Perspective

Fortnightly Magazine - October 15 1995
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One of the iron rules of competition and open markets is that there are winners and losers. Winners tend to win very big; losers tend to lose everything and disappear, through absorption or insolvency. As deregulation takes hold, high-cost producers and less adroit managers may find themselves steamrollered by emerging strongmen and entrepreneurial upstarts. These rivals may usurp segments of their business by bidding the job cheaper and still making money, leaving a rising tide of shareholder suits in their wake. Some of these will be derivative suits for mismanagement; some will be securities law suits for misstatements in prospectuses. Most likely, the majority of lawsuits will cover both these bases.

The targets of this litigation will be the company officers and directors, of course. So how will they defend themselves?

Senior management will either take early retirement or add defending these suits to the list of their daily duties. Their lives are unlikely to be affected to any large extent. Outside board members, however, may find the experience a substantial and expensive headache. In part, this will be because some outside utility directors have a level of knowledge and involvement in their companies that may well fall short of the easily defensible threshold of responsibility.

Many utility companies are run like quasi-governmental entities, whose obligations are first to management and employees, second to ratepayers, third to creditors, and last to shareholders, who are really regarded more as deeply subordinated debt holders than as owners of the enterprise. The real owners are management. So when shareholders' lawyers ask for evidence of management and board efforts to deliver returns for common shareholders, some records will be hard to defend.

Through the Looking Glass

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