The journey of Họagen-Dazs is a truly an American
“rags to riches”experience, the story of a hard-working young man with a vision, which he transformed into a reality making and marketing a new and better product, and creating for all of us the most delicious ice cream imaginable: Họagen-Dazs.
The commercialization of ice cream in the United States was pioneered in 1851 Baltimore. It was hand cranked and sold—quickly, before it melted—at point of origin. The invention of refrigeration and its place in transforming the family kitchen made ice cream a viable and semi-durable household food product. Five million gallons were sold in 1899. Only a decade later, ice cream sales soared to 30 million gallons and by 1919 sales topped 150 million gallons.
Here’s where the Họagen-Dazs story begins. In the early 1920s, Reuben Mattus, at age 17, was working for his mother, a small-scale New York ice cream propri- etor. He peddled her fruit ice and ice creams from a horse-drawn carriage. The competition wasfierce and the profit paltry. The ice creams that he and his competitors sold were typically of poor quality, mostly milk-based, air bubbly, uneven, and poorly packaged.
Reuben Mattus knew that his prospects were pretty dismal if business continued“as usual”and that he had to do something radical if he was to change his fortunes in the ice cream trade. The change he made was to specialize in high quality ice cream. His expertise in the trade, his willingness to experiment over and over again, and his unfailing imagination led him to a promising venture. He substituted fresh cream for milk, more butterfat, fresh egg yolks, and a host of other superior ingredients, such as dark chocolate from Belgium and vanilla beans handpicked in Madagascar.
He whipped the resulting blends longer and more
rapidly to eliminate any trace of air or ice crystals so that thefinal product was a richer, smoother, and creamier ice cream. The new taste and texture were in a class by themselves.
By 1959 word had spread quickly throughout New
York. Rueben Mattus’s ice cream was much sought after.
For him, its success only fed his wildest fantasies: a company that made gourmet, ice cream parlor ice cream that could even be found in the nation’s dairy cases. To achieve this dream, he converted his business from a proprietorship to a corporate structure. He invented a new name for his ice cream: Họagen-Dazs.
This Scandinavian-sounding name was totally made up, but it did send out a clear message: always fresh, exotically good, and deliciously cold.
In 1976, Reuben Mattus’s daughter opened thefirst independent Họagen-Dazs store and it was an imme- diate success. Soon after, Họagen-Dazs franchises mushroomed almost everywhere in the country and in response to global demand, its international distribu- tion took off in 1982. It is now available in 84 countries, including Ireland, Italy, Israel, and India. Like Coca-Cola, Nike, and McDonald’s, Họagen Dazs became a clearly identifiable multinational product.
A year later, in 1983, Reuben Mattus cashed out, selling the company to Pillsbury who, in turn, sold it to General Mills in 2001. But does it matter who owns Họagen-Dazs? It tastes like Họagen Dazs. That’s what counts, and Reuben Mattus is the reason it does.
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But There’s a Downside, Too! Why, then, would anyone choose sole proprietorship when they can just as easily incorporate? Even if you decide to remain a small business, why not form a corporation and own all its stock? This way, you avoid unlimited liability.
In many cases, the decisive negative to the corporate form of business organization is that both the owners and the corporation itself pay taxes on the same corporate income. That spellsdouble taxation. The corporation, chartered as an independent, legal entity, must pay a tax on corporate profits (also called corporate income tax). But when the corporation’s after-tax profit is distributed to its stockholders in the form of dividends, those dividends are taxed as well. This double taxation is enough to discourage many from taking the cor- porate route.
From the stockholders’ point of view, another negative to corporate own- ership is that stockholders exercise corporate control only theoretically. In practice, management is in a much stronger position to control the corporation than are its stockholders. Typically, a stockholder or even a large group of stockholders hold only a minute fraction of the total outstanding stock. It is difficult for them to draw together the necessary 50 percent plus one share to vote out management. It does sometimes happen, but these are rare and notable events.
The Threat of Takeover Corporate management has its own problems.
