Sears Case StudyEssay Preview: Sears Case StudyReport this essaySEARS CASE STUDYby Robert A.G. Monks and Nell MinowIntroductionThe great advantage of publicly held companies is that they bring together capital and managerial expertise, to the benefit of both groups. An investor need not know anything about making or marketing chairs in order to invest in a chair factory. A gifted producer or seller of chairs need not have capital in order to start a business. When it runs well, both profit, and the capitalist system achieves its goals. Our system of capitalism has been less successful when the company does not run well. As some of Americas most visible, powerful, and successful companies began to slide, they demonstrated an all-but fatal weakness in the ability of our system to react in time to prevent disaster. Managers and directors at companies like IBM, General Motors, and Sears took their success–and their customers–for granted. They took their investors for granted, too, until it was almost too late.
The problem is that the strength of the system, the separation of ownership and control, is also its weakness. A shareholders investment in a chair factory gives him certain rights, including the right to elect the directors and the right to inspect the books. These rights may have some meaning when the company is small enough that the investors number in the hundreds. But in large, complex companies, with investors in the millions, they are likely to exercise a third right, the right to sell. While some economists will argue sale of the stock sends a significant
message to management, I agree with Edward Jay Epstein, who said that “just the exchange of one powerless shareholder for another in a corporation, while it may lessen the market price of shares, will not dislodge management–or even threaten it. On the contrary, if dissident shareholders leave, it may even bring about the further entrenchment of management–especially if management can pass new laws in the interim.”1 Just because shareholders desert a sinking ship, that does not mean that management will plug the leaks.
SearsSears Roebuck was a classic example. For nearly a century, Sears deserved the title “Americas favorite place to shop.” It was the countrys leading retailer, its catalogue a genuine part of American history. In the 1950s, the company founded Allstate Insurance. The company diversified into financial services in the early 1980s, acquiring the Dean Witter brokerage and realtor Coldwell Banker. The aim of the purchases was to create a giant supermarket of both goods and services, so that consumers could buy a house, finance it, insure it, and stock it with furniture — all under the same roof. Wall Street referred to the diversification as a “stocks and socks” strategy.
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