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Corporate Democracy is a Myth

Recently, there has been a great deal of outrage concerning the huge pay and severance packages awarded to a number of CEOs. There has been much criticism of the fact that CEOs earn 520 times that of the average worker. A great deal has been made of the scandalous actions of a number of CEOs and boards concerning the backdating of options. Sadly, a much deeper, more pernicious, more threatening problem of the future of our economy exists at today’s corporations: many corporate boards and managers are doing an abysmal job. The lack of competent leadership makes our companies less competitive day by day, causing an upward spiraling trade and current account deficit, as well as a near meltdown of the financial sector. The buildup of incompetent boards and managers is the result of poor corporate governance. Poor corporate governance now threatens more than just potential shareholder value; it threatens this country’s very economic survival.

To paraphrase Winston Churchill, "democracy might not be the greatest system there is but it is the greatest system mankind has invented so far." Many American corporations are dysfunctional because corporate democracy is a myth in the United States. They run like a decaying socialistic state. Our boards and CEOs exist in a symbiotic relationship where the boards nourish the CEO with massive stock options that are re-priced downward if the companies stock declines - making them forever valuable. They reward the CEO with pay packages and bonuses when the stock is floundering or the CEO is leaving the company. Corporate performance and the shareholders welfare seldom enter the picture. What kind of democracy is this? There is no accountability.

The inherent quid pro quo is to pay the board huge retainers for attending several meetings per year and rubber stamp ill conceived CEO proposals. In turn, a CEO can fly around the world on the company’s private jet on the "business" of visiting all the world’s greatest golf courses while he runs the company – and the value of your stock – into the ground. The average shareholder can do nothing about it. A great example is the subprime mortgage mess that has cost our economy and the populace untold billions of dollars and personal hardship. These losses did not stop boards from awarding huge severance packages to the CEOs most responsible for the current carnage.

It is the board’s responsibility to hold a CEO accountable, and remove the CEO if he or she is not producing results. But exacting such a measure requires effort and strategic consideration, and boards are often too lazy and/or passive to rock the boat, especially since the company will continue to pay and pamper and even indemnify them under almost any circumstances. Board members receive expensive tickets to important sporting events, the theatre, and are also treated to use of the company’s fleet. Worst of all, the board itself is not made accountable because corporate board elections are generally a joke.

Board meetings are often a complete travesty. I know because I have sat and do sit on a number of boards where I am in the minority. Because of this, today our economy is in a major crisis. Many of our companies are incapable of competing. Additionally our banking system has issued mortgages that cannot and will not be paid back. We are in this situation because there is no leadership in the executive suite. Why did we get here? Because in corporate America there are no true elections. It is tyranny parading as democracy. It’s a poison running through the blood of corporate America. Perhaps, with enough public support, the lawmakers and regulators will take note.

When you rid a company of a fruitless board, the rewards are often enormous because the underlying company and its employees can be excellent. It is the top level management that hangs like an albatross around the company’s neck. Years from now historians will marvel why we the shareholders – the legitimate owners of companies – did not do something effective about removing terrible managements. We can do something about the current situation. I will discuss in future entries how simple it can be and what has constrained us from taking action.

Comments

Way to go Carl. I can't agree more. Shareholders have the power, yet they don't exercise it. Americans are generally smart people - where are they getting their voting advice? Could it be their fiduciaries - american mutual funds/ pension funds that are the problem? Boards/Mgmt are entrusted with capital - employee pension money - that they can deploy. The nature of this system ensures that they will give this capital to fund managers that will vote for, and therefore entrench management. Look forward to reading you in the future.



Democracy is messy business... Face it..



Get your blog on nobosh and I'd love to be a regular reader.



This is exactly correct. corporate world has to change and look more on the employees who gives real output to the company, instead of paying millions of money to the CEOs.



There is too much focus on the CEO as if other members of the executive team are not important and only the CEO should have a role in building senior management. This mindset leads to a CEO's coronation or execution. Boards need to build a strong senior management team so the company does not need to rely on only one person to whom all the glory and blame goes to. This is not a quick fix solution but is the central management problem in American business.



Do you think that if executives, and more importantly board members, were paid based on stock performance that more great leaders would emerge in the corporate world?