While individual stockholders or groups of stockholders may themselves not have the ability to gather the necessary voting stock to change management, an out- sider—typically, another corporation—may decide on a takeover. By aggressively buying up enough of the target corporation’s stock, it can eventually come to own the corporation outright. It’s an old rule of the sea. Big fish eat little fish.
How can management defend itself against a hostile takeover attempt? It may resort to an array of antitakeover, or “shark-repellant,” activities. One strategy may be to do precisely what the aggressor corporation does: It can buy up its own corporate stock. That is, instead of providing its stockholders with dividends, the threatened management uses the corporation’s profits to buy its own stock until the corporation virtually owns itself, making it impossible for a hostile takeover attempt to work. After all, the corporation can simply refuse to sell its shares, regardless of price offered.
Management can sometimes avoid a takeover by making the corporation less attractive to the potential acquirer. How? It can purposely accumulate consider- able debt by borrowing on the value of the corporation’s assets and using the proceeds to pay a one-time cash dividend to its own stockholders. This newly acquired corporate debt may make the targeted corporation less appetizing.
Management could also pursue a“lesser of two evils” strategy, encouraging a friendly corporation, a“white knight,” to make a competitive takeover bid. Under friendly new ownership, the threatened management stands a better chance of surviving.
You can see why small yet successful corporations are attractive targets for corporate takeover. Many of them, with impressive track records, simply cannot withstand a determined,financially well-heeled corporate aggressor.
The Issue of Corporate Governance
Supreme Court Justice Louis Brandeis (for whom Brandeis University is named) once wrote about corporate enterprise: “There is no such thing as an innocent stockholder. He accepts the benefits of the [corporate] system. It is his business and his obligation to see that those who represent him carry out a policy which is consistent with the public welfare.” While Justice Brandeis was clear about where
What are the major disadvantages of corporations?
corporate responsibility lies, he was much less clear about how stockholders can put into effect their rights to corporate governance.
In theory, stockholders own the corporation. They hire management to run it and appoint a board of directors to oversee management’s activities. The rela- tionship between the board and owners is based, fundamentally, on trust. Owners entrust the board with the task of ensuring that management works loyally and effectively to promote the owners’ best interests. In practice, boards of directors may do little of that. Instead, they may tend to function more as management’s rubber stamp. Management frequently pursues goals that it sets for the corpora- tion—and particularly for itself—and too often with incomplete accountability to the board of directors. The board, whose job it is to ensure accountability, is either ill-equipped to do so or worse, reluctant to demand it. That is, too often, corporate governance is stood on its head. It may not be a matter of stockholders’
innocence—or lack of it, as Justice Brandeis thought—as much as a matter of stockholders’ corporate powerlessness.
How did this inversion of corporate governance come about, and what are its consequences? In part, the fault lies with the way boards of directors are chosen.
The CEO—chief executive officer of corporate management—often plays a major role in the board’s selection process and, understandably, the CEO favors board members with whom he or she would be most comfortable working. In turn, the CEO-picked board members end up accommodating CEO executive decisions.
Who’s left out of this arrangement? Owners.
It seems reasonable, doesn’t it, that if boards of directors pursued the owners’
interests, they would reward successful management according to the degree of success and replace unsuccessful ones. It seems no less reasonable that under management-picked boards, regardless of managements’ performance, their rewards end up being abnormally high and replacements rare. That’s precisely what you see in the graphic of Exhibit 1.
Look at the ratio of CEO pay to the average earnings of blue-collar workers. In 1980, CEOs earned 42 times the blue-collar average. Setting aside the issues of whether that ratio is deserved or whether owners had a say in determining it, the ratio of CEO pay to blue collar-earnings doubled to 109 by 1990 and climbed again to 263 times by 2009. Accountability? Owners seem to be totally out of the picture.
They can either accept it or sell their ownership. They typically have no other practical recourse.
EXHIBIT 1 U.S. CEO-to-Worker Pay Ratio
1980 42 TIMES
1990 109 TIMES
2009 263 TIMES Corporate governance
Corporate governance is concerned with the rules governing the structure of the corporation and the exercise of power and control of the corporation by shareholders, directors, and management.
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