SEATTLE/ Conservative Monitor -- Top executives (referred to as management hereafter) and the boards of major corporations have a rich history of trying to pilfer the company from the owners or shareholders. Although it started much earlier, the 1950s was the start in a major way of the "give us a bonus" period.

Management came to the board and announced (paraphrasing) that while they knew they were receiving six figure incomes that they weren't doing the best for the shareholders because shareholders had short-term profit expectations. As a result they were not maximizing long-term profits and the value of the company. If they were given a bonus based on firm performance, however, their interests would be more in line with the shareholders and they would do a better job.

As the board of directors, what would you do if an employee came up with a story that they were not doing the best job possible but if paid more they would do better? Lets not forget, management is still an employee responsible to the board and shareholders. What would make you believe they would do better if paid more, especially given the fact they already have an extremely attractive salary. They should have been fired, not rewarded, as any other employee of the company would have been. Being risk adverse, probably the reason they achieved their position, they didn't tie the bonus to their performance. Rather than a bonus based on inflation-adjusted improvements over extended periods of time, they received a bonus regardless of how the firm performed.

With continued disappointing performances and shareholder complaints, in the 1960's management came up with a new strategy. Their performance would improve if they only had an ownership interest. As managers, their interests were not always the same as shareholders. Give them an ownership interest and they would act more like owners. Sound familiar. They didn't have enough confidence to actually buy the stock but wanted to receive stock options. Of course they should receive these options at a discount from the lowest price over a period. Options instead of bonuses or indexed the options to the market or inflation, heavens no. Keep the bonuses and get stock options.

By the 1970s, corporate raiders began to appear. These raiders saw value in companies that were not being realized by the current management (even with these bonuses and stock options). Management developed new strategies to protect themselves, the interest of the stockholders be dammed.

To protect their jobs management developed defensive measures to prevent corporate raiders from taking over the companies they managed. These defensive measures, referred to as "shareholders rights" by the board and management and "poison pill" by the raiders, took several forms but always increasing the cost of acquiring the company. You have to love the idea of shareholders rights plans that protect management and reduce the value of the stock. At least incompetent management surely does. If management and the boards were truly interested in the stockholders interest they would have welcomed these raiders, as the stockholder would realize a quick gain that could be invested elsewhere

Occasionally, management negotiated a buyout. In these cases, the management was always richly rewarded. This was often a position in the new company or some other payoff. Could management negotiate the best deal for stockholders if the buying company rewarded them? Evidence would suggest, not always.

Another approach was the Leveraged Buyout (LBO) where management offered to buy the company from the shareholders. The buyout was financed by banks or by junk bonds. They argued that stockholders concentration on short-term profits didn't allow management to take the necessary steps to maximize long-term profits. (Wasn't the bonuses and stock options to insure this wouldn't happen?)

Companies with competent managements (Safeway and Levi Straus are examples) realize impressive profit improvement within a year. A year doesn't exactly seem like a long time. These extraordinary gains were usually realized by manipulation of general and administration costs. Marketing and sales costs were increases before the buyout, which would reduce profits just before the buyout but would normally result in increased sales and profits after. Bloated headquarter staff were quickly reduced of unnecessary personnel. Other cost reductions resulted in quick gains. This process was often reversed, as profits appeared to soar, the company was sold back to the public, and only to find cost reductions could only be maintained at the expense of long-term growth.

The LBO lost favor with the banks as poor managers followed and managed to lose money. The problem was that firms brought in to value the business were willing to place any value the paying customer wanted, one value for the buyer, another for the seller and a third for tax purposes. Over paying became a problem, however, management usually came out ahead at the expense of the banks and stockholders.

In all these schemes, management held out the threat that they were so valuable that if they didn't receive this added compensation or were protected from corporate raiders they would be attracted away to other companies. Management can do a great deal to destroy company wealth but little to increase it. Scattered throughout most companies are hard working dedicated employees if left to their own devices, and often fighting management, do what's best for the company. The only surprise in all this is how cheaply the non-interlocking board members are bought off.

Firms more often than not succeed in spite of management, not because of it. Frequently executives claim credit when the success was a result of events out of their control, a booming economy or misstep by a competitor. Others succeed by buying up other companies, using accounting gimmicks to inflate profits or conspiring with competitors to limit supply and raise prices. GE transformed itself into largely a finance company during a period that most finance companies prospered. Good times hide bad management practices with finance companies.

Some will argue that good management is worth the cost of the salary, bonuses and stock options. Michael Eisner, Walt Disney Co. CEO might be used as an example of an executive that has transformed a dowdy old company. Most of the gain in Disney's stock value came about from raising prices at the theme parks and releasing movies to video, things that previous management proposed and would have been obvious to a first year MBA student. Disney was turning away people from their theme parks by 10 a.m. When demand exceeds supply the price is to low. A profit-maximizing price would never have the parks full. With the expansion of the video rental and sales market Disney was sitting on a gold mine of unreleased movies.

Since that early success, how has Disney stock outperformed the market? It was rumored that Eisner wanted to close the animation division but was rebuffed by Roy Disney. Left alone, the division had a number of hits. Since Eisner and colleagues claimed "ownership" the division appears to have become risk adverse. Was Eisner worth the pay he received? Not in my opinion.

What should shareholders do to regain control? Boards should be independent with no company executive on the board. The stockholders employ management, management does not own the company and should be reminded of that fact. They are key to the company's success only in their imagination and to the extent they control the board. Vote against compensation plans for executives to remind them of their position. Tie top executives compensation to their firm's performance--a reasonable salary with stock options indexed to inflation and tied to the relative performance of the firm to its industry, return on other investments such as bonds or the performance of the stock market as measured by the S&P.