By now, anybody with even the slightest bit of interest in finance ought to have seen 1 of director Oliver Stone's many big screen political statements: 1987's Wall Street, which, fittingly enough, came just after the real-life stock market crash that the world suffered earlier that year, capping off what turned out to be 1 of the most scandal-filled years in D.C. history, with the whole Iran-Contra affair dominating the political headlines up until October 1987... Perhaps the seminal moment in that film, which is otherwise a stock geek's real-life fantasy, is the speech given by stockbroker (& extraordinary "hardball player". in my opinion) Gordon Gekko, played by the equally hard-edged actor Michael Douglas, who's certainly been no stranger to headlines recently... That speech was given to stockholders of the fictional company, Teldar Paper, which he is planning on taking over in what is usually referred to in Wall Street circles as a "hostile takeover", where 1 company buys or merges with another to prevent its own takeover... The speech itself is actually based on real-life stock arbitrageur (in other words, somebody who takes advantage of price differences between 2 different stocks, or even markets in general, to successfully turn an overall profit) Ivan Boesky, who himself was charged with insider trading in an infamous 1986 insider trading scandal in which it was discovered, mostly through testimony, that he had obtained over $200 million through massive bets on different corporate mergers & takeovers, including some coming within just days of another announced takeover! Boesky accepted a 3.5 year plea deal from federal prosecutors, along with a $100 million fine, in exchange for being permanently barred from securities trading... His line in the aforementioned 5/18/86 commencement address to graduates of UC Berkeley's School of Business Administration, which ended up inspiring the most famous line in (the character) Gekko's speech was "Greed is all right, by the way. I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself." Gekko's speech to Teldar, meanwhile, with some added context & opinions courtesy of Satya J. Gabriel, economics professor at Mount Holyoke College, an all-women's college in South Hadley, Massachusetts, with each part of Gekko's speech coming between quotes, & Professor Gabriel's thoughts coming without them:
Gekko: "Today management has no stake in the company. Altogether the men sitting here own less than 3% of the company. Where does Mr. Cromwell (the CEO) put his million dollar salary? Not in Teldar stock. He owns less than 1%. You own the company. That's right, you, the stockholders. You are being royally screwed over by these bureaucrats with their steak luncheons, hunting and fishing trips, their corporate jets, and golden parachutes."
Gabriel: Gekko is referring to the fact that in contemporary corporations, the commoditization of ownership has resulted in shareholders losing effective control over the board of directors and top management. It is management, "these bureaucrats," who make the key decisions about deploying corporate assets and spending working capital. Top-level managers look after their own interests, not those of the widely dispersed shareholders. The board of directors is in a position to fire top-level managers who abuse their power, but typically these managers also sit on the board and/or have strong influence over who does. Indeed, the board and top-level managers are often closely allied, except in times of serious threat to the corporation's viability or reputation, when the board may turn against the top-level execs. However, this is rare. Most of the time the board can relax and simply rubber stamp the decisions of their chief executive officer. And the board has little to worry about from shareholders. The costs of monitoring top-level management (agency costs) are very high and most shareholders (owning a tiny fraction of the company) do not even try. Typically, they sign over their votes to the board in the form of proxies. By wielding proxy votes, existing boards of directors can virtually guarantee their continued control over the corporation. The Teldar board, according to Gekko, has been complicit with management in wasting the resources of the corporation (using working capital to finance perquisites for managers and board members, e.g. "steak luncheons, hunting and fishing trips, corporate jets, and golden parachutes"), resources that ultimately belong to the shareholders, and the board has, if Gekko is correct, presided over the creation of a bloated bureaucracy that burdens the corporation and drains cash flow (further stealing from the shareholders):
"Teldar Paper has 33 different vice presidents, each earning over $200,000 a year. I've spent the last two months analyzing what these guys do. I still can't figure it out. One thing I do know is that our paper company lost $110 million last year. I'll bet half of that was spent in the paperwork going back and forth between these vice presidents."
Gekko's argument, which has many adherents within the corporate finance establishment, is that his battle to wrest control of Teldar Paper from the existing board of directors and their managers is in the interest of the shareholders and ultimately has beneficial effects on capitalism as a whole. The existing board and their managers have created an inefficient, bloated bureaucracy that wastes corporate resources. Gekko would put into place a new regime that would eliminate many of these inefficiencies and squeeze more shareholder value out of the corporate assets. Indeed, the argument in favor of Gekko's analysis would point to the fact that he can pay a much higher price for Teldar stock than it was selling for before his takeover attempt and yet still make a profit on the deal. This proves, according to that argument, that Teldar's assets were simply being mismanaged and that Gekko can take over the company, replace the board, fire Cromwell and his 33 vice presidents, eliminate the waste, and liberate shareholder value:
"Well, in my book, you either do it right or you get eliminated. In the last seven deals that I've been involved with, there were 2.5 million shareholders who have made a pretax profit of $12 billion. I am not a destroyer of companies. I am a liberator of them!"
The corporate raiders and forced restructuring is understood as creating a leaner, meaner, more shareholder friendly American capitalism. If, in the process, long-term employees of the restructured firms lose their jobs and factories or even whole divisions may disappear, generating negative effects on whole communities (see Michael Moore's documentary Roger & Me) then so be it. That's the cost of progress:
"The point is . . . that greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms --- greed for life, for money, for love, knowledge --- has marked the upward surge of mankind, and greed . . . will not only save Teldar Paper but that other malfunctioning corporation called the U.S.A."
some finishing thoughts on the speech from M.H.C.'s Professor Gabriel: "The above speech represents an application of the theory that the market for corporate control provides an important mechanism for transferring assets from the control of managers who, by virtue of the widely dispersed pattern of corporate ownership, have gained too much autonomy and have been using that power in a manner inconsistent with maximizing shareholder wealth. The ownership shift that results from the takeover allows for the replacement of inefficient managers with more efficient ones. This process, according to Gekko, will not only solve the specific problems of the inefficiently run corporation, in this instance, Teldar Paper, but will ultimately make US capitalism, as a whole, function more efficiently, i.e. generate economic growth."
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