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By Root 2704 0

development—known as takeovers, or take-over bids.* We said in Chapter 8 that poor managements produce poor market prices. The low market prices, in turn, attract the attention of companies interested in diversifying their operations—and these are now legion. Innumerable such acquisitions have been accomplished by agreement with the existing managements, or else by accumulation of shares in the market and by offers made over the head of those in control. The price bid has usually been within the range of the value of the enterprise under reasonably competent management. Hence, in many cases, the inert public shareholder has been bailed out by the actions of “outsiders”—who at times may be enterprising individuals or groups acting on their own.

It can be stated as a rule with very few exceptions that poor managements are not changed by action of the “public stockholders,” but only by the assertion of control by an individual or compact group. This is happening often enough these days to put the management, including the board of directors, of a typical publicly controlled company on notice that if its operating results and the resulting market price are highly unsatisfactory, it may become the target of a successful take-over move. As a consequence, boards of directors have probably become more alive than previously to their fundamental duty to see that their company has a satisfactory top management. Many more changes of presidents have been seen in recent years than formerly.

Not all companies in the unsatisfactory class have benefited from such developments. Also, the change has often occurred after a long period of bad results without remedial action, and has depended on enough disappointed shareholders selling out at low prices to permit the energetic outsiders to acquire a controlling position in the shares. But the idea that public shareholders could really help themselves by supporting moves for improving management and management policies has proved too quixotic to warrant further space in this book. Those individual shareholders who have enough gumption to make their presence felt at annual meetings—generally a completely futile performance—will not need our counsel on what points to raise with the managements. For others the advice would probably be wasted. Nevertheless, let us close this section with the plea that shareholders consider with an open mind and with careful attention any proxy material sent them by fellow-shareholders who want to remedy an obviously unsatisfactory management situation in the company.

Shareholders and Dividend Policy

In the past the dividend policy was a fairly frequent subject of argument between public, or “minority,” shareholders and managements. In general these shareholders wanted more liberal dividends, while the managements preferred to keep the earnings in the business “to strengthen the company.” They asked the shareholders to sacrifice their present interests for the good of the enterprise and for their own future long-term benefit. But in recent years the attitude of investors toward dividends has been undergoing a gradual but significant change. The basic argument now for paying small rather than liberal dividends is not that the company “needs” the money, but rather that it can use it to the shareholders’ direct and immediate advantage by retaining the funds for profitable expansion. Years ago it was typically the weak company that was more or less forced to hold on to its profits, instead of paying out the usual 60% to 75% of them in dividends. The effect was almost always adverse to the market price of the shares. Nowadays it is quite likely to be a strong and growing enterprise that deliberately keeps down its dividend payments, with the approval of investors and speculators alike.*

There was always a strong theoretical case for reinvesting profits in the business where such retention could be counted on to produce a goodly increase in earnings. But there were several strong counter-arguments, such as: The profits “belong” to the shareholders, and they are entitled