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	REMARKS TO THE INDUSTRIAL LEAGUE OF ORANGE COUNTY Irvine, CA 2 February 1989

[Handwritten addition: 90%
5%
Estate]
Thank you, Bob (Burge).
[Handwritten addition: and thank you for being here.]
[Handwritten addition: Short Speech— Dad's remark]
I'm here tonight to talk about the problems I see in Corporate America ... offer a few solutions.
Corporate America is in the middle of a major overhaul ... long overdue.
Problems started just after WW ll ... entrepreneurial founders were replaced by professional managers; a no-risk mentality emerged.
Separation of ownership and control.
Many companies got away from core businesses, built huge bureaucracies ... GM 14 layers, Japanese 5.
[Handwritten addition: and]
No matter how poorly management performs, there's little that shareholders can do about it.
Managers are insulated ... poison pills, golden parachutes, antishareholder legislation.

There must be a system where CEOs can be dismissed if they don't do an acceptable job ... like football coaches, or like politicians who stand for re-election.
That's why I formed USA in August '86 ... upgrade shareholder awareness ... $1 mm in honorariums and another $1.3 mm from my book (Non-profit deal). [Handwritten addition: Never have taken an honorarium]
A new era of shareholder rights has begun ... shareholders are restoring management accountability, re-establishing that shareholders are owners, managers are employees.

We are seeing a transformation of American corporations:
—The goal ... size is meaningless, results are everything
Restructuring is trimming Corporate America's fat and is providing vitality for the entire economy.
[Handwritten addition: [Text stricken: —gets a little rough sometimes.]]
There's a new study out by Steven Kaplan at the University of Chicago ... Companies that restructured are proving to be substantially more profitable than their industry peers.
That's good for the country ... productivity and efficiency create more jobs, higher wages and increased tax revenues.
But restructuring is also creating a public outcry ... that happens when you force a change on the status quo.
There will be a lot of Congressional hearings ... they'll probably tinker with the tax codes and corporate regulations.

But the deals will continue, because they are economically driven.
I'm not saying every deal is going to be a good deal:
[Text stricken: —RJR Nabisco offer by KKR, $25 billion ... Good deal (explain)]
[Text stricken: — Philip Morris for Kraft, $13.1 billion ... Bad deal (explain)]
Some of the deals will be good, some not so good ... but the market will weed out the bad ones:
— New study by SEC chief economist Kenneth Lehn (Lane) shows how companies that make bad acquisitions become targets themselves
Other studies show that, despite the rhetoric, restructuring has been a phenomenal success.
Joe Grundfest at the SEC has shown how jobs can actually be saved by takeovers; Michael Jensen at Harvard estimates that shareholders have gained more than $400 billion from restructuring since 1982; and Bronwyn Hall at Stanford found that R & D spending is not affected by takeovers.
Just look at our economic performance since 1982, when restructuring heated up:
— Lowest unemployment in 14 yrs
— R & D up 100% in the past decade, after no growth the decade before
— And U.S. Industry is operating at 84.4% capacity, highest in almost a decade

But some managers are still fighting the restructuring movement because they don't have a significant financial stake in the companies they run ... They've forgotten who owns the company.
[Text stricken: Look at NCR's recent PR campaign emphasizing the company's many "stakeholders" ... stockholders are at the end of the list.]
Goodyear CEO Robert Mercer is [Handwritten addition: a] [Text stricken: another] good example. He told the L.A. Times recently:
—"Our No. 1 constituency is not the shareholder. You handle the customer first, then comes the shareholder, equally with employees, the communities where we operate and the suppliers ... the whole litany of interests."
Who does he think owns the company? Who takes the financial risks? Not him:
—42 years, $1.25 mm annually, 10,000 shares... 17-tenthousanths of 1%
Or look at Campeau's takeover of Federated Department Stores.
Federated CEO Howard Goldfeder... 37 years, $800,000 salary, big bonus... owned only 3,000 shares; 32 ten-thousandths of 1% of the company.
The best of all was Newmont's Gordon Parker... had 406 shares... not even round lots.
Jack Reichert, chairman of Brunswick Corp., has a unique theory of why managers don't need to own stock. He told the _Chicago Sun-Times_:
—"The question really becomes one of 'Do you believe you own the company?" I feel I own the company because I own it spiritually."
Don't you wish you owned stock _spiritually_ when the market crashed[Text stricken: ?] [Handwritten addition: in '87.]
If managers took the same financial risks, they would think like shareholders.
The fact is, there would be no takeovers if management did its job... (Definition of a going concern).

It's really that simple... keep stock price near asset value and there will be no takeover.
Restructuring for maximum efficiency is one way to get the stock price up... But also, companies [Text stricken: must start distributing more of their earnings to the shareholders][Handwritten addition: makes the company more competive. We are in a global economy & are required to compete or get out.]
[Handwritten addition: Another concern to be delt with]
Look at Ford, with $10 billion in retained earnings; Boeing, $5 billion... More money than they know what to do with, which has historically been a disaster.
Restructuring has helped FORTUNE 500 companies have the best profits _ever_, but dividends are still near an all-time low... average 3.6% yield.
Average dividends for Fortune 500 companies are only 20% of cash flow... that's $65 billion of $325 billion annually.
I'll give you an indication of how much they could distribute if they wanted to... Mesa, started in 1956 with $2,500, distributes more than $300 million annually.
Compare that to Boeing, $245 mm; Unocal, $115 mm; Phillips $175 mm and Goodyear, $100 mm.
Fred Hartley on dividends ...
Distributing a higher percentage of cash flow leaves plenty of cash for corporate growth.
Look at Mesa... distributed nearly $1 billion to our stockholders, doubled reserves in 3 years, and still growing.
Want to avoid another market collapse and keep our economy moving forward? Distribute 50% of cash flow instead of 20%:
—Dow would go above 3000
—Prevent a recession
—Upgrade standard of living for millions of Americans
And if Congress would eliminate the double taxation of dividends, the amount of money that could be pumped into the economy would be phenomenal.

This is a populist issue... There are 50 mm U.S. shareholders; California has the most, with more than 6 mm.
If you include pension funds and trusts, half of all U.S. households are directly affected.
In conclusion... shareholder activism and restructuring are here to stay ... this process will make [Text stricken: our country][Handwritten addition: America] more competitive than ever before.
We have the blueprint for success.
[Text stricken: Both stockholders and management have a responsibility to make sure restructuring continues... Stockholders must continue their activism.]
Management must realize that its job is to perform for the stockholders.
The formula is really that simple.
I'd like to close with an appropriate story:
— Three iron backspin
With all restructuring has done, why would anyone try to stop the movement?
Thank you.

QUESTIONS & ANSWERS

draft 1-27-89 11 a.m.
[Handwritten addition: But just like any period of change there's an iron-headed crowd that must be dragged in kicking and screaming
One time quick fix—retire 55— 65
There's a whole new generation waiting in the wings— different resolve.
[Text stricken: I can't wait to turn it over to them.]With the restructuring of Corp America which is the backbone of our economy I am excited about the [Text stricken: 1990's]prospects for the 1990's. Thank God for 8 years of Ronald Reagan and thank you for being here tonite.
I know there are a lot of doomsayers these days— But when I see our young people today I am very excited about the 1990's.
If we can finish the weeding out process we'll leave the '80's in a cloud of dust.
Thank you and God Bless]