Tuesday, January 27, 2009

Carl Icahn On Corporate Governance

Carl Icahn wrote a piece in Friday's Wall Street Journal on corporate governance. Coming from a guy who regularly invests in equities of companies he feels are poorly run, it's worth reading his thoughts.

He wrote,

"Private enterprise forms the basis for our economy. It provides most of the jobs we enjoy and creates the wealth that raises living standards. New government spending can only do so much to repair the economy. Reshaping corporate management can do much more.

The problem with doing nothing is obvious. Faltering companies are now soaking up hundreds of billions of tax dollars, and they are not substantially changing their management structures as a price for taking this money.

How does it serve the economy when we subsidize managements that got their companies into trouble? Where is the accountability? More importantly, where are the results?"

On this point, I am in total agreement with Mr. Icahn. We are currently wasting money by subsidizing badly-managed companies, e.g., GM, Chrysler/Cerebrus, Citigroup, BofA, and AIG.

Icahn suggests Congressionally-mandated reforms,

"Changes are needed and can come if Congress insists on reforms that make corporate boards and managers more accountable to stakeholders.

First, Congress needs to pass legislation giving shareholders enhanced rights to elect new boards, submit resolutions for stockholder votes, and have far more input on executive compensation and other issues. As companion to these reforms, Congress needs to pass legislation that prevents managers from making it more difficult for shareholders to exercise their ownership rights.

Managers often come up with creative ways to perpetuate their reigns of error. These include myriad takeover obstacles like poison pills, bylaw provisions, and others devices that thwart shareholder efforts to hold managers accountable.

If Congress is reluctant to make wholesale changes at the federal level, it can enact one simple provision that would allow many of the needed changes to take place on the state level: It can give shareholders the right to vote to move a company's legal jurisdiction to a more shareholder-friendly state such as North Dakota. Currently that decision is in the hands of company boards."

While I continue to disagree with investors', including Icahn's obsession with the pay of senior management, I don't disagree it's worth having Congress pass Icahn's proposals, one way or the other. The state's rights option is very appealing by creating 50 competing corporate domiciles.

Mr. Icahn closes with these sentiments,

"What we need are measures that let the capitalist system produce jobs and economic activity, with minimal but effective government oversight. Government spending is an important catalyst to economic gains, but we need to focus on improving the way private companies are managed so private capital can flow into them.

Lax and ineffective boards, self-serving managements, and failed short-term strategies all contributed to the entirely preventable financial meltdown. It is time for battered shareholders to fight back.

It is time for change and the place to start is in the corporate boardrooms of America."

It all sounds good, and very patriotic. But, really, just how do thousands of individual shareholders mount an attack upon a few members of the board of a large corporation?

Why isn't plain old share price the best investor weapon? Sell shares of companies you don't want. If enough shareholders do this, and other investors short the stock, the price will fall to a level that makes current management vulnerable; to creditors, predators, or simple liquidation, at which point some better management team swoops in to recover any salvageable value.

What's wrong with this scenario? Isn't it the ultimate in capitalist retribution? A poorly-run company simply loses value, until it no longer has capital with which to operate?

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