A thousand families. When I think of Chieftan Corporation, and the role I played as Chairman of that company, that’s what I think of. If you apply the typical family size of about four people, that’s four thousand individuals. And if you multiply the economic impact of the spending of the company and those four thousand individuals by the average ratio, we’re talking about 28,000 people whose livelihoods are affected by the activities of Chieftan.
It’s a big responsibility for a board director. The board’s duty is to ensure that all stakeholders’ interests are considered in every decision of strategy, management and use of resources. The board’s duty is to protect the assets of shareholders and work to maximize their value. I also think that it’s the board’s duty to consider those thousand families and the extended population affected by the company’s performance.
This isn’t a social responsibility. It’s not an altruistic motivation. It’s a business issue. If you remove the people from a company, the inventory of assets might include real estate, buildings and improvements, cash in the bank, the money that’s owed the company at that point, patents and trademarks, capital equipment and information stored in computers and files. Those “hard” assets would probably be worth a significant amount. But without the people, there is no future generation of revenue from operations, by far the largest asset an operating company has. That’s why business valuation methods typically measure value by multiplying revenue or profitability. Buying an operating company is essentially buying future cash flows. Without the people in the company, there isn’t any flow.
The board discussions at Chieftan turned to the eventual sale of the company. It’s nobody’s fault. The company was healthy and its future bright. It’s just that the founder had the audacity to be mortal. His estate plan was well-composed with all the eventualities considered. Estate taxes have been anticipated and will be paid easily. Once all bequeaths are distributed, the remainder of his considerable wealth will be transferred to a charitable foundation, which has the charter to do much good for at-risk children. But the foundation can’t own an operating business.
The board has the responsibility to enact the will of the shareholders, which in this case includes several trusts and a minority interest held by management. To maximize the return on assets for shareholders, the board must consider all options: sale of assets in pieces, sale of the operating company in total to a strategic buyer or a private equity firm, a public offering, or a leveraged buyout by management. If the decision were determined strictly on highest valuation, a bidding war between strategic buyers and private equity firms would likely generate the best price. And what would be the impact on those thousand families in this scenario? If sold to a strategic buyer, which would likely include current competitors or other companies who wish to diversify or vertically integrate their businesses, the post-sale decisions would be predictable. The buyer would begin with keeping things running as they are until it could be determined what assets to sell in order to recoup some of the purchase price. If selling assets isn’t as attractive as borrowing, the company would be leveraged to its maximum capability to service debt, to recover the cash outlay used to purchase the company. The first option would eliminate non-performing assets, or those which are no longer congruent with the parent company’s strategic objectives. The second option would encumber the company with debt that it doesn’t have now, reducing available cash for capital investments, product development and weathering downturns in business. Both of these strategies result in a strict emphasis on performance and profitability. From a purely capitalistic perspective, this can seem a good thing. Privately held companies, particularly those founded and led by a dynamic, inspiring leader, tend to tolerate lower performance in exchange for loyalty and trust. When such a company as Chieftan is acquired, there appears to be “found money” on the table, ostensibly garnered through eliminating business units, turning over under-performing employees and bringing in new people in key positions.
Acquired companies seldom yield the expected returns, however. Twenty percent or less achieves the results that the acquiring company expected, and which were used to justify the purchase price. Survey after survey has found this to be the case, and the largest single reason cited is “people issues”. Now that’s a big category, and needs parsing to understand. If you ask acquirers what this term means, it is further segregated into “cultural conflicts” between the parent and the acquired, “no bench strength”, “turnover of strong performers” subsequent to the acquisition, etc. But an important element that seems to go unnoticed is the bond of trust and loyalty. Even though there may be a certain portion of the employee population that has been allowed to under-perform in exchange for loyalty, that very loyalty is actually more profitable to the company, and contributes more to its long-term viability, than if employee performance was at the top of the scale without loyalty. Allegiance earned through years of mutually supportive actions and decisions results in a total employee population that will suffer hard times without leaving, contribute everything they can when asked and look for ways to ensure the company’s success. When the person to whom allegiance is given is absent, the employees fear for their own futures, distrust new leaders (even if they are progeny of the founder), and begin searching for alternatives if they can. And if the rumor mill spreads news of a possible sale of the company, the activity intensifies long before any transaction can take place. Performance can diminish, talented second-tier managers and professionals take other jobs, and the company’s true assets—its people—begin to fragment.
A board needs to consider all options for the sake of shareholders. The option that maintains the highest possible integrity of employee allegiance will be the most profitable for the shareholders, and will ensure future cash flows for whoever owns the company.