As a stock holder I am frustrated with lucrative contracts, severance packages, and not to mention death benefits even of executives today. Then if someone needs to be fired, they get a windfall! With the current structure now there is no reward for being a great leader and there is no penalty for being a poor leader, rather as unconscionable as it sounds, a reward!



I find this comment very disturbing:"...The lack of competent leadership makes our companies less competitive day by day, causing an upward spiraling trade and current account deficit, as well as a near meltdown of the financial sector. The buildup of incompetent boards and managers is the result of poor corporate governance. Poor corporate governance now threatens more than just potential shareholder value; it threatens this country’s very economic survival. ..."

Really? So, outsourcing jobs to other countries doesn't hurt economic survival?

It's not always about the money Mr. Ichan. Sometimes, the CEO not only has a right to the shareholders who invest in the company, but to the hard working men and women who make the company by building the products, marketing the products, the people selling the products, etc. etc. Do I agree with the pay? No! I do believe that CEO's are paid WAY to much for basically "overseeing". CEOs of companies generally have VPs, Senior VPs, Junior VPs, Executive VPs, etc. etc. that actually do more work in their respective departments than the CEO. Why should a CEO get millions & millions to be a glorified "watchdog"? But sometimes, just sometimes, a CEO's worth is more than the money you give him!

Sorry, that's just my two cents!



I agree with your sentiment wholeheartedly, however, I would like to take a step back and look at our various regulatory bodies which needs revamping. SEC rules have not been revisited since I dont know when. Before we held Corporate CEO's accountable for mortgaging the interest of their shareholders, we need to also ask what SEC is doing to discourage naked shorting, stock shorting and allowing institutional stockholders to manipulate market price of even the best run companies. We have analysts working for financial institution/hedge funds who give their two cents on "upgrades" or "downgrades" without substance to financially benefit themselves and the hedge funds they are working for. Once we strengthen the corroded bottom of our stock market and make it reasonably clean, we can then clearly hold CEO's responsible for their performance (not that they cannot be held accountable now).

Like ordinary corporate citizen, CEO pays should be performance based, options strictly monitored. What we have also seen is that those attending stockholder meeting - major institutional and hedge funds - do little to voice their concern over the poor performance of the company because they cover their losses through shorting the stock.

Whilst we do have to hold CEOs accountable, we need to allow them to operate in a corrupt free healthy market environment where real performance is rewarded and price performance not manipulated by few 'big boys'

SIRI, this morning, is a perfect example of maket manipulation of a stock. No substantial merit in downgrade, yet the stock got punished !!



I think it's great that you have decided to do this blog. Before I get into really discussing my feelings on the subjects, how do we know that it is indeed you, Mr. Icahn, who will be participating?



Carl,
I think we have a great opportunity in this election year to take back our boards. Why dont you set up some form letters on your site here that can email specific congresspersons our views? Your bully pulpit and the current environment may be the combination we need to get this done. Thanks for all you do.



Who ever said corporations were democratic? The corporate ecosystem in place controls from the top down and the status quo is king.

Each industry suffers it's own problem but mostly it comes to chasing short term profit at the cost of long term growth.

Darwinism is based on change and the changes that can exploit the relative environment flourish. The benefit of being human is the ability to institute change but that takes creative thinking and, in the long term, vision and courage.

Why risk "visionary thinking" when the fat pay check, corporate jets and golf outings around the world are on the line.

Besides if these guys were so smart wouldn't they be creating there own businesses?



All of this reminds me of when I was in school and we read a book about coporations and what the author coined as "interlocking directorates" or "the good ole boys network". CEOS simply help each other out by serving on the compensation committees on each others boards of directors. Using a few generic companies as an example...... the CEO of company A has his/her salary determined by his/her board's compensation committee which is populated by the CEOs of companies B, C, and D. Next, the CEO of company B has his/her salary determined by the CEOs of companies A, C, and D. This is repeated for the CEOs of companies C and D. The take care of each other.

Obviously, there are huge conflicts of interest which lead to overpaid CEOs, lack of accountability and lack of effectiveness.



I am glad to see this criticism and call to activism.
The most effective activism is at the shareholder voting level; the other method is at the political level.



Any company's management should be held accountable for creating value for it's stockholders, employees and customers. If stockholders loses it's investment then company's management has not right to take astronomically huge bonuses and extravagently lavish compensation packages. All financial services companies on wall-street have done more harm than good to their investors this year, so their management must be forced to take a 100% bonus cut and at-least 25% pay cut this year.



