Giving into pressure from activist shareholders, Timken recently split in two companies. There was a detailed profile of the situation in the New York Times on Sunday.
I was struck by one of the early unqualified statements by author Nelson D. Schwartz:
As in all publicly traded companies, TinkenSteel’s board and top executives have a fiduciary duty to shareholders to maximize both profits and investor returns.
This wasn’t qualified or referenced, just given as a statement of fact. Yet it’s a very narrow definition of the fiduciary obligations of the board and top executives. Returns vs. profits. Today vs. tomorrow. There are a million nuances. Schwartz goes on to provide a compelling alternative. He explains that in the 1980’s, the company spent $450 million on a new plant:
… supported these huge capital expenditures even though it meant lower profits in the short term and less capital to return to shareholders. The wager in the 1980s paid off in the long run, allowing Timken to innovate, dominate the market for high-margin, specialized steel, and stay ahead of rivals in South Korea, Japan and Germany.
In battling demands to split the company Timken executives talked about the long-term viability of the combined companies,Timken executives fought back, making the case for keeping bearings and steel under one roof. Bearings require specialized steel that can, for example, withstand enormous pressure deep underwater in an offshore oil well. The metallurgical expertise the steel unit acquired in creating these advanced materials, they said, translated into products for other customers like medical device makers and drillers.
There were other structural reasons for the two companies to stay together. Because the steel business can be very profitable but is much more volatile, the bearings division served as ballast for the combined company. Excess cash from the bearing side smoothed out those peaks and valleys and helped pay for big investments like the huge caster.
But Mr. Larrieu and Relational maintained that if the money couldn’t be invested in the business now or in the foreseeable future, it should be returned to shareholders, who are, after all, the owners of the company. A few months after the transaction went through, one of the players making this argument, Relational Capital had sold their interest for a 75% gain. Long gone before any consequences of the transactions they provoked. So let’s go back to the opener. The unquestioned statement that it was the fiduciary obligation to maximize profit and investor returns. Not this kind of return. Not at the expense of longer term viability. Yet the game goes on.
People always nod sympathetically when I talk about intangible capital and the future of American business. Wouldn’t it be nice, they say, if we could make those intangibles real? Well, we can. And we should. Based on my outsider's read of the situation, it seems pretty obvious that Timken had significant long-term value prior to the split. Companies like this should have an ICountant to validate the importance of the people, the knowledge, the innovation capacity and the future outlook of their companies. Without hard information to battle the short-term thinking seen in this kind of transaction, our financial system will serve the needs of speculators rather than true investors.
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