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Chapter 44: Implications of Liquidating Value. Stockholder Management Relationships

Graham states that the stockholder has abdicated his responsibilities not intentionally but by default. This docility and seeming apathy are results of certain traditional but unsound viewpoints which he seems to absorb by inheritance or by contagion. These notions include

1.    Management knows more about the business than the stockholders do, and therefore its judgment on all matters of policy is to be accepted.

§  It is nearly always true that the management is in the best position to judge which policies are most expedient. But it does not follow that it will always either recognize or adopt the course most beneficial to the shareholders. It may err grievously through incompetence.

§  A second reason for not always accepting the decision of the management is that on certain points the interests of the officers and the stockholders may be in conflict – compensation of officers; expansion of business, thereby right to larger salaries and more power and prestige; payment of dividends; liquidation of business.

§  In all these questions the decisions of the management are interested decisions and hence require scrutiny by the stockholders. Managements are to be trusted but does not mean they should be given carte blanche in all matters affecting their own interests. A private employer hires only men he can trust, but he does not let these men fix their own salaries or decide how much capital he should place or leave in business.

§  Directors not always free from self-interest in connection with these matters. Directors have close ties to the CEO, get high compensation and often are chosen by the CEO.

§  Managements are loath to return any part of the capital to its owners, even though this capital may be far more useful and therefore valuable outside of the business than in it. Returning a portion of the capital means curtailing the resources of the enterprise, perhaps creating financial problems and reducing the prestige of officers. Complete liquidation means the loss of the job itself.

2.    Management has no interest in or responsibility for the prices at which the company securities sell.

§  Management may properly take some interest in market price of shares. Marketability of securities is one of the chief qualities considered in their purchase. But marketability presupposes not only a place where they can be sold but also an opportunity to sell them at a fair price. It follows that the responsibility of managements to act in the interest of their shareholders includes the obligation to prevent – in so far as they are able – the establishment of either absurdly high or unduly low prices for their securities.

3.    If a stockholder disapproves of any major policy of the management, his proper move is to sell his stock.

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