Carl Icahn On Boards, Governance & Compensation

Activist investor and former corporate raider Carl Icahn weighed in on executive compensation, boards and corporate governance again in this past weekend's edition of the Wall Street Journal. Building on the recent government-mandated restrictions on compensation for executives of banks receiving Federal investment, Icahn renewed his calls for corporate governance reform.

As he did in the editorial on which I commented in this post only a few weeks ago, Mr. Icahn writes scathingly of entrenched boards and executives. This time, he highlights his own organization, United Shareholders of America, urging readers to join it and him.

While I respect Mr. Icahn's accomplishments, attitudes and actions, the problem I continue to have remains what I wrote in the prior, linked post,

"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?"

I just don't see how shareholder maneuvering accomplishes anything, unless you happen to be able, like Mr. Icahn, to buy sufficient shares to challenge the board, gain a seat, etc.

But isn't this just exchanging one small group of controlling people for another? What if you don't happen to agree with Mr. Icahn on his choice of targets?

It just seems to me that really pure capitalism uses price- and little else- as the signal and weapon with which to discipline companies and their executives.

Isn't this process how it should work?

1. Company management entrenches itself while the board cooperates.
2. Management begins to enrich itself at shareholder expense, while business falters.
3. Business continues to weaken while executives continue to become wealthy.
4. Non-shareholders don't bid the company's equity up, while disgusted shareholders sell.
5. Equity price gradually, then more quickly, falls.
6. Executives can't raise fresh capital, losses mount, and firm becomes target for takeover.
7. Eventually, another company buys the ailing firm, or it files Chapter 11.

Short-circuiting this process via some sort of shareholder action seems, to me, beside the point. First, you're asking thousands of shareholders who don't know each other to agree on a common action.

It's one thing to want current management out. But what next? How do thousands of unacquainted company owners do this? They don't trust the board, but how do these thousands of individual owners assemble a workable new slate of directors?

It's feasible for Carl Icahn to do these things himself. He can amass large positions in target companies, assemble board candidates, and even articulate solutions for the company's ills. But that's not mass shareholder action. That's one wealthy activist or large fund manager behaving like Eddie Lampert.

How well is Sears doing since his takeover of the retailer?

Call me simple, but in my book, a liquid market with very low barriers to buying and selling shares is the best form of corporate governance.

Let equity prices do their work, and skip the heated arguments over more legislation and regulation over corporate boards and their actions.