Financial History Issue 117 (Spring 2016) | Page 25

Collection of the Museum of American Finance General Motors stock certificate, dated March 26, 1981. Ross Perot’s battle with the company became a turning point in shareholder activism in the United States in the 1980s. — An experienced businessman You need to recognize that I am one of the few people who can and will disagree with you… I do not believe that GM can become world class and cost competitive by throwing technology and money at its problems. —  The Japanese are not beating us with technology or money. They use old equipment, and build better, less expensive cars by better management, both in Japan and with UAW workers in the US. — We are not closing the quality and price gaps in spite of huge expenditures on automating plants. The fact that we have not set a date to have competitive prices indicates the prevalent attitudes about our will to win. The foundations for a future relationship are honesty, openness and candor — or simply put, mutual trust and respect. From this point forward, actions count — words do not. We must focus all our energies on helping GM win. Perot’s reason for tackling General Motors was simple: “It was the opportunity to save millions of American jobs. It was too exciting to pass up.” This is a man who engaged in many difficult battles over his lifetime and fought to their end. But perhaps none of these was harder than making positive changes at a poorly-run public corporation. Perot’s letter turned out to be the breaking point in his relationship with Smith. From that moment forward, Smith focused his energy on getting Perot off the board of directors. General Motors ended up spending $80 billion on new plants and equipment through the course of Smith’s nine-year tenure as chairman, plus another $10 billion for acquisitions of high-tech companies like Hughes Aircraft, whose purchase was approved over Perot’s lone dissenting vote. Much of this money was wasted, as was more than $700 million used to buy out Perot in 1986 to make him walk away from GM. One of the world’s greatest industrial companies — once a model of good management and governance — was on a path to insolvency. When the buyout was made public, Perot, who was as astounded as anyone that GM’s board of directors would approve such a large payment just to get rid of him, challenged shareholders to do something about it. He said, “I’ve alerted the stockholders that if they accept this, then they deserve what they get.” Perot’s battle with General Motors became a turning point in shareholder activism and public company governance in the United States. Large pension funds that had held GM stock for years without making a peep were aghast that a company would spend $700 million to weaken its board of directors. Institutional investors were finally discovering their voice. Perot ultimately left General Motors without accomplishing any of his lofty goals for the company, but on his way out he stoked a fire under the country’s largest institutional shareholders that remains burning today. The awakening of institutional investors, prompted by the Perot buyout in 1986, had an immediate impact on public company governance. CEOs and directors were targeted in ways that seemed unthinkable just a few years earlier, as evidenced by the California Public Employees’ Retirement System’s campaign to dump Smith from the GM board. But the biggest effect was at first quite subtle — the stiffening resolve of institutional holders behind the scenes. Shortly after the Perot buyout, the head of the State of Wisconsin Investment Board (SWIB) said, “If shareholders continue to be passive, they will continue to be shorn like sheep.” He meant it. After Perot, you could no longer count on large institutional shareholders to be pushovers. This helped end the corporate raider era, while encouraging the kind of shareholder activism that dominates markets today.  Jeff Gramm manages a hedge fund and teaches value investing at Columbia Business School. He has served on several public company boards of directors. This article was adapted from his book, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism (HarperBusiness, 2016), with the permission of the publisher. www.MoAF.org  |  Spring 2016  |  FINANCIAL HISTORY  23