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We Pay So Much For So Little

With the monster financial meltdowns of the past month, the time has clearly come for shareholders to exert their rights and bring about major changes in corporate governance in America.

I intend to use this blog as a forum and a focal point to push for legislative changes to make corporate managements more accountable to shareholders, who are the true owners of America’s corporations.

I don’t claim to know what went on inside the boardrooms of these companies. However, based on my close involvement and knowledge concerning how many boards operate, it is difficult to see how one could reach any conclusion other than that the boards of directors of a number of these imploded financial firms utterly failed to successfully implement some of their primary tasks - to oversee management and monitor and evaluate risk controls.

This is unacceptable and intolerable. The financial pain and job losses these meltdowns have caused is now reverberating through the economy and this will likely continue for months or even years.

What has transpired in recent weeks with Lehman Brothers, AIG, Fannie Mae, Freddie Mac and Merrill Lynch is shocking. The dominoes keep falling on Wall Street from a mismanaged credit crisis, causing economic disarray, huge job losses and pain on a global scale.

In each case, the root cause seems to be excessive risk-taking by managements, or worse, managements that weren’t sufficiently aware of the risks their companies were taking and how it may impact their businesses.

Who was supposed to be watching these managers? Where were the boards of directors that are supposed to be overseeing these executives? I’m not going to judge the individual boards of these companies in what they did or should have done, but consider the following.

All too often compliant boards are intimidated by managements in their cushy, well-paid worlds and refuse to rock the boat by asking hard questions and demanding CEO accountability. Why is this so? Because of excessive board compensation and allegiances to those who provide it.

A new study shows that total remuneration for directors at the top 250 U.S. companies has risen 22% over the last three years. Many large companies pay board members almost $10,000 a week and what do these members do? In many cases, their job is simply to attend four to five board meetings per year.

Total director remuneration at the largest American corporations is running over $1,000 per hour, according to the study by Steven Hall & Partners. With many U.S. corporations struggling, why are we paying board members all this money? Lehman's board members, for example, were paid just short of a half million dollars each last year.

Given the massive bankruptcy filing at Lehman, I would appreciate it if someone would advise me of what those board members did to deserve that compensation? Can any board member of these collapsed financial institutions claim to have truly monitored the risks their companies were taking? Did any of them speak up? We may never know, but the effects of their action or inaction is apparent.

Maybe the loss of these cushy board seats and compensation packages will be a lesson to board members everywhere. What did they do to prevent these great ships from going down? Were they enjoying lavish lunches and fine wines in the officers' dining rooms or were they on the bridge challenging the captain? Or was the captain even there?

If the boards did their jobs, many of the problems today would probably not exist. Unfortunately many boards have failed miserably. (Just count the corporate jets at the Superbowl or at Augusta.) Boards fail because of a pernicious symbiotic relationship between members and the CEO. Amazingly, in many cases board members are afraid the CEO will terminate them if they are too critical.

I’m not the only one attributing events of the last week to a failure in corporate governance. Dealbreaker’s John Carney spoke about it in a post as did Larry Ribstein of Ideoblog. Even John McCain and Barack Obama have expressed concern. "I warned two years ago that the situation was deteriorating and was unacceptable, and the old boy network … is directly involved," McCain said. Said Obama, "This isn't 9/11. We know how we got into this mess. What we need now is leadership that gets us out."

Why are we paying boards so much to oversee CEOs who are doing a terrible job? To be a board member is a job- not a privilege - and board members should be compensated according to their performance. To continuously increase boardroom pay for dismal performance is outrageous. But more preposterous is the fact that boards allow so many of our companies to deteriorate.

It is time to stand up. Join the blog and join my cause.


Well said. I hope that the dismissal of the Fannie Mae and Freddie Mac CEO's without their golden parachutes will spur under-performing managers out of the door and will increase accountability to their shareholders and their employees.

I agree that the key problem is about the management and the board as representatives of the shareholders.

But I am starting to think that as long as the shareholders themselves are the management and/or the board, the problem may not disappear. And even in that case, if their shareholding is not a significant percentage, they might still view their role as managing (and spending) "someone else's money."

The whole model of broadly-owned public companies seem to have certain limits. Maybe the solution is just to understand (and make the public understand) the principal-agent issues of public companies.

Well said Mr. Icahn. This madness has got to stop. The days of the independent investment firm are gone and now that they need to pair up with a bank in order to survive. One can only wonder what mess they'll create with our deposits. It's one thing to use our tax dollars to clean up their mess, it's another when they'll have direct access to our savings accounts with no one holding them accountable.

Mr. Icahn

For the most part I cannot agree with you more about the absurdity of what is happening to our financial markets. Board members who truly do nothing and neglect their responsibilities should be held accountable and removed accordingly. The problem we are facing now is all do to the credit crisis and defunct mortgages which these companies believed to be a good investment. At the time, they may have been right although I'm sure further due diligence would have shown problems in the horizon. At the time when people were able to pay their mortgages and keep current with creditors, these were great investments by these large corporations. As the economy slowly started declining, these payments started disappearing and forced these major companies