I understand your position, Mr. Icahn, but I have to disagree.

Exorbitant CEO and Board Compensation has a purpose. Despite the fact that such compensation often does not lead to better performance out of the top brass, it sure as heck gets the rest of the company into high gear--everyone wants to be at the top.

Did a CEO of a certain Wall Street Bank that tumbled in 2007 deserve a $40M paycheck? Probably not--but that $40M paycheck looks mighty tempting, and if I'm an employee at that bank I might work just a bit harder to get closer to it.

If I were a shareholder, I would be fine giving a large bonus to the ONE CEO even if he were a buffoon, if it would make the THOUSANDS of other employees work harder to reach the top.



I completely agree with you regarding the abysmal state of to today’s corporate world. However I feel that you have no explained the true reason that we have the ineffective leadership governing the corporate world that we now see. It isn’t just the CEO’s that are underperforming in such a massive way but it is the entire management structure that has come into place in the last 20 years.

Prior to the 1980’s it was unusual for a person to gain a management position without at least putting in some time as a company employee in a non management role. As a result most management knew exactly what it was that the people they managed did as they had done it themselves. This gave them first hand knowledge of the skills required in the company they worked in. As well, there was an expectation that once you secured employment with a good firm you would be there for a long period of time. Again this resulted in management knowing the business they managed in intimate detail.

However something happened in the 1980’s that changed that and not for the better. There was an explosion of wealth and as a result corporations grew at a rate they had never grown before. Add in the new tech sectors that were popping up all over the place and you had an economy that faced an unheard of problem, a labor shortage. The sudden expansion required management and there wasn’t enough people being groomed for management positions within the companies that required the staff so they started looking outside the company. Suddenly you had a situation where management staff were being hired without knowing anything at all about the job they were doing.

This has perpetuated itself over and over and over until now you have most of the management in the business world completely cut off from the reality of the companies they are supposed to manage, They cover their ineptitude with buss words and industry speak and grasp at plans that get implemented without ever knowing if they will actually work. Suddenly you have a team concept in place and management is now calling itself the leadership and yet the same old problems are still going on.

On top of all of this it is now common place to hire you management staff directly out of University with no actual job skills at all and nothing but theories learned in a classroom about how a business model really works. This has lead to an explosion of consulting firms that are brought in to help out and in reality the consultants often know even less then the management but they are listened to and the end result are more bad ideas implemented without thought.

At the end of the day what you have are business people completely out of touch with their employees. Those companies that are doing really well are those with management that have been groomed within the company and have a solid grasp of what it is the employees do.

The sad part is that it will take a total collapse of the business world before anything improves. This will be the only way to rid us of the leeches at the top that are feeding off the workers. I just hope that there is something left for the workers to pick up and rebuild when the dust settles.



The quality of decisionmaking is a function, in part, of the experience of the decisionmaker. Is it any wonder that decisionmaking is poor after a 20-year period, during which any remotely competent manager could have kept stock price (if not cash flow) moving up and to the right?

Company managers want to do better. But theirs hands are tied without better facilities for gathering and processing information about their firms.

The first steps forward should be focused on improving the methods and standards for accounting. New regulatory measures will do little to fix the root cause of the problems we now face.



We are a democratic country/corporation disguised as tyranny because citizens/shareholders are lazy and passive. Its the American way; let the few do the work and the majority to sit back and relax.



I wholeheartedly agree with your comments about the lack of corporate responsibility and direction. Corporate board members do not want to be bothered with effective management in all of their divisions. In my personal experience with an executive vice president, general counsel and secretary (yes that is his complete title), I experienced how no one wants to make an ethical decision. He interrupted me as I tried to explain my complaint with his company's product. He tried to pass me off to another division which I had already encountered. He said he didn't know anything about the product his company sells! I want his job and paycheck too!!! My phone skills are much better.



I've felt for a while that majority of corporations just pay lip service to the concept of shareholder value. It's something to mention in investor calls and glossy annual reports. Whereas the actual decisions which affect shareholder value are made with the value of top management in mind.

I'm looking forward to the solutions you will propose for this issue.



