GM's Pension Fund Started the Take-Over Debacle of the 1980s
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In 1950, General Motor's management wanted to create a pension plan for their employees. They had two options for the kind of funds they created (Beatty, 157):
"Defined benefits" gave you a fixed portion of your last salary. If the fund went up, GM paid less. The idea was that GM would pay less- forever.
"Defined contributions" did it differently. GM paid a fixed annual sum into the plan. The retiree either received a fixed stipend, or a variable one with the success of the fund.
Defined benefits won out after the Board finance committee reversed management's defined contribution recommendation. This did two things. It forced fund managers to focus on returns. It also built up enough funds in both the GM fund and all the other ones that followed it to stoke the buy-out boom of the 1980s (Beatty, 158).
Drucker pointed out that in a hostile take-over, the big pension funds supported the buy-outs because of a bribe they received. The raider bought some stock of a company and then offered to buy the company. The company refused as it believed it could manage things better. Then the raider offered to buy the stock of other stockholders for a premium over the current market. The seller here was usually a pension fund after that bigger return. The purchase of the stock was paid for with a huge loan. When the buy-out was successful, the new management loaded the company with new debt to pay off the huge loan.
All this started the miserable cycle of self-protection, including golden parachutes for senior management, later in the 1980s. Companies ran themselves to fend off a raider, not to be profitable. They ignored stockholders who then were only too happy to support the raider. Miserable is the correct word. The result was miserable, ultimately, for everyone.
Reference
Beatty, Jack. The World According to Peter Drucker. The Free Press. 1998.