The Icahn Report

My Responses to Your Comments

On Corporate Democracy is a Myth...

Dan writes...

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.

Answer: Thanks for the suggestion. That could be a good idea and crosses over into what I've been talking about. We intend to put out petitions and form letters.  I want a ground swell. I want people to subscribe. I believe something can be done in Washington.

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Regarding Your Comments on Yahoo

Many of you have been asking me about Yahoo. Please remember I am in the middle of a proxy fight. A proxy fight involves a complicated process of SEC approvals, federal securities laws, filing requirements and a great deal of time and money.

At this time, due to SEC regulations, I do not intend to post your comments regarding the proxy fight. However, I am planning to give you my views about Yahoo and its management shortly. If you wish to be informed I invite you to subscribe. Stay tuned.

SECURITY HOLDERS ARE ADVISED TO READ THE DEFINITIVE PROXY STATEMENT AND OTHER DOCUMENTS RELATED TO THE SOLICITATION OF PROXIES BY CARL C. ICAHN AND HIS AFFILIATES FROM THE STOCKHOLDERS OF YAHOO! INC. FOR USE AT ITS ANNUAL MEETING WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION, INCLUDING INFORMATION RELATING TO THE PARTICIPANTS IN SUCH PROXY SOLICITATION. WHEN COMPLETED, A DEFINITIVE PROXY STATEMENT AND A FORM OF PROXY WILL BE MAILED TO STOCKHOLDERS OF YAHOO! INC. AND WILL ALSO BE AVAILABLE AT NO CHARGE AT THE SECURITIES AND EXCHANGE COMMISSION’S WEBSITE AT WWW.SEC.GOV. INFORMATION RELATING TO THE PARTICIPANTS IN THE PROXY SOLICITATION IS CONTAINED IN THE PRELIMINARY PROXY STATEMENT ON SCHEDULE 14A THAT WAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 2008.

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.

Absurdity of Corporate Board Elections

This country's corporate democracy – the primary mechanism of which is the election of a company's board of directors – is ineffectual. Every year, a company will circulate a proxy statement to its shareholders for their vote on a slate of board nominees, but those nominees are nominated by the board, and they nominate themselves or others that they deem to be "qualified."

It is possible for a shareholder to nominate directors, but the company does not have to include these nominees in the company's proxy statement. In an attempt to elect nominees to the board in a proxy fight a shareholder is forced to comply with arcane rules for prior notification and to prepare and circulate his or her own proxy statement at great expense. A proxy fight can cost millions of dollars out of the shareholders pocket.

Faced with a contested election for the board, management will spend the company's money (the assets of the shareholders) fighting to reelect themselves and their handed picked nominees. To add insult to injury, it's likely that the company has a staggered board In this case, even if the shareholder wins seats, the representation will not be the majority required to enforce action thus necessitating another proxy fight the following year. Occasionally newly elected directors, even if a minority of the board, are able to sway the incumbents. However, this is often very difficult to achieve – trust me, I've been there.

The process is akin to the President of the United States anointing himself as his party's nominee for re-election and then accessing unlimited public funds to run the election campaign. He then runs against candidates that must finance their campaigns from their personal assets. The current corporate election process of our public companies becomes more unconscionable when one considers how difficult it is to remove a director that is not satisfactorily performing his or her duties. But the removal process is a post for another day.

In the last several years, the Securities and Exchange Commission has paid lip service toward improving the process, but no real progress has been achieved.

About CEOs – Anti Darwinian Metaphor – Survival of the Unfittest

The following is a metaphor I use. While it is slightly facetious, there is much truth to it. But keep in mind, there are many CEOs, even some I have sparred with, that are exceptions. Often, their companies are undervalued not necessarily because of them but because there are restructuring opportunities that their boards stand in the way of. CEOs that I have interacted with like Dick Parsons from Time Warner, Jim Kinnear from Texaco, David Roderick from U.S. Steel, Bob Rossiter from Lear, and Bill Fatt from Fairmont among others … do not fit the following metaphor. But unfortunately, there are too many CEOs in this country that the following does pertain to.

Anti Darwinian Metaphor

The way CEOs become CEOs in America is a travesty. This is one of our major problems. I use the anti - Darwinian metaphor. The survival of the unfittest.

If you remember if you were in college the fraternity president was always there for you. When you had nothing to do or when you were a little depressed. Feeling down. You go to the club and the fraternity president would always be there. You wondered when he had time to study which he probably didn’t do very much of in school. He was there to sympathize with you if your girlfriend didn’t show up or didn’t call you back and you obviously sort of liked the guy because the fraternity president was usually a likeable guy.

When the elections came up you would always vote for him. He had a couple qualities - the fraternity president. Politically, he was a survivor and he never made many waves. He did not promote controversy. Therefore when he went out into corporate America he was able to move up the ladder fairly quickly. Remember he survived, he didn’t make waves, and he wasn’t a threat. He kept moving up and up.

Eventually he becomes the assistant to the CEO. The CEO had the same qualities. He’s a survivor. He’d never employ anyone underneath him who might be a threat. The boards like these guys… this type of CEO. The boards generally don’t own any stock (another problem with our system). The boards don’t really care to hold CEOs accountable. Remember it’s a symbiotic relationship. These guys pay the boards very well – they give the boards perks. The boards don’t care to hold them accountable because that might endanger the perks they love so much.

