Since the beginning of the 1980s, American business management has faced charges of myopia in the first degree.
Corporate leaders, preoccupied with quarterly profits and other short-term financial goals, were sabotaging their companies' futures by playing it safe, neglecting research and long-term product development, and ducking risky but promising new ventures.
So said academics at the Harvard Business School and elsewhere, foreign competitors like Sony Corp. Chairman Akio Morita, and some outspoken U.S. business leaders like William C. Norris, chairman of Control Data Corp.
Now comes a new, but related, worry. The assaults of corporate raiders like T. Boone Pickens Jr., Saul Steinberg, Carl Icahn and Sir James Goldsmith have triggered a series of defense maneuvers by corporate chiefs that further weaken their companies' long-term strength and competitiveness, critics warn. To fend off hostile takeovers, U.S. corporate chiefs are purposely inflating their debt, paying billions in ransom, and squeezing even more short-term earnings out of their operations -- all at a heavy cost in long-term competitiveness, the critics say.
It has become the preoccupation of corporate chiefs, says Robert Reich of Harvard's Kennedy School of Government. "A lot of chief executive officers . . . are spending enormous amounts of time worrying about who is going to acquire them, who they are going to acquire in order to avoid being acquired themselves, huddling with accountants and their financiers, huddling with their lawyers, and you have to ask the question, who's minding the store," Reich said on the CBS Network's program Face the Nation last Sunday.
A company that lets its earnings -- and stock price -- slip by pushing capital into research and other long-range building blocks is asking for a takeover, says Harold M. Williams, former chairman of the Securities & Exchange Commission. "So the raiders enhance an already overpowering trend toward the short-term viewpoint," says Williams.
"It's hurting this country. It's hurting the economic system," says Andrew C. Sigler, chairman of Champion International and a spokesman on the issue for the Business Roundtable, a group of 200 large U.S. companies.
There's no doubt that for companies that become takeover targets or feel the raiders' breath, the struggle to escape is all-consuming, taking 150 percent of management's attention.
But it isn't clear how much a fear of the raiders is distorting business decision-making generally.
A new piece of evidence challenging the Sigler thesis has been prepared by SEC economist Kenneth Lehn, in a Jan. 22 report to Chairman John S. R. Shad.
Lehn set out to test whether an increased ownership of corporate stock by institutional funds is facilitating hostile takeovers and influencing corporate managers to pursue short-run rather than long-range projects.
Lehn supposed that a company whose stock moves into the hands of large institutional investors would feel more and more vulnerable to a takeover, given the fund managers' customary short-term horizons. And if a company gave in to those pressures, it should show up in a reduction in its corporate spending for research and development, Lehn reasoned.
But an analysis of financial reports by 324 U.S. corporations between 1980 and 1983 showed no such connection between institutional ownership and R&D spending, he said -- and, in Lehn's view, no support for the Sigler argument. While institutional ownership increased from 30 percent to 38 percent in that period, R&D expenditures, as a percentage of sales, also rose, from 3.38 percent to 4.03 percent.
An examination of R&D spending for 35 companies that received tender offers during 1980-83 shows that the target firms tended to have R&D spending far lower than the average for their industries: In other words, companies that skimped on R&D tended to be targets.
"According to the Business Roundtable view, the firms most vulnerable to takeovers should be firms that have aggressively undertaken R&D projects to the detriment of their quarterly earnings," Lehn said. But his study doesn't lend support to that view.
Lehn's simple analysis doesn't settle the question of how the raiders' forays may be distorting company strategies and damaging corporate performance.
In one "ominous" development last year, the growth of corporate debt exceeded the increase in corporate equity last year by a record margin, notes Henry Kaufman, executive director of Salomon Brothers Inc. and a leading Wall Street analyst. This debt-equity gap was because of the nearly $100 billion spent by companies last year to buy up their own stock, which in turn reflected mergers, acquisitions and leveraged buyouts.
But as Congress begins a consideration of its response to the corporate takeover boom, it might pause to reflect that the willingness of companies to risk their capital in long-term research and product development is influenced by many factors.
And of those factors, the fundamental economic conditions -- interest rates, inflation, tax policies and customer demand, for instance -- weigh more heavily than a fear of corporate raiders, for most companies, executives say.
For all its myopia, American business' short-term preoccupation in the late 1970s and early 1980s was a reasonable strategy in a time of gyrating interest rates, when long-term decisions were very likely to be wrong.