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	REMARKS TO THE MIDWEST GAS ASSOCIATION KANSAS CITY MO MARCH 7, 1989

Thank you, ().

I've been asked to talk to you today about the competitive problems in Corporate America.

I want to leave plenty of time for questions, so I'll keep the speech short (Dad's remark... best speech ever).

You have to go back a long way to see where Corporate America's problems began.

It was just after WW II... entrepreneurial founders were replaced by professional managers; a no-risk mentality emerged:
—Separation of ownership and control

That is the key... Virtually every problem Corporate America has can be traced back to that one issue: Managers do not think like owners.

The owner/manager had a totally different set of incentives than professional managers have.

The owner/manager looked to make the company the best in the business and to distribute the profits to his partners and himself:
If the business prospered, so did the owners, the employees, the suppliers and the surrounding communities
But the professional manager got a salary instead of a cut of the profits.

The salary was based on the company's size, rather than its profitability:
—Professional managers worked for the 4 ps... Pay, Perks, Power and Prestige

They created huge bureaucracies:
—GM 14 layers, Japanese I don't have to tell you who would win that competition

These bureaucracies stifled entrepreneurship, destroyed morale.

And since management's rewards were based on the size of the company rather than its efficiency, managers created huge, inefficient conglomerates.

Instead of distributing the profits to the owners, managers hoarded the money and used it to diversify into businesses they knew nothing about.

Goodyear example:
—Celeron... Paid too much... It's like Mesa deciding to make tires
—The Aerospace unit (Blimp remark)
—Goodyear even bought a $220 million resort in Arizona, where the managers could spend their vacations.

That's where Corporate America was by the early 1980s: Bloated, Uncompetitive, Bureaucratic and Barely Accountable to anyone... What I call the BUBBA Syndrome.

You could find these Good Ol' Boys at the corporate hunting and fishing camps or flying around in their lavish corporate jets... I know; they used to invite me along:
—I haven't been invited lately

No matter how bad management was, there was nothing the small shareholder could do.

Then along came the takeover entrepreneur, who showed that the value of the company's assets was not reflected in the stock price:
—The stock was discounted because of poor management (Definition of a going concern)

Shareholders activism is slowly forcing managements to perform, and to restructure companies.

What we are seeing is a transformation of American corporations:
—Size is meaningless, results are everything

First speech I made on restructuring... L.A. in 1982.

Back then my arguments were rhetorical... Now the empirical evidence is in, and it all supports restructuring.

But FORTUNE 500 managements are still fighting to maintain the status quo:
—Poison pills, golden parachutes, anti-shareholder legislation

They are selling the shareholders down the river to protect their own parochial interests.

There must be a system where CEOs can be replaced if they don't do an acceptable job... like football coaches, or like politicians who stand for reelection (Explain corporate voting... like Russia).

The way to restore America's competitiveness... make managers accountable to the owners.

We must reestablish that shareholders are the ownem of public companies, and managers are emoloyees.

That's why I formed the United Shareholders Association in August '86... To upgrade shareholder awareness and protect shareholders' interests in Washington.

I sincerely believe in USA (Non-profit deal).

Let me tell you how much I believe in it:
—More than $1 million in honorariums
—Another $1.3 million from my book

FORTUNE 500 CEOs scream that shareholder activism is hurting their business.

They give you the “short-term long-term” argument... saying long-term growth is sacrificed for short-term profits.

What they're really saying is “Give us more time to make the same mistakes.”

FORTUNE 500 CEOs are the short-termers: big salary, bonuses and perks... little ownership.

That gets back to the point I made about the separation of ownership and control.

I had one CEO tell me that his idea of the perfect company would be to have 100 million shareholders with just 100 shares apiece... No accountability.

You may remember last year, Campeau's takeover of Federated Department Stores.

Federated CEO Howard Goldfeder... 37 years, $800,000 salary, big bonus... owned 3,000 shares of stock in the company he was running.

The best of all was Newmont's Gordon Parker... 406 shares (Not even round lots).

Jack Reichert, chairman of Brunswick Corp., has a unique theory of why managers don't need to own stock. He told the Chicago Sun-Times:
—“The question really becomes one of ‘Do you believe you own the company?’ I feel I own the company because I own it spiritually.”

That's one sure way to avoid another market crash.

Why won't managers buy stock in the companies they run? Because it's a bad investment! (Phillips' Bill Douce stock option story).

If management owned a significant amount of stock in the companies they run, they would think like shareholders...

They wouldn't have wasted shareholders' money on bad diversifications...

And they would have returned profits to the owners... themselves included because of their stock.

Instead, look at the retained earnings they're still hoarding... Ford, $10 billion; Boeing, $5 billion... Even Chrysler has $3.3 billion.

That's more money than they know what to do with, which has historically been a disaster.

Restructuring has helped FORTUNE 500 companies have record profits for the past two years.

Their earnings were up 42% in 1988, yet dividends rose only 11%... yielding just 3.6%, which is near an all-time low.

Looked at another way, Fortune 500 companies pay out only 20% of cash flow... that's $65 billion of $325 billion annually.

So, despite shareholder pressure, managements aren't returning profits to the owners.

I'll give you an indication of how much they could distribute if they wanted to... Mesa, started in 1956 with $2,500, distributes about $300 million annually.

Compare that to Boeing, $245 mm; Phillips, $175 mm; Unocal, $115 mm; and Goodyear, $100 mm.
—Fred Hartley on dividends...

Distributing a higher percentage of cash flow still leaves plenty of cash for corporate growth.

Again, look at Mesa... distributed nearly $1 billion to our stockholders and doubled reserves in 3 years... and still growing.

Want to avoid another market collapse and keep our economy moving forward? Distribute 50% of cash flow instead of 20%:
—Dow would go above 3000
—Prevent a recession
—Upgrade standard of living for millions of Americans

This is a populist issue: 50 mm shareholders... If you include pension funds and trusts, half of all American households are directly affected.

In conclusion, shareholder activism is here to stay... it is returning management accountability, and this process will make our country more competitive than ever before.

Thank you.

Q & A