist groups and the “bad guy” raiders were aligned. Just take one example from the movie that mimics reality: Gordon Gekko’s speech to the board and management of Teldar Paper at its annual stockholders’ meeting. Gekko—the supposed villain—rips the executives for wasting the shareholders’ money on country club memberships, hundreds of do-nothing vice presidents, excessive compensation, and “golden parachutes.” One can imagine CII or ISS making these same arguments then and now.