Thursday, June 28, 2007

Alan Murray's Interview with Carl Icahn

Yesterday, The Wall Street Journal/CNBC sponsored a conference, hosted by Alan Murray. The topic was, I believe, private equity.

Currently, CNBC has video clips of this interview in its free section, broken into four parts. Because it will soon move to their paid, premium area, I won't bother frustrating readers with a link. However, it is well worth your while to watch the 30 minutes or so of total air time.

As I have written here, back in December of 2005,

"However, what really made me sit up and take notice was Icahn’s pointed comment regarding the modern large-cap American CEO. He feels that, on average, and as a group, they are seriously disadvantaging US business relative to foreign businesses. This is a fascinating viewpoint. It echoes my own research, writing and feelings, some of which are found elsewhere on this blog.

Icahn specifically voiced concern that today’s CEOs are so over-compensated that they simply do not pay sufficient attention to maximizing ongoing shareholder wealth. In this, I totally agree ( see my recent post regarding pay-for-performance for large-cap CEOs). He feels that if this trend continues, American business will lose its competitive edge and, over time, fall victim to hungrier, more attentive foreign competitors."

In his CNBC interview, Icahn explained in much more detail how he thinks this has occurred. I must say, I am in total agreement with him. I actually watched it happen at Chase Manhattan Bank in the late 1980s. Essentially, Icahn contends that today's CEOs are the guys who simply socialized well, didn't do anything notably innovative, nor stupid, and kissed ass. Being no threat to their managers, they were moved up in concert with said managers, resulting in senior executive ranks full of yes-men and average, mediocre "talent." Since a CEO of this type does not want a second smarter than him, the capabilities of the firm's CEOs decline with each generation. A business version of Aristotle's theory on the decline of leadership in society, beginning with the wise, benevolent philosopher-king.

Icahn is really funny, but very insightful and shrewd. He explains, without naming names, why CEOs like Jeff Immelt exist and prosper. He goes so far as to lay the blame not with the boards of these firms, but publicly-held mutual funds. Because those funds are so often desirous of pension money to manage, they will often judiciously withhold criticism of a company, in hopes of getting some business.

Too, although Icahn didn't single this out in the parts of the interview I watched (for some reason, each segment cut out at about the halfway point), once a CEO has made something north of $2-3MM, he really isn't all that motivated to make his shareholders wealthier, if he ever was. His major orientation is to just not lose his lucrative, relatively easy job.

I also found it both funny, and chilling, that Icahn explained that, when he actually gets inside of some of these firms, the managements, including the middle layers, are much worse than imagined.

His comments and insights echoed and supported my own proprietary research findings, which is that very few companies are capable of consistently outperforming the market on the basis of total returns. There just are not that many smart CEOs who are motivated to really take risks in order to enrich their shareholders at a rate better than those owners can realize by simply holding the S&P500 Index.

I think it's a mark of how right Icahn is, that so many corporations attempt to smear his motives and ideas when he arrives on their doorstep, holding a significant position in their company, and wanting a board seat.

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