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	REMARKS TO THE COLLEGE OF BUSINESS STUDENTS ABILENE CHRISTIAN UNIVERSITY ABILENE TX MARCH 29, 1989

Thank you, [Text stricken: Bill (Teague)] [Handwritten addition: Jeff (Jones)].

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

I want to leave plenty of time for questions, so I’ll keep my remarks short.

First, there has been a lot of talk about an ethics crisis in Corporate America.

There is no ethics crisis... It’s a leadership crisis.

The problems are at the top... not the fault of MBA schools, as some claim.

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 piece of the action, as well as the financial risk.

I say in my book managers should have at least 50% of their net worth in the company... I have 90% in Mesa (Book — executive who explained why he couldn’t do it).

Owner/managers had a totally different set of incentives than professional managers had.

An owner/manager looked to make the company the best in the business... distribute the profits to his partners and himself.

If the business prospered, so did the owners, the employees, the suppliers and the surrounding communities:
— Simple and rather easy to understand

But professional managers had another agenda... The 4 Ps: Pay, Perks, Power and Prestige.

Stockholders, the owners, didn’t participate in any of these perks.

The professional manager got a nice salary instead of a cut of the profits.

The salary was based on the company’s size, rather than its profitability... The bigger the company, the bigger the salary:
— USA’s Corporate 1000

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

Goodyear example:
— Celeron... Paid too much... Like Mesa making tires
— The Aerospace unit (Blimp)
— A $220 million resort in Arizona, where the managers could spend their vacations

Phillips had a similar resort, Pier 66 in Fort Lauderdale, Florida.

And that’s where Corporate America was by the early 1980s: Bloated, bureaucratic, becoming less competitive and barely accountable to anyone... and losing market share every quarter.

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

Then along came entrepreneurs 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)

The market knows the good managers from the bad (Gulf example).

But shareholders are the only ones who can force managements to perform.

There are different kinds of shareholders... Some are big and active, sometimes called “raiders.”

Active shareholders are forcing a transformation of American corporations:
— Size will become meaningless, results will be 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.

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.

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

We must establish that shareholders are the owners of public companies, and managers are employees.

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 USA:
— More than $1 million in honorariums
— Another $1.3 million from my book
— Still costing me and Bea $30,000 a month

Entrenched CEOs scream that shareholder activism is hurting their businesses.

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... BRT less than 3/10ths of 1%.

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 a 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.

Why won’t managers buy stock in the companies they run? Because it’s a poor 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 unwise 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 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.

Shareholder pressure has started to loosen the corporate pursestrings, but managements aren’t returning enough of the 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... Fred is not an isolated case.

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

And the extra billions of dollars pumped into the economy would upgrade the 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.

And one more thing... As Corporate America’s future leaders, you will be a major force in returning America’s competitiveness.

The future in not with 60 year-olds like me... It’s with the newer, more entrepreneurial generation coming out of the business schools today.

And I’m very encouraged by what I see.

Thank you.

Q & A