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	REMARKS TO THE CEO CLUB WASHINGTON, DC JUNE 28, 1988

25 MINUTES (FINAL 11 A.M. 6/25/88)

Thank you, Joe (Mancuso).

I appreciate this opportunity to discuss the effects of corporate restructuring. The subject cries for public debate, which is why I formed the United Shareholders Association in August 1986. USA has succeeded in bringing shareholder rights to the forefront of national debate.

You know where I stand on the issues of restructuring, takeovers and shareholders rights. I’d like to talk today about what I see as a serious erosion of our free market system, a departure from the basic principles of capitalism.

Two schools of thought have emerged surrounding public corporations. . .I’m from the free market side.

I founded Mesa in 1956 with $2,500. Today it’s America’s largest independent producer of domestic oil and gas. When Mesa went public in 1964, it was clear the company had one mission. . .to create value for the new owners, the shareholders. Mesa grew from that $2,500 start into a $2 billion company. We went from 421 stockholders to 150,000. But the mission remains the same. . .maximize returns for shareholders.

In other words, size is secondary; results are the primary objective.

Mesa’s mission hasn’t changed, but the means of accomplishing it has changed constantly. Mesa has continuously restructured its operations. . .major restructurings in ’70, ’73, ’79, ’82 and ’85. . .we’re still doing it. Change is the only constant. It is sometimes painful and there are always winners and losers, but it’s necessary for survival. Nobody had to pressure Mesa to restructure. We changed ahead of the times.

It was tough. We downsized, cut employees. . .but the result is a strong company in a weak industry. Without the changes, we would now be a part of a major oil company. Mesa would have been acquired because we couldn’t have survived.

The Free Market school has proven time and again that the system fails if you put anyone’s interests before the owners’. The Capitalist system set up incentives that serve the whole. . .that’s the engine that built the greatest economy in the history of the world.

Making money for stockholders is consistent with responsibilities to employees, communities, customers and suppliers. As an example, Mesa distributes $310 million to its owners annually, and at the same time we pump $87 million directly into our local economy.

The more profitable we are for our owners, the more our employees and local communities benefit from our success.

Corporate altruism makes the public feel good, but it doesn’t buy cars and houses, and it doesn’t pay taxes.

To succeed, employees must be challenged and rewarded, customers must get the best product for the best price. But you do that only by first serving the owners’ interests. . .then communities, customers, employees and suppliers all thrive.

By contrast, the other school says business is more complex than that. They believe public companies exist to serve society instead of to focus on profits for their owners. How much money do you think I would have raised to start Mesa in 1956 if I’d told people I was forming a company to serve society?

Yet that school of thought is growing.

Look at NCR’s recent PR campaign emphasizing the company’s many “stakeholders”. . .stockholders are at the end of the list.

Goodyear CEO Robert Mercer is another good example. He told the L.A. Times last December:
“Our No. 1 constituency is not the shareholder. You handle the customer first, then comes the shareholder, equally with employees, the communities where we operate and the suppliers. . .the whole litany of interests.”

Who does he think owns the company? Who takes the financial risks? Not him. He’s been with Goodyear 41 years, makes about $1.25 million annually, yet he owns only 10,000 shares. That’s 17-tenthousanths of 1% of the company he runs.

The current “society first” rhetoric is a smoke screen for a “management first” philosophy. This departure from free market principles is what has caused the problems I see in Corporate America.

It all started after WW II with the emergence of the professional manager. These managers lost the entrepreneurial spirit that the founders had used to build the companies. The result was the creation of huge bureaucracies.

Activist shareholders have begun to recognize the problem. Takeovers, LBOs, proxy fights and the like have been the solutions. I’m not saying every deal is a good deal, but overall, today’s corporate restructuring reflects a return to the basic principles of capitalism.

We’re going back to Adam Smith. . .Create value for owners, not empires for management.

Corporate America is now well into the process of change. Some saw it coming, helped bring it about. Others were nimble enough to adjust or were fortunate enough to have it forced on them. Another group, the iron-headed crowd, is being run over by change.

The data has been analyzed, the results are in and the restructuring philosophy has been almost universally adopted.

The results are clear to see:
—16 mm new jobs since ’82, leading to lowest unemployment rate in 14 years
—R&D up 100% in the past decade, after no growth the decade before
—U.S. Industry at almost 83% capacity, highest in 8 years
—Fortune 500 profits highest ever

But just like every period of change, there’s a group that has to be dragged kicking and screaming into it. . .that’s the crowd that becomes vulnerable to takeovers.

Instead of restructuring voluntarily to maximize value for shareholders, they insulate themselves from owners with poison pills, golden parachutes, state anti-shareholder laws.

They move only when they’re pushed out of the freight train’s path, then they gripe because someone pushed them.

The companies whose managements continue to resist change are going to suffer.

Restructuring will continue. . .it’s inevitable. . .it’s well on its way.

The loss of companies that don’t adjust will be a blow to the shareholders and the entire American economy.

Your challenge as CEOs of up-and-coming companies:
—Remember who owners are
—Make ownership a priority, for you and all employees
—Know your assets. . .use them to maximize value

Finally, never be afraid of change. . .use it as an opportunity to restructure for growth.

I’d like to close with an appropriate story:
—Three iron backspin

With all restructuring has done, why would anyone try to stop the movement?

Thank you.

QUESTIONS & ANSWERS