Will you marry me, lol?!!!! It's like you have my thoughts...eh...or me yours is more like it. I absolutely MUST become under your employ. This country needs a revolution...except there's no where to go...no new land...and people have become so complacent and seemingly stupid. Who are our candidates speaking to anyway? Does anybody actually do the reseacrh to see if what they are saying can be done? Where's our constitution? The next generation is learning that debt is okay...and when all else fails, ask the government to take care of it. It is sick...and sad. What is so obvious to you ... and others like myself ... is it not obvious to board members...selling out for a ride in a BIG PLANE!!!! ooooohhhh a big shiny plane!!! Look what I'm in. It is utter madness. And why did Bear Stearns put themselves in that postion...they literally GAVE AWAY their building on Madison Ave...gave it away. Geez...236 million for the whole kitty...are you kidding me? Thank god for this site. you will hear from me often...and I hope to meet you someday in the same business circle.



Mr. Icahn:

I would like to commend you on starting this blog and enhancing our knowledge. These are the thoughts of an articulate and insightful corporate citizen, shareholder and activist. You deserve the success you have achieved because you have utilized your thought processes to uncover value and make our economy and the companies that comprise it more efficient. Please keep up your good work!



First I would like to say Thank you for creating a place where people can speak against the inefficient boards. I totally agree with your Comments, there is no better way to put it, your statements are bold and very strong. I have worked in many jobs and I can say that many USA companies are filled with incompetent managers, inefficient managers, and executives who aren't decisive. However I believe the problem is deeper then inefficient, low ethical values, no leadership of board members and CEO's. The same people with the same ethical values make the Government institutions, starting from Senate, House of representatives, Town Mayors, court system, police, corporations (as you said) education system etc. And most of the times you will see these ex gov worker, ex school professors, ex executives be part of a board, because board members are chosen based on their connections not on their qualifications.
Your hope in lawmakers doing something I say Good Bless you in your prayers. These lawmakers mostly represent the interests of lobbying firms (corporations) so their own pockets first. All over the world campaign contribution by a business to a candidate is illegal here in USA is legal so legal corruption. These CEO's are just a part of it, I would like to add that when they spend time around the world with their private jets more then spend time playing golf they spend it with their doll, high paying escorts (in case you don’t know). I did meet a CEO once someone who couldn’t speak straight and such men’s I call rats not leaders. Also it is a big problem that fact that on these culture people who stand by their beliefs are seen as not “TEAM PLAYER”. Often leaders are alone so they will no play as the team wants, they will lead, but it is a social understanding that team players are not liked.
The problem is that in America it has become a belief into the majority of people's minds that being straight forward, honest, hard worker, ethical is a sign of weakens not of strength, so people who do really have these qualities (the real leaders) do not get put into power positions. Many people have a poor memory of how this country was build, except the old generations, and many younger generations (sorry no offense meant) just like to party but no work, and are lazy, like the easy path. The depression times of 30’s are forgotten. So whoever gets power have these principles in mind as a symbol of succeeding in life. Worse the schools teach students to rat on each other, go to cops if they see something wrong, (in our case many people love to rat to the boss about their coworkers) which builds distrust and insecurity into people's character, hence no leadership. So I believe if you fire some crooks in a corporation other crooks will emerge because the system is filled with them, within one year they will become “TEAM PLAYERS”. To have change we need a revolution in USA, a social reorganization, because is healthy to progress. More I believe the current government system is not anymore Capitalism nor Communism, nor socialism the European style, something unseen, I call it: everybody look for themselves which is equal to ANARCHY. The virus is spread all over the system that only a total crash of the system will convince people to abandon such values and bring healthy change.
This will make people to squeeze efficiency out of the cooperate world who is filled with incompetent, a... kisser manager, without character and make many people to see value in hard work. We are in that process, I hope it becomes more dramatic so it affects enough people so there are fresh examples for current and future generations to remember of what happens when lack of leadership take hold of a country, which history has demonstrated with countless examples, but we keep forgetting. Human beings need to be constantly reminded of the past to act properly for the future.

Thank you.



Mr. Icahn you are one of my personal heroes and I really enjoy your blog. Im glad that at least one person in the US is able to stand up to the corrupt corporate bureaucrats. Keep up the blog!



You state that it is specifically America's culture of CEO / board intimacy that has led to America's lack of competitiveness on the world stage.

Do you have some evidence that the corporate governance culture in other countries is significantly better, leading to better competitiveness? I have not seen any signs of such an improved culture here in Europe, in any case.



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