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1, 1932 13

Should Rich but Losing

~ o r p o r t i o n s Be Liquidated

HE unprecedented spectacle

confronts us of more thati oneindustrial company in three sell

current asat

this situation we have pointedour previous articles, t h r ~

(a) Ignorance of the(b) Compulsion to sell and in

buy; (c) Unwillingness tofrom fear that the present liquid

e dissipated.In the preceding articles we dis

two causes and theirlications. But neither

nor the financialof the public could fully ac

current market levels.f gold dollars withol t any strings

could actually be purchasedSO cents, plenty of publicity and

of buying power would

of the bargain. Corporate goldare now available in quantity

t SO cents and less-but they dostrings attached. Although they

to the stockholder, he doesn'tHe may have to sit

and

For that reason the public

at their face

N fact, the hardheaded reader lllaywell ask impatiently: Why all

t l.lk about liquidating values,companies are not going to li-

As far as the stockholdersconcerned, their interest in the

is just asas their interest in theI f

the business were

i f the enterprise were

f we had some

This criticism has force, but therean answer to it. The stockholders

bottom it is not a theoretical quesat all; the issue is both very

and very pressing. .It is also a highly controversial

It includes1.n undoubted con-

By BENJ MIN GRAHAM

fEct of judgm.ent between corporatemanagements and the stock market,and a probable conflict of interestbetween corporate managements andtheir stockholders.

IN its simplest terms the questioncomes down to this: Are these

managements wrong or is the marketwrong? Are these low prices merely

Which Is Right-the Stock

Market or CorporationManagement?

ANOTHER aspect of the curn ent maladjustment betweencorporations and their stockholders is the question of possibleliquidation. Many stocks seII forless than their cash value because the market judges thatfuture operating losses will dissipate this cash.

f that is the case, then shouldnot the stockholder demandliquidation before his cash isused up? The management saysNo, -naturaIIy. But the stock

market says Yes, -emphaticaIIy.

Which is right? What are thesalient factors on both sides ofthe question?

Forbes presents herewith thethird, and last, article in thisseries by Mr. Graham, whichreaches down to the very roots ofthe present troublous situation.

the product of unreasoning fear. or

do they convey a stern warning toliquidate while there is yet time?

To-day stockholders are leavingthe answer to this problem, as to allother corporate problems, in the

hands of their management. Butwhen the latter's judgment is violently challenged by the verdict of

the open market, it seems childish tolet the management decide whetheritself or the market is right. Thisis especially true when the issue involves a strong conflict of interestbetween the officials who draw salaries from the business and theowners whose capital is at stake. If

you owned a grocery store that wasdoing badly, you wouldn't leave it tothe paid manager to decide whetherto keep it going or to shut up shop.

The innate helplessness of the pub-

lic in the face of this critical prob;..

lem is aggravated by its acceptanceof two pernicious doctrines in thefield of corporate administration. The

first is that directors have no resporisibility for, or interest in, the mar

ket price of their securities. The second is that outside stockholders knownothing about the business, andhence their views deserve no consideration unless sponsored by the management.

By virtue of dictum number one,directors succeed in evading all issues based upon the market price of

their stock. Principle number two is

invoked to excellent advantage in

order to squelch any stockholder (not

in control) who has the temerity tosuggest that those in charge may notbe proceeding wisely or in the bestinterests of their employers. The twotogether afford managements perfectprotection against the necessity of

justifying to their stockholders thecontinuance of the business whenthe weight of sound opinion pointsto better results for the ownersthrough liquidation.

THE accepted notion that directors have no concern with the

market price .of their stock is as fallacious as i t is hypocritical. Needlessto say, managements are not responsible for market fluctuations, but

they should take cognizance of ex

cessively high or unduly low pricelevels for the shares. They have aduty to protect their stockholdersagainst avoidable depreciation in

market value-as far as is reasonably in their power-equal to the dutyto protect them against avoidablelosses of earnings or· assets.

I f this duty were admitted and insisted upon, the present absurd relationship between quoted prices andliquidating values would never havecome into existence. Directors andstockholders both would recognizethat the true value of their stockshould under no circumstances be lessthan the realizable value of the business, which amount in turn wouldordinarily be not less than the netquick assets.

They would recognize further thatif the business is not worth its real-i:::able ·Z alue as a going concern ·it

should be u'ound up. Finally, direc-

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tors would acknowledge their responsibility to conserve the realizablevalue of the business against shrink

age and to prevent, as far as isreasonably possible, the establishmentof a price level continuously and substantially below the realizable value.

HENCE, instead of viewing with. philosophic indifference the col

lapse of their stock to abysmally lowlevels, directors would take these declines as a challenge to constructive

action. In the first place, they wouldmake every effort to maintain adividend at least commensurate withthe minimum real value of the stock.For this purpose they would draw

freely on accumulated surplus, provided the company's financial position remained unimpaired. Secondly,they would not hesitate to direct the

stockholders' attention to the existenceof minimum liquidating values in ex

cess of the market price, and to asserttheir confidence in the reality of thesevalues. In the third place, whereverpossible, they would aid the stockholders by returning to them surpluscash capital through retirement of

shares pro rata at a fair price, as advocated in our previous article.

