When corporate raiders took on corporate America
Debunking the myth of the 1980s
Hi,
Welcome to Unshared, a newsletter by me, Kyle Edward Williams, about the history of the corporation and political economy. It’s been a while since my last missive. I’ve been working a handful of projects and I’m excited to share more about one of those very soon. In the meantime, consider this a reboot and a first installment in a short series of posts that will dig into the history of corporate raiding.
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Today I’m going take on a bit of conventional wisdom that’s frequently called on to explain the recent history of American business. It’s a flawed story, but it’s powerful and popular precisely because it takes something complicated and messy and explains it in simple terms. More about that below…
That complicated and messy history might be summed up in a few questions. First, how did the U.S. lose an industrial economy that provided jobs, stability, and prosperity to a growing middle class? And, second, how did we get overrun by Wall Street investors and “greed-is-good” executives who emptied out the factories and flushed away any semblance of economic equality? In short, how did we go from George Romney, the industrial automotive executive who made a career creating jobs, to the diminutive Mitt Romney, the private equity partner who made a killing cutting jobs?
The answer given by such different people as critical scholars of neoliberalism and advocates of conscious capitalism is that there has been a shift in the way people thought about the economy.
It’s a story that goes something like this. About fifty years ago, a handful of libertarian economists pioneered a new way of thinking about how to run the American economy. In 1970, Milton Friedman wrote his article, “A Friedman Doctrine—The Social Responsibility Of Business Is to Increase Its Profits,” which made shareholder value out to be the sole criterion of business success. Two years later, a pair of Mont Pelerin Society economists named Armen Alchian and Harold Demsetz co-authored an academic article for the American Economic Review in which they argued that there really wasn’t any difference between corporations and markets. Everything is a market, even relations within firms. And in 1976 another dynamic duo, Michael Jensen and William Meckling, wrote “Theory of the Firm,” in which they argued that a corporation was nothing more than a “nexus of contracts.” There was no inside or outside; there was no corporate ontology at all.
This revolution in ideas, so the story goes, produced a transformation in the economy that reached a fruition in the 1980s and 1990s when metrics like return on investment, quarterly earnings, and share price justified massive deregulation and the outsourcing of jobs. It was the victory of an ideology, which had long incubated in the dark corners of the University of Chicago and in a movement funded by right-wing foundations like the Volcker Fund. This ideology cast nearly every institution in human life—from corporations and the state to churches and universities—as markets that followed the rules of “market logics.” (And, of course, there is no purer market than financial markets and their metric-driven rules.) It was an ideological rally cry for forcing every institution to follow to those rules to a T. The result was the financialization of everything.
It’s a powerful story. And I don’t want to deny that aspects of it are true. Ideas do have consequences and the rise of market thinking in the final decades of the twentieth century is no exception. But the truth is that, far from a radical intrusion into American business in the 1980s, the idea and even the methods of an activist Wall Street have a far older provenance.
The relationship of an activist Wall Street to the works of libertarian economists of the 1970s is actually the reverse of what many of our histories claim. Corporate raiders came first. The ideological justification for corporate raiding followed after. In the short remainder of this post, I’m going to tell the story of a man named Louis Wolfson, one of the first and most well-known of the corporate raiders of the 1950s.
Wolfson grew up in Jacksonville, Florida and he maintained a lifelong tan to prove it. A natural athlete who boxed in his teenage years, Wolfson went to the University of Georgia in 1930 on a football scholarship, but he left Athens two years later after a season-ending shoulder injury. He went back to Jacksonville to his father’s junk and scrap metal yard hard hit by the Great Depression. With this experience in the family business, Wolfson was schooled in the humblest form of arbitrage: not so much turning trash into treasure, but finding value where no one else was looking.
Later branded by The Saturday Evening Post as “Florida’s fabulous junkman,” Wolfson started out in a conventional enough way, making bank on defense contracts during World War II. But his big break came in 1946 when he bought up two shipbuilding companies on the cheap during a wave of war industry selloffs. Over the next few years, he sold the assets and closed down the shipyards at great profit. Next he bought an interest in a film studio for $400,000 and later sold it for $1.2 million. In 1949, Wolfson set his sights on Capitol Transit, a Congressionally-chartered holding company that controlled the transit system of Washington, D.C. Wolfson didn’t care about public transportation, but he was alert to the fact that Capitol Transit was sitting on more than $6 million in cash reserves. Wolfson bought a controlling share for a little over $2 million and proceeded to liquidate the company’s accounts through higher dividends. He rounded off the decade with a proxy fight for a Manhattan-based construction company, chalking up a majority of directorships and eventually taking the title of chief executive.
Wolfson made himself an expert in doing what few were willing and able to do in the 1950s: prowl American industry for firms that were sitting on large retained earnings and were managed by a sedate board of directors and executive leadership. If management owned or controlled 15 percent or less of voting stock, Wolfson pounced. While Wolfson developed a reputation for himself as a kind of anti-corporate outlaw, he was far from the only one pioneering this form of business strategy. One study found a steady increase of shareholder insurgency in the first half of the 20th century. There were fights over companies ranging from New York Central Railroad to 20th Century Fox. Perhaps the most infamous was the one that gave Wolfson the national spotlight for a brief moment in the mid 1950s. It was his battle for control of Montgomery Ward.
