SEARS CASE STUDY

by Robert A.G. Monks and Nell Minow

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Introduction

The 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 America's most visible, powerful, and successful companies began to slide,
Such a group would give the board non-binding advice on matters such as major restructurings, acquisitions, mergers and executive compensation. Hanson hinted that he favored a major restructuring, thus joining the growing school of thought that argued that Sears's value could only be realized when the successful financial divisions were spun off from the plunging retail division.

After discussions with Sears officers, CalPERS agreed not to press for the shareholder advisory committee at the annual meeting in May of 1991, on condition that Sears executives meet with CalPERS at least twice a year. But performance continued to decline, and investors continued to seethe. Fourth-quarter earnings revealed early February showed a 37 percent decline in earnings, before a $155 million charge for the retail division restructure. Including the charge, earnings declined 74 percent .

Public confidence in Sears hit a new low. Wall Street analysts said that Sears required $1 billion in cuts to make it competitive, substantially more than the $600 million that Brennan said the cost-cutting program would achieve. Standard and Poors reduced its credit rating on Sears to single A. Asset Analysis Focus commented that: "Sears, Roebuck & Co. has one of the greatest price to intrinsic value disparities of any large publicly traded company."5 In February 1991, Sears traded at between $25 and $30 a share, while analysts speculated it had a breakup value of up to $90 a share.6