It’s no surprise that companies are in business to make money. Although the bosses of some of the world’s largest and most profitable companies 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 makes investors buy shares in a corporation in the hope that they will get a high return on their investment. However, it also begs 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; which was the ultimate factor in Danny DeVito persuading the shareholders of the New England Wire and Cable Company to give him the votes he needed to take a controlling interest in the company and liquidate the assets if he wished.
Danny DeVito, aka “Larry the Liquidator,” plays 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 looked at was the New England Wire and Cable Company, a family-owned company that prides itself on treating its customers fairly and its employees with integrity. However, as Danny DeVito describes at a shareholders’ meeting, that will not 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 investments by having a declining stock price and minimal new business opportunities in sight. Larry’s plan is simply to 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 case for shareholders that many would argue cannot be passed up. The selling point Larry makes very clear is the per-share book value of the 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 liquidation value per share of the New England Wire and Cable assets sold in Larry’s planned hostile takeover is $25 per share. Comparing this amount to the initial market price per share of $10 gives shareholders a net gain per share of $15 upon liquidation of the company. However, if the shareholders voted against Larry and the company’s liquidation did not go through, the shareholders would have the potential to continue to lose their investment in a company that was no longer profitable. The decision does not seem complicated for the shareholders: to maximize their wealth by liquidating the company or to continue losing money by investing in an unprofitable company? However, it is 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.) have 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 liquidation. A shareholder must decide whether the ethical implications of taking over a company that employs many in their area and selling the assets for a profit on their own 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 at 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 CFO and CEO jailed executive. The movie “Other People’s Money” does a good job of drawing attention to the issue of ethics and greed in society, which will always be at the forefront of corporate America.