The Business of America

THE OPEN MIND
Host: Richard D. Heffner
Guest: Lester Korn
Title: “The Business of America”
VTR: 3/9/85

I’m Richard Heffner, your host on THE OPEN MIND. A few years ago, I noted a particularly provocative op ed piece in The Wall Street Journal, one having to do with boards of directors and corporate governance, a theme of obvious concern as corporations loom ever larger and mightier in our lives, and as the investments we make in them seem to increase and multiply, tying us ever closer to the business of America. So we spoke here on The Open Mind with the op ed author. But now a lead editorial in The New York Times, titled “Greenmail, Who’s the Villain?” raises even touchier questions about corporate governance, about how well American chief executives and boards of directors are doing their jobs, protecting their employees, safeguarding our investments, so that once again I’ve invited the man so many consider preeminently knowledgeable about decision-making in the executive suite and in the boardroom, Lester Korn, chairman and chief executive of Korn-Ferry, International, the world’s key executive search firm.

Lester, thank you for joining me here again on The Open Mind.

Korn: Thank you, Richard. It’s a pleasure to be back.

Heffner: You know, we’ve talked about boards of directors, and we’ve talked about, well, we compared American executive style with Japanese executive style, and you made your predictions about the – optimistic predictions – about the course of American business. How do you feel about this matter of mergers and greenmail and the fuss that’s being made over capturing a variety of American corporations?

Korn: Well, at the risk of offending some of my friends who would take a counter view, Dick, I think in a year or two we will look at this phase of greenmail in a slightly different manner, and perhaps slightly more positively, than we are today. To begin with, greenmail, in and of itself, has become a pejorative term, and I think, before government action happens, some of the pejorativeness should be taken out. Greenmail presumes that someone is coming into a company to take it over or attempt to take it over with the thought that they will run up the stock and force that management either out or into the hands of another, thereby making a killing in the stock. That’s where most of it has been today, and there’s some federal action pending as to whether or not to do something about that. However, forgotten in all of this, or not yet really discussed, is the fact that the people who are doing that – if you wish to, we can call them “greenmailers,” for the moment – have, in fact, isolated out companies whose value is undervalued in relation to their assets, and are, in fact, for all of the shareholders, perhaps, bringing attention to the fact that the values are low, and should be higher. Because greenmail would not succeed if, in fact, they were dealing with a company whose value was accurate; in other words, they can only make money by pushing the stock up. Consequently, they have to find undervalued situations. Consequently, shareholders have to say, “Why are my shares undervalued, and what has management been doing about it?” So, I’m not sure that, if we were discussing greenmail – and I think that phrase will disappear on us – a year or two from now, it would have quite the negative connotation it has right now.

Heffner: You mean maybe it will be considered an improvement of management, spotting companies whose management, and perhaps boards, need to be shaken up a bit?

Korn: Well, I think possibly that. I think more likely two things will have occurred. The short term profits will not be able to accrue. If I am a person that wants to buy your company, and I start to gather up the stock in your company, and you go off and buy me out, I think there will be some mechanism whereby I have to give back my short-term profits. I don’t think I’m going to be able to make that quick killing that is being made right now by some of the people that are involved in it. And I think that may take some form of government action. I think the longer term issue is that, where you have spotted a company and have made an investment in it, you’ve made that investment because you think there are greater values, those values should accrue to all the shareholders, and If I, as the takeover company, beat you back, I should beat you back, in my opinion, on means other than paying you a premium, but not my other stockholders.

Heffner: When you say, “beat back with other means,” some of the companies are finding any means at their disposal, even aside from greenmail, legal actions that are designed to stop this. But isn’t it all part of the American free enterprise, corporate gain? And shouldn’t it be permitted as such?