The company had been controlled by a man named Sewell Avery, a cautious and conservative businessman who had been chairman since the early 1930s. By the time Louis Wolfson started looking through the retail company’s financials in the early 1950s, Montgomery Ward was sitting on a nest egg of $327 million and hadn’t opened a new store in over a decade. The company was flagging behind a much more energetic and profitable Sears, Roebuck, and Company.
Wolfson’s plan, first laid out in July 1954 to a group of investors on a yacht anchored on New York City’s Hudson River, was to buy up stock quietly through shell companies and intermediaries. But when a mistaken disclosure listed Wolfson as the purchaser of 10,000 shares, the financial press was alerted to the attempt to take control of Montgomery Ward. The share price jumped $20. Instead of backing down, Wolfson held a press conference at the Biltmore Hotel where laid out his case against Avery, whose leadership he said was “a glaring and notorious example of private enterprise in reverse gear.” In a frenetic campaign that looked more like a presidential run than an investment strategy, Wolfson travelled the country speaking about the virtues of shareholder democracy and giving his pitch to Ward shareholders.
Wolfson’s takeover attempt was ultimately a failure, though his group did end up with three of the nine directorships (one of which he took himself). Avery soon resigned, and his successor implemented many of the demands Wolfson had made. For his part, Wolfson quickly recouped what he had spent on the abortive proxy fight. Over the subsequent years, he made himself into a kind of prophet uttering jeremiads against big business. “The hard fact is that American business leadership no longer emphasizes the pioneering spirit which helped build this nation,” he said. It was now overrun by “robot executives” who followed “patterns of conformity.”
The story of Louis Wolfson was recounted in the national newspapers, magazines, and, in 1956, a popular paperback titled Fight For Control written by a journalist and public relations professional named David Karr, which recounted the deeds of corporate raiders over the previous decade. An encomium to the proxy fight, the book cheered on the victory of shareholders over big business. Karr explained:
The independence of management has been sharply curtailed. The change is a result of the techniques described in this book. By taking grievances and issues directly to the stockholders, insurgent groups have often unseated a complacent board of directors. By observing the fate of their displaced colleagues, members of management have come to realize the necessity of keeping the stockholders informed as to the company’s plans and progress. For both groups a modern proxy fight is a gigantic effort to win the stockholder’s confidence and support.
It was Wolfson’s career in corporate raiding, as recounted with journalistic flair by David Karr, that fired the imagination of an economic theorist named Henry Manne. A University of Chicago graduate who would later found the Law and Economics Center at the George Mason School of Law, Manne was an early and influential advocate for Wall Street dominance of big business. His 1965 article, “Mergers and the Market for Corporate Control,” which was one of the most widely cited law review articles of the twentieth century, referenced Karr’s book multiple times and mentioned Wolfson by name. Manne theorized that if traders only behaved more like Wolfson, there would be a vigorous market for control of corporations that made sure any shirking managers would soon be looking for a new job.
An advocate for radical deregulation of the financial sector and a proponent of the legalization of insider trading, Manne celebrated Wolfson in the pages of the Wall Street Journal after his death in 2008. Wolfson, he said, was the original corporate raider. Irritated that obituary writers eulogized Wolfson for his later philanthropic giving, Manne wrote that Wolfson’s invention of the modern hostile tender offer was a “contribution to human welfare” that “far exceeded the total value of all private philanthropy in history.”
Manne recounted in a oral history interview four years later:
The guy who invented hostile takeovers was a man named Louis Wolfson, who, as a young man, was a rather crude professional boxer. I think he sort of stumbled into this takeover business. I later met him, and he never had any understanding of the economic implications of takeovers, but he understood how to make money. He pioneered the thing. He worked out a lot of the different angles of the early hostile takeovers.
The implication is clear. It was left up to Manne and the rest of the libertarian economics movement to produce a theoretical understanding of the takeover and a generalized worldview of Wall Street accountability, but it was Wolfson and his generation of corporate raiders who pioneered the act itself. Far from a radical incursion into American economic life beginning in the 1980s, Wall Street campaigns to “unlock value” and shake up the lumbering institutions of big business date back to the early post war era.
Two or three more things…
Next week we’ll take up the history of conglomerates in the 1960s and the sophisticated financial strategies that came along with them.
I’m not sure how this fits in, but I wanted to mention: it was discovered decades after he wrote Fight For Control that David Karr, in addition to being a journalist and public relations executive who eventually got involved in some proxy fights himself, was also a Soviet spy who worked for the KGB. In 1979, he was found dead in a hotel room in Paris under suspicious circumstances.
Keep an eye out for a forthcoming essay from me on Donald Trump and the myth of the businessman reformer over at The New Republic. I’ll include a mention here once it’s out.
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