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There are few things that Ben Stein and I see eye-to-eye on. I still love reading his columns because, although I disagree with them, they are well researched and he does have impeachable credentials. When he’s arguing for regulation, however, you know something is up. This week, he did argue for regulation in a way that I never really considered, but completely and totally agree with.

His argument is that management led buyouts should be completely banned. If not completely banned, then all documents relating to the buyout should be made public prior to the shareholder vote. His reasoning is that management buyouts are a huge violation of fiduciary duty. Usually when you see the words “fiduciary duty” I’m rallying against H&R Block, but not in this case.

Basically, fiduciary duty of managers is to run the company in the best interest of shareholders. Now, we all know that isn’t happening in instances of option backdating, financial statement chicanery, and other ills of the modern management age but the management led buyout is one of the worst ideas for shareholders. What happens is that managers get together with banks and take a company private. Then, they either spin it back off to the public (making a boatload of money) or sell it off in pieces (making a boatload of money).

Stein’s argument (and my concurrence) is that the managers are ripping off shareholders because that money belongs to the shareholders and not to management. There is a conflict of interest because the managers, who are the agents of stockholders, want to pay their stockholders as little as possible. Obviously, this is not in the stockholders’ best interest. As an agent, the management has a duty (fiduciary, of course) to act in the stockholders’ best interest.

This is all encapsulated in the memo that management prepares for investors detailing how much they plan to make on the deal. Investors wouldn’t invest unless they plan to make (a boatload of) money. The memo is kept confidential because you wouldn’t want it leaked to shareholders to see the potential billions they won’t make if they sell for just a little more than the stock is worth now.

My second favorite part is the “fairness letter” written by an investment bank to tell the shareholders they are getting a fair deal. It’s usually written by an investment bank with their hands on the deal. Now, whatever motivation would they have to mislead investors on a fairness letter? Oh yeah, the boatloads of money they have their hands on.

So, if you are a shareholder and are looking at a management buyout *cough*HCA*cough* you may want to think about why management and a bunch of investment banks want to buy the company. What do they know that you don’t?