DirectorsatWork 215will resist the efforts of the acquiring firm whether or not their re-
sistance best serves the corporation. After all, in most cases their
jobs are at risk.
Within U.S. corporations—and probably increasingly within cor-
porations organized elsewhere—takeovers put unmatured stock op-
tions at risk. Faced with this prospect, managers may employ mech-
anisms designed to resist inferior bids in an effort to resist superior
bids. They thus may use a poison pill against a bid that is great for
shareholders when it should be used only to deter bids that are bad
for shareholders.
In these situations, boards must recognize that CEOs and their
troops are under fire, just as they are when a board challenges one
of their proposed offensive acquisitions.
In both situations boards should expect managers to adopt a
siege mentality which obscures honest thinking about what is in the
owners’ interests. In both offensive and defensive situations there is
no clear mechanism that can assure that boards will respond prop-
erly, but boards must at least recognize what is happening psycho-
logically in these situations if they hope to respond effectively at all.
For investors, identifying directors with that capacity is key.
CAPITAL
A company generating substantial amounts of excess cash can deploy
it in one of four ways. It can reinvest in the business, repurchase its
own shares, distribute the cash in dividends to shareholders, and, as
was just noted, make acquisitions.
Aside from a few formal and manipulable limits, U.S. law gives
boards of directors unbridled discretion in the choice of these uses,
including declaring and paying dividends and making or not making
repurchases. Corporate charters rarely restrict dividend policies, al-
though a corporation’s loan and credit agreements sometimes do.
The policy of most U.S. boards is to pay regular quarterly cash
dividends at a stable or steadily increasing dollar amount. This pat-
tern is inconsistent with the reality that underlying business perfor-
mance is hardly ever that smooth. Earnings are almost always bumpy
(even if less bumpy than average stoc kprices).
Dividends tend to be way higher than they should be. Given the
importance of dividend policy in capital allocation decisions, certain
common reasons that boards use to justify their policies, such as