When the CEO retires the assistant becomes the CEO. And remember what I told you. He’s a survivor. He would never have anyone underneath him as his assistant that’s brighter than he is because that might constitute a threat. So therefore, with many exceptions, we have CEOs becoming dumber and dumber and dumber. We can all see where this is going. It would almost be funny if it wasn’t such a threat to our ability to compete and to our economy in general.

Absurdity of the Staggered Board

With a staggered board, board members are grouped into classes. Each class typically represents about a third of the total number of directors, and only one class comes up for election in a given year, thus assuring that it will take more than one costly proxy fight to gain a majority of the board seats.  An activist shareholder attempting to effect change at a company that has a staggered board has to mount, finance and win at least two very costly proxy contests over a period of at least two years to gain a majority of the board seats. Even if the activist has the support of the majority of shareholders, the activist would still need to work through two hard years to obtain control of the board.

To make matters worse, under Delaware’s General Corporation Law which governs the majority of public companies, directors on a staggered board can only be removed for cause unless the certificate of incorporation provides otherwise, which it never does. This is true even if a majority of the shareholders want to replace the existing board.

If a company has a staggered board it is nearly impossible to change control of that company in less than two years.  But as we all know, two years in the life of a poorly managed company is an eternity.  Although this is not a problem unique to United States markets it is by no means universal.  In many countries the ability of shareholders to call a meeting and remove and replace directors is enshrined in the local law of the jurisdiction. This prevents the stagnation and abuse of shareholders that a staggered board can promote.

It is time for all public U.S. companies to be governed by a policy that allows significant shareholders to call a meeting at which the entire board can be removed and replaced by the vote of a majority of the quorum. This sensible policy would be a major step in the right direction to promote shareholder democracy and would put the United States on par with other countries that value the efficient management of critical engines of their economies---public corporations-- over the interest of entrenched managements.

Something can and should be done. We need to let our Washington representatives know how critical these issues are to shareholders. We need to make management and boards accountable. We need… change.

Comments on Sandy Weill's Statements Concerning Citigroup

To public companies, activist investors might seem a bit confrontational. How else would they describe someone that is buying shares, trying to replace a board and sending an open letter to current directors citing their unreasonable behavior? But let's face it, many domestic companies are experiencing massive losses of assets and huge declines in stock market value, often due to the failure of top management. Someone needs to demand that directors’ act responsibly namely in the selection and supervision of management.

If shareholders are not allowed to hold poor boards and CEOs accountable, how can our companies compete? Who suffers? In a declining company, it's not only the CEO receiving huge severance that’s a problem, it’s also the thousands of employees that are fired due to mismanagement.

Citigroup is a good case in point. It wasn’t so long ago that everyone from branch managers to securities regulators were worried that Citi was on the path to global dominance. Now Citigroup is being forced, reluctantly, into intense cost cutting and the selling of assets.  Telegraph.co.uk has pointed out in "Arch critic calls for Citigroup to be broken up," that analysts believe a break up would be Citigroup's best option. What can be ascertained from Citi's dramatic change in fortunes?

A recent article published in the Financial Times entitled "Citi's Weill admits flaw in 2003 succession" may give us some insight. The article states that Sandy Weill, Citigroup's former chairman and CEO "acknowledged that the planning that led to the choice of Chuck Prince … was flawed and turned out not to be the 'right thing' for the company." Weill now believes that "the board should have fostered competition… rather than handing the job to Mr. Prince."

Absurdity of The Poison Pill

The poison pill prevents any shareholder, or a group of shareholders acting in concert, from owning more than a certain percentage of a company by allowing all other shareholders to purchase shares at a lower price in the event one chooses to cross the ownership line (typically 15%) without prior permission from the company. This effectively kills the value of their investment – hence the name, "poison pill." Public companies refer to a poison pill as a "shareholder rights plan." Does anyone else find that amusing? If anything, it undermines shareholder rights rather than supporting them.

Initially approved by the Delaware court in 1985 under Moran vs. Household International, over 1,500 American companies have a poison pill, and it can be put in place and removed by the directors as they please whenever they please without a shareholder vote. Typically directors feel comfortable in knowing that no single shareholder or group of shareholders will have more than 15% of the vote during a proxy fight.

To show how ridiculous the pill is, consider this analogy. If you are one of several partners that own a horse and the horse does well, and you agree to purchase another partners interest, would you allow the trainer to threaten to punish you  by diluting your partnership interest to almost no value if you dare to do this? It sounds absurd but this is what happens in corporate America. 

Thanks for the Support

Thank you for your comments. I am impressed that so many people support this cause. I appreciate the readership and will do my best to expose the worst of corporate America. One emailer wrote he would like to be "a fly on the wall in a boardroom." I answer: In most cases, you probably wouldn’t like it if you owned shares in that company, unless you enjoy feeling uneasy about your investments. Another emailer wrote "Please continue to do what the markets demand and require, so that no CEO or board member has the ability to take advantage of the shareholders, company inefficiencies or America's capitalistic approach to financial success." I answer: Often the abuse of shareholders by entrenched management and self perpetuating boards is intolerable.  It destroys shareholder value and our economic hegemony. I will continue to fight against these destructive forces which are a great threat against our ability to compete in today’s global economy. With this blog I hope to provide all shareholders with a full understanding of these matters and build a grass roots movement to stand for real corporate democracy.  I believe that it is extremely important for shareholders, the true owners of our companies, to let our elected representatives in Washington know how strongly we feel about the corporate abuses in America and the deleterious effects they are having on our economy. Please subscribe.