Finally, they would study carefullythe company's situation and outlook,to make sure that the realizable valueof the shares is not likely to suffera substantial shrinkage. I f they findthere is danger of serious future loss,they would give earnest and fair-·

minded consideration to the questionwhether the stockholders' interestsmight not best be served by sale or

liquidation.

HOWEVER forcibly the stockmarket may be asserting the de

sirability of liquidation, there are no

signs that managements are givingserious consideration to the issue. . In

fact, the infrequency of voluntarydissolution by companies with diversified ownership may well be a subjectof wonder, or of cynicism. In the caseof privately owned enterprises, withdrawing from business is an everyday occurrence. But with companieswhose stock is widely held, it is the

rarest of corporate developments.Liquidation after insolvency is, ofcourse, more frequent, but the ideaof shutting up shop before the sheriff steps in seems repugnant to thecanons of 'NaIl Street. One thingcan be said for our corporate managements-they are not quitters. LikeJosh Billings, who in patriotic zealstood ready to sacrifice all his wi fe'srelations on the altar of his country,officials are willing to sacrifice theirstockholders' last dollar to keep thebusiness going.

But is it not true that the paid

officials are subject to the decisionsof the board of directors, who represent the stockholders, and whoseduty it is to champion the owners'interests-if necessary, against theinterests of the operating management? In theory this cannot be gainsaid, but it doesn't work out in prac

tice.

T HE reasons will appear from astudy of any typical directorate_

Here we find: (a) The paid officials

themselves, who are interested intheir jobs first and the stockholderssecond; (b) Investment bankers,whose first interest is in underwritingprofits; (c) Commercial bankers,whose . first interest is in making andprotecting loans; (d) Individualswho do business of various kindswith the company; and finaIly--- -andalmost always in a scant minority

(e) Directors who are interested onlyin the welfare of the stockholders.

Even the latter are usually boundby ties of friendship to the officers(that

is how they came to be nominated), so that the whole atmosphereof a board meeting is not conduciveto any assertion of stockholders'rights against the desires of the operating management. Directors arenot .dishonest, but they are human.The writer, being himself a memberof several boards, knows somethingof this subject from personal expe-nence.

The conclusion stands out thatliquidation is peculiarly an issue forthe stockholders. Not only must itbe decided by their independent judg

ment and preference, but in mostcases the initiative and pressure toeffect liquidation must emariate fromstockholders not on the board of directors. In this connection we believe that the recognition of the following principle would be exceedinglyhelpful:

The tact that a cornpany s sharessell persistently below their liquidat-ing value should fairly raise the ques-tion whether liquidation is advisable.

P

LEASE note we do not suggestthat the low price proves the de

sirability of liquidation. It merelyjustifies any stockholder in raisingthe issue, and entitles his views to respectful attention.

i t means that stockholders shouldconsider the issue with an open mind,and decide it on the basis of thefacts presented and in accordancewith their best individual judgment.No doubt in many of these casesperhaps the majority-a fair mindedstudy would show liquidation to beunjustified. The going concern valueunder normal conditions would be

found so large, as compax:ed sum realizable in liquidato warrant seeing the dethrough, despite current olosses.

However, it is conceivableder present difficult cott-ditowners of a great many-'bmight conclude that they wobetter by winding them u

than continuing them: 'Whbe the significance of such ment to the economic situa

whole? Would it mean furthtion, further unemployment,reduction of purchasingVVould stockholders be harmcountry while helping theSuperficially it might seempowerful arguments can be a

to the opposite effect.The operation of unsound

ated enterprises may be calledment, instead of an advantagnation. We suffer not on

over-capacity, but still more

disruptive competition of cowhich have no chance to survcontinue to exist none the lesloss of their stockholders and

settlement of their industry.Without making any pro

themselves, they destroy thpossibilities of other entTheir removal might permit

adjustment of supply to dema larger output with colower costs to the stronger

nies which remain. An endnow being made to accompresult in the cotton goods i

FROM the standpoint of

ment, the demand for th

uct is not reduced by closinunprofitable units. Hence,tion S transferred elSewhereployment in the aggregate be diminished. That great inhardship would be involvedbe denied, nor should it be mibut in any case the conditionployment in a fundameritally enterprise must be precariouextreme. Admitting that tployees must be given symconsideration, it is only just

out that our economic princnot include the destruction oholders' capital for the soleof providing employment.

We have not yet found anprevent depression from tus in the midst of our sudance. But unquestionably ways to relieve the plightstockholders who to-daymuch and can realize so fresh viewpoint ori thesemight work wonders for tdemoralized army of Americaholders