Regulate corporate raiders

In this neo-Darwinian, “free” (i.e. deregulated) capitalist economy of ours, one of the easiest ways for an already-wealthy individual to get still wealthier on the backs of everyone else is by becoming an “investor” and “turnaround” specialist of the “corporate raider” variety. How is this done, and with what effect? What can be done about it?

Corporate raiding begins, of course, with personal privilege and wealth from inheritance or another source. It helps if the would-be investor-raider has been exposed to some economic theory at an accredited business school, preferably followed by some brief practical experience with a venture capital or other investment bank or firm. (High IQ is not a prerequisite for this type of work.) Looking to greener pastures, the budding raider wants, if he can, to form an investment group of his friends of similar background, wealth, and inclination to pool their money and gain still more. Together they study the economic scene in search of a vulnerable target company suitable for “altruistic” take-over, for one reason or another. It helps if the company has issued stock in the public market that can be bought in friendly or hostile manner in sufficient quantity for the raiders to gain a foot-hold or controlling interest on the Board of Directors.

Once sufficient control of the company has been gained in this (or some other) way, the investment or raider group sets about calling the shots by reorganizing and streamlining the company, usually by reducing employee costs (numbers of staff or their benefits, or both), selling off lower performing units or services, and expanding others. It is then possible to recast corporate financial reports and projections of future sales, income and profits in a more favorable light, which then allows the team to approach banks, other venture capitalists and investment companies in order to attract still larger investments and obtain huge loans, which in turn can be used to pay for more intensive promotional advertising, fund further expansion of operations, drive up share price, and pay generous annual management fees to the raiders for their selfless service to the company.

By loading the company with inordinate levels of unsupportable debt based on inflated estimates of asset values and improbable projections of future profit, the raiders all too often set up the company for eventual disaster, including outright bankruptcy due to the inability of the company to service the debt. At that point, it helps if the raiders spot the impending doom before anyone else, and start to bail out while the going is good and the stock price is still high. It may be possible to sell off the remaining company, in whole or in parts, at a considerable profit, and the raiders can then walk away with tens of millions of ill-gotten gains, at the expense of creditors, taxpayers, other shareholders and hundreds, even thousands, of dismissed employees. Turning their backs on the past, and only looking forward, the raiders then move on to target another company, and another, and another, one after the other, using similar tactics and leading to similar results. Some even have the temerity to run for political office and use their increased, under-taxed wealth to finance their campaigns and in effect buy the votes of voters who aren’t paying attention.

Looking back on the pattern of such investor-raider exploits, one example after another in recent years, it becomes evident that these raiding practices all too often send American jobs, profits, and know-how overseas. The raiders frequently find ways to cache their own ill-gotten gains in overseas tax havens designed to avoid or evade U.S. taxes, which ordinary, law-abiding Americans cannot do. While complaining of high corporate and individual tax bracket rates in the U.S., these corporate investors and raiders usually do not in fact pay anything like the tax rates they complain of. The average effective tax rate which these investor-raiders actually do pay (if any) is usually lower that the average income tax rate paid to the U.S. Treasury/IRS by hard-working American blue-collar workers.

Such practices are sometimes explained and defended as perfectly legal under statutory law because over the years wealthy self-styled elites, with thanks to their teams of lobbyists in the federal and state Legislatures, have managed to control legislation and kill any and all attempts to pass more democratic regulatory statutes. They have systematically stacked the laws in their own favor, at the expense of the rest of the nation. The ultimate explanation or justification can be delivered in three words: This is America. It sure is.

But should it be this way? Regardless of the lack of statutory regulation, there is little doubt that such corporate raiding by wealthy elites harms and damages everybody else. It violates the moral principle “Primum non nocere,” to “firstly do no harm.” In short, this corporate raiding may or may not violate codified law, but it certainly causes harm that can and should be remedied under the Common Law of Torts (i.e. the laws governing and compensating harm to others). The harm results directly from a combination of callous, reckless behavior, incompetence and negligence on the part of the raiding individual or investment group. Should “We the People,” as American citizens in a democratic Republic, presumably with respect for the Common Law, continue to turn a blind eye toward this kind of malfeasance and its damaging consequences for others? Or has the time come to stand up and put an end to it?

A potentially effective and practical way to initiate the process of reform, with or without statutory regulation, is to encourage and organize shareholder, creditor and employee class action lawsuits under the Common Law of Torts, to hold mal-practicing “investors” and “raiders” liable for the demonstrated harm they have profited from. Such lawsuits should seek to re-coup the millions of dollars of ill-earned, under-taxed gains in order to compensate other shareholders and especially the victimized employees who have lost their jobs as well as pensions and other benefits, as a direct result of the malfeasance of the raiders. This is common practice in personal injury law. Why should it be different for abusive, harmful corporate raiding?

Winning class action lawsuits and taking back from wrong-doers tens of millions of dollars in damages will pass a message throughout the U.S. It will call attention to the magnitude of corporate raider abuse and the damages it causes in our country. It will provide fertile ground for drafting of appropriate, detailed regulatory legislation at Federal and State levels. The U.S. economy will directly benefit because raiding middlemen will no longer be able to add to their personal fortunes by unregulated bleeding of the U.S. economy. Finally, it will provide greater social justice, more equitable fairness to regular Americans taxpayers who actually work. It’s time for us to reign in and regulate the corporate raiders, beginning with civil lawsuits and ending up with detailed legislation that properly criminalizes their malpractice.

Sharon, Conn., resident Anthony Piel is a former director and general legal counsel of the World Health Organization.