Korn: Absolutely. And I would be the last one in the world to argue that it shouldn’t be permitted just as it is. I think, however, that the, some of the tactics that have been used are going to change because there is a outcry, and some of them, the courts are actually intervening in. for instance, there was a case not too long ago, the Household International case, the Transunion case, where, for instance –and that one is still being litigated, or reheard, to put it more properly – where the, how the directors responded to the transactions are being questioned. In one instance, for instance, the question of whether an investment banking firm had been brought in to advise the directors is at issue, because apparently it wasn’t done. Well, if that case, and, without dealing with that specific case, but if, the one thing that that case will tell me as a director on the boards I sit on is that if we are tendered on any of our companies, we ought to have investment banking advice. So it isn’t’ all just legislative interference, the courts, the shareholders themselves. Backing away for a second, I think that the real question is, “Why is this an issue now?” The real point I would like to make and discuss with you today is: Shareholders buy the stock. They have only one way to exercise control, and that is through the election of directors. The only other thing that they can do, if they don’t like what’s going on, is sell the stock. The free capitalist system puts a management in place; they run the company. If they run it well, theoretically the shares go up. If they run it poorly, theoretically the shares go down. And, over a period of time, that’s just about the way it works. Now, in the last year or two, we’ve had a group of people, very, very smart people, say, “Okay, here’s a company that is very much undervalued. It’s not necessarily badly managed; it’s undervalued. The market does not value it properly.” It may be in prosaic industry; it may be a company that is a low-profile company; but it’s undervalued. Its assets are worth more than the Street, than the Wall Street quotations indicate that it is. People will come in, try and take those companies over. But there really isn’t anything wrong with that.

Heffner: But are you saying that there is no necessary connection between an undervalued company, a grossly undervalued company, and poor management?

Korn: Oh, no. I think there probably is, if you use the two extremes: grossly undervalued company, and poor management.

Heffner: Well, let me…

Korn: A company can be grossly undervalued largely because it isn’t producing profits. On the other hand, the values are usually in terms of assets and the return on assets. You can have a very asset-rich company…People aren’t buying steel companies today. They’re asset rich. They’re not generating much in the way of products at the moment, but they’re not buying steel companies. There are a number of companies that are smokestack America companies that are basically undervalued because they’re out of favor on Wall Street. It does not necessarily mean that they’re badly managed, it means that the Street and people are not attracted to buying it.

Heffner: You know, I do need to press, though, the question of management. You’ve raised it. The Times editorial raised it. A lot of people have. To what degree do you feel that there is, in this country, in major corporations, not quite the kind of level of management that you would applaud; and perhaps not quite the kind of action on the part of boards of directors that you would encourage?

Korn: It’s hard to quantify that, but I would not be true to myself or to you as a friend if I didn’t say that there isn’t a fair amount of ineptitude at both the management levels and at the board levels. The system is such that once you attain the top three to five jobs, management must have its own standards, and boards must have its own standards, to maintain continuing standards of excellence. Otherwise, the desire for the status quo and the entrenchment sets in. now, boards of directors are charged with exercising due diligence. Part of the due diligence is evaluating management. I anticipate over the next four or five years, that boards are going to become much more vigorous, and probably much more public, in how they evaluate management and how they evaluate the senior manager. One of those measures will be how is the stock doing against the economic background and against stocks in its own peer group. But I think that, in a free capitalist society, while I do think there are managers who are not doing as well as others could, we are in a free capitalist society, and theoretically, those who are inept will fall out. Now, it may take a little longer because they can put in systems to protect themselves; but I do not believe that a truly inept manager of a Fortune 500 company can survive more than a relatively short period of time.

Heffner: But Lester, in a sense, we wouldn’t be having this discussion if that were true enough. If that were true enough, we wouldn’t find this problem surfacing; and it has. There are so many people talking about it.

Korn: Oh, the problem…I agree. The point I agree, totally. I think the only difference we have, Dick, is that, I think, a great deal of what’s occurring is because of the value of the asset. Sometimes two things in one box are worth less than if you sell them separately. And so people who are looking at these assets, particularly the oil plays that have been made over the last six months or so, are saying, “Here are assets that, if they were liquidated, if they were separated and sold, would be worth more to the shareholder than if they are kept together and run as an ongoing venture for profit.” And that is absolutely true. After all, these asset plays, these investments in stock, I’m convinced, are not made, by and large, for the person to be taken out at a premium six months later. I honestly believe that what they are trying to do is either shove the company into another holding, or segregate them and liquidate them, capturing a higher value.

Heffner: So you really don’t feel they’re looking for this greenmail, in large part?

Korn: Oh, I don’t think they’re looking for the greenmail. And I think if they are looking for it, we’re going to be in for real trouble. They have gotten it.

Heffner: Right.

Korn: They have gotten it because – now, let’s turn the other side of the coin – I’m on the board of a company that has one of these friendly – I’m looking for the right word; I don’t want to use the word “predator”, because I do know many of these people.

Heffner: “Friendly predator”, huh?

Korn: Friendly takeover. Friendly investor, friendly investor – marching down the hall. And I’m sitting there, and I’m looking at it. I have a number of defenses. My counsel has doubtlessly told me, as I’ve been told on several other boards, the first thing you say is that the offer is not high enough. So you, and then you immediately call the attorneys and the public relations council and start giving press releases, and so forth. The question of how you get rid of that person and preserve, or that investment group, and preserve the entity, then becomes paramount. Now, the preservation of the entity may not be what should be done, because the entity, maybe, shouldn’t be preserved; but that’s what management’s going to do, and that’s what the board’s going to do.

Heffner: You say, “That may not be what should be done.” In what terms? In immediate economic terms?

Korn: In terms of ultimate value to the shareholders. In other words, if the board of directors is there to represent the shareholders, the people who own 50, 100, 1000 shares, then they have to maximize the value.

Heffner: But, Lester, doesn’t that become a question of over how long a period of time? Are we talking about…

Korn: Of course.

Heffner: …a crapshoot? Are we talking about gambling? Are we talking about getting rid of something right now? Maximize what I take home today; not worry about what I’m going to do tomorrow night?

Korn: Well, we are talking about how you get your friendly investor off your back to preserve the entity that he came marching in on. And the quicker you get him off your back, the more likely the entity will remain as is; the preservation of the status quo. And I’m not saying that’s good; I’m saying that’s the way it is. On the other hand, I’m also saying that a lot of the people who are involved and who have been called “greenmailers” have not the intention of, in fact, having their interest bought out and going away, but, in fact, have in mind either the takeover of the company because they think they, themselves, can enhance the value of the stock, or their investment group can, or they want to see that stock sold to a third party for a far higher value than the Street has been valuing it.

Heffner: You know, I remember…

Korn: If I were one of them, I could make quite a case – and I am not, obviously, one of them – but if I were a…excuse me for a second. I just thought of a good point.

Heffner: Uh hum.

Korn: If I were one of these people who were investing in these undervalued companies, or whatever, however they perceive them, I could make quite a case that my investment is inherently to the benefit of the shareholders. And, in fact, in the two or three instance where they’ve taken over, they have proven that they can run companies rather well.

Heffner: Well, that doesn’t take me off the track of what I was going to ask next at all, because it’s just that question: companies that will then be run well. Because I know a great many people feel that all of this churning is undermining America’s economic strength, and you feel that, perhaps not; perhaps it is strengthening us.

Korn: I think that, to the extent that this churning forces managers and directors to evaluate whether they are maximizing profits, whether they are planning the corporate good for the benefit of the shareholders, it is good. I think that the amalgamations – and some of these have taken place, you may recall, a few years ago. The last time we talked, I think, as a matter of fact, the Pac Man game that was going on…

Heffner: Right.

Korn: …between three or four companies that set the stage for what we’re seeing now, really. And out of that emerged a much stronger, much healthier, large, operating entity. The traditional way of this occurring, Dick, is that, once you make a tender on another company, if you get it, chances are you’re going to have to sell off portions of that company to help pay for having taken it over. The divisions that get sold off frequently get sold off to managers who were there, and they create another entity that begins a new life of its own. And I’ve seen a couple of studies that are very interesting that show that, in fact, these takeovers, while they do put together larger economics units, in essence, also spawn a number of other units that are smaller and have a new life of their own and have an entrepreneurial bent to them that the larger entity never had. So, it’s a very interesting subject. I don’t think that we want to do anything in this country to stop the merger and acquisition process. What we want to be sure, though, is that directors are responsive to evaluating those; can say yes or no based on the facts, and by exercising due diligence; and are not frightened into either saying yes or saying no.

Heffner: What about the concern for employees? What about concern for some of the more traditional values? I mean, I know that when we have spoken politically, I know that you are deeply, profoundly concerned with maintaining and sustaining America’s traditional values. What happens to them if what I’ve called this churning, churning, churning – maybe it can be demonstrated, maybe directors can assure themselves that immediately, and maybe even the long run, the company will do well, it’s…there will be resources that will be invested elsewhere – what happens to the working people of this company…of this country? I mean of this company and this country.

Korn: You touch on a very, very broad subject, and I want to approach it in two ways: one, in the short run, the workers and the working force typically are frightened. They’re worried about their jobs and so forth. And typically, in the short run, there is nothing to fear. In the long run, there usually is because there’s going to be a redirection. There can be plant closings. There can be a number of things that will change the makeup of the work force. There will be…it can have a very manifest effect. Now, in the last six months to a year, that has been a trend that I’ve been thinking a lot about that is beginning to emerge in this country that – and I haven’t made up my mind yet, my own mind, whether it’s for good or for bad – but, the ability to terminate people on the basis of two weeks of employment…two weeks’ notice, and terminate them on that basis, seems to be under some very considerable stress at the moment, and largely because of some of the actions that have taken place as a result of mergers and acquisitions. As you know from your travels in Europe, you get something like one-tenth of a month’s service for e very year; so that, if you’ve been employed for 10 or 15 years, you must be given a six months’ or eight months’ or nine months’ severance, depending upon which part of Europe you are, so that you have time to rebuild your life. We’ve never had that here. You can be pink-slipped with two weeks’ notice. The last six months or so, there have been a number of lawyers, and a number of issues in the courts, that appear to say that, if in fact you have held a job for five to ten years, you have built up a residual right as it reflects termination. So that the cost of termination may become much higher in the next year or two, and I suspect it will, and partially as a result of what we have been talking about this afternoon. However, the key point is that you cannot keep jobs that are no longer desirable. The unions have found that there is no way to have make-work. And the redevelopment, the retraining, of modern America is so serious, it’s such a cause of concern, that we have yet to address.

Heffner: Yes, but we’re not talking about make-work. We’re talking about losing work because of this financial churning.

Korn: Well, I think we’re saying the same thing, to be honest with you. We are, in fact, losing jobs because one of the ways that companies find to be more efficient is to relocated from the north to the south, for instance. And what do they do? They shut down the plant or they try to sell it, but they generally shut it down, and they move to the south and, obviously, that’s a new plant, and it takes fewer workers, and it’s automated. What happens to the worker in Cleveland or in Gary, Indiana or in Detroit? And that’s where the entire social strata and the entire underpinnings need to be examined, because the unions can’t handle it, it’s too big for the unions. The government shouldn’t’ interfere. That’s where we need to find a way to encourage new industry in those areas, and new jobs in those areas. There’s nothing wrong with start-up assembly industries in the northeast. There are a number of companies, it’s a very interesting group called “The American Business Conference,” that’s made up of the hundred growth companies of America. It’s headed by Arthur Levitt, who’s a friend, I think, of both of ours. And I’m one of the co-founders of it. The hundred largest companies…fastest growing companies in America are demographically spread across the nation. The northeast has its fair share, as does the southeast, the southwest. There’s nothing magical about the Sun Belt other than some favorable laws that are now not as important as they were a few years ago. It’s the attraction of new capital that will attract new jobs. One of the things that we have to do with all this churning is, in my opinion, address the question of how you put these people back to work, because there is endemic unemployment that takes place.

Heffner: Then, let me ask you whether you are in support of the cuts that are being made in the very programs that might have, might provide the opportunity for that retraining? If you see this as a growing problem?

Korn: I’m in favor of whatever we need to do to get the budget expenditures of the American government down.

Heffner: That’s on the one hand.

Korn: That’s right. And I am very much in favor of private industry having the incentives to create jobs in the northeast. After all, why did the companies locate in the Sun Belt, the so-called Sun Belt? They went to Tennessee and so forth. They went there because there were economic incentives for them going. Those same economic incentives – and I’m not talking about union-busting laws, you know, I’m not talking about that at all – I’m talking about the tax-free zones, I’m talking about providing the kind of government support services and support attitudes that want business to come in. you know, four to six years ago, the State of California was losing business because of political attitudes. Now, it’s gaining business because of changing political attitudes. You can create jobs, but you only can create jobs when you attract corporations’ investment.

Heffner: But you’re saying that you feel this is a function, then, the training is a function of corporations and business, not a government function?

Korn: Oh, I think so. I think so. The, to be perfectly honest with you, I think unions ought to be working a little bit more at it, too. I think that, when you really look at it, the preservation of jobs is, in certain industries, is probably a hopeless task. And the retraining of the members of that union, of that particular union that has a d=job decline that’s clearly programmable, is critical. And there’s a lot to be done in it, but we, this is one of the more difficult areas in the United States, and we have yet to face into it.

Heffner: Lester, I don’t know whether that is bad news or good news, because you’re saying we haven’t done it and we’re going…we have to, and you think we’re going to. But I’ll take it at that and end the program on that optimistic note, and thank you so much for joining me today on The Open Mind.

Korn: It was my pleasure.

Heffner: And thanks, too, to you in the audience. I hope you’ll join us again next time on The Open Mind. Meanwhile, as another old friend used to say, “Good night and good luck.”