Other people’s money: ethical implications of liquidating a company
It’s no surprise that companies are in business to make money. Although the heads of some of the largest and most profitable companies in the world will say that there are many other reasons; such as job creation and maintenance, personal job satisfaction, environmental concerns, etc., the bottom line is that a corporation’s primary responsibility and business objective is to maximize shareholder wealth. The concept of maximizing shareholder wealth is what causes investors to buy shares in a corporation in the hope that they will earn a high return on their investment. However, it also leads to the question: “How far will a company go to maximize shareholder wealth?” In the movie “Other People’s Money,” beginning with Danny DeVito, the prominent theme was maximizing shareholder wealth; that it was the ultimate factor that caused Danny DeVito to persuade the shareholders of the New England Wire and Cable Company to give him the votes he needed to have a controlling interest in the company and to liquidate the assets if he so desired.
Danny DeVito, aka “Larry the Liquidator,” stars as a corporate raider who takes over companies through a hostile takeover and sells off that company’s assets for huge profits. The last money-making opportunity Larry targeted was the New England Wire and Cable Company, a family-owned business that prides itself on treating its customers fairly and its employees with integrity. However, as Danny DeVito describes at a shareholder meeting, that won’t put money in shareholders’ pockets. By that fact alone, Larry will be able to successfully take control of the company. New England Wire and Cable Company is a division of the company that is losing money and therefore losing shareholder investment with a declining stock price and minimal new business opportunities in the offing. Larry’s plan is to simply take over the company and sell the assets of the New England Wire and Cable Company division to make millions. That’s the name of the game with corporations, right?
Financially, Larry makes an attractive shareholder case that many would argue cannot be passed up. The selling point that Larry makes very clear is the book value per share of stock to shareholders, which is a liquidation formula that represents the amount each share would receive if the company were liquidated. If Larry wins the shareholder votes, takes control of the company, and sells the assets, the per-share liquidation value of the New England Wire and Cable assets sold in the hostile takeover Larry plans is $25 per share. Comparing this amount to the initial market price per share of $10, yields a net earnings per share of $15 to shareholders upon liquidation of the company. However, if shareholders voted against Larry and the company’s liquidation did not go through, shareholders would have the potential to continue to lose their investment in a company that was no longer profitable. The decision does not seem difficult for shareholders: maximize their wealth by liquidating the company or continue to lose money by investing in an unprofitable company? However, it’s a more complicated decision than Larry wants to convey to shareholders. It is also where the ethics debate enters so heavily into the role of accounting and corporate America.
The role of ethics has been at the height of discussions since some major accounting scandals (Enron, WorldCom, etc.) emerged in recent years. In the movie, Larry is only concerned with the bottom line of maximizing shareholder wealth. As Andrew “Jorgy” Jorgenson, president of New England Wiring and Cable, said at shareholder meetings, it’s also important to consider all the jobs that will be lost due to the liquidation. A shareholder must decide if the ethical implications of taking a company that employs many in their area and selling the assets for a profit by themselves are worth the financial reward. Too often it is exposed that money-hungry executives like Larry will do anything to establish wealth, including unethical practices. This was also the case with Enron in 2002, when top executives engaged in accounting fraud to create wealth for themselves and maximize the wealth of their shareholders, ultimately leading to the demise of the company and the chief financial officer and director jailed executive. The movie “Other People’s Money” does a good job of bringing attention to the issue of ethics and greed in society, which will always be at the forefront of corporate America.