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Chrysler Corp., Krekorian Reach A Five-Year Truce Agreement

Ownership in U.S. companies is fragmented in that there are a very large number of shareholders, each of which holds only a very small fraction of the total number of shares outstanding. This enforces the principal-agent problem. Without having a major (core) investor(s) the current shareholders might not even agree on what management should do. Moreover, even if they agree that management is not maximizing their wealth, coordinating their actions to influence management action (and potentially firing them) is extremely hard.

Let me give you an analogy on coordination. In western movies, horses were tied together at night. So even if all the horses wanted to run free, they wouldn’t be able to go anywhere as each would be pulling in a different direction. I guess I need to watch more MTV to give you better analogies.

I want to use the Chrysler-Krekorian news as an illustration of the importance of a core investor in disciplining management. (See also the Mattel-Hasbro story above.) Krekorian, who has a 13.6% stake in Chrysler, decided to exert his influence on Chrysler not through possibly launching a proxy fight, but obtaining some concessions from management. He was able to choose his appointment to the company’s board. This would give Mr. Krekorian more access to Chrysler’s management. Moreover, he was also able to influence other financial policies, including the company’s promise to re-purchase its own shares in the future.

Story Source: WSJ, 2/9/96, p. A3