Knowledge that Transforms

This paper studies managerial compensation, financial reporting, and dividend policies of the seven major domestic steel producers during requests for union concessions. Substantial layoffs, reported losses, and sacrifices by nonunion stakeholders buttressed managers' case for union concessions. From 1980 to 1988, sample firms reduced their work force by about 300,000 (almost two-thirds) and annual wage payments from 16.1 to 8.6 billion. Reported income is lower during union negotiations, controlling for cash flows, as is managerial pay, with average CEO salary plus bonus declining 18%. Dividend reductions and white-collar pay cuts are substantial, pervasive, and clustered during union negotiations.

Turner Broadcasting illustrates how organizational mechanisms can be adapted to prevent a majority owner from imposing costs on minority shareholders through inept management or opportunistic behavior. These mechanisms involve issuing preferred stock with unusual features, concentrating its ownership among a small group of investors, allowing the new preferred shareholders to elect several directors, and requiring supramajority approval of major management decisions by a reconstituted board of directors. The alienability of the preferred stock is restricted to help insure that its ownership stays concentrated and in the hands of those with the specific knowledge and incentives to be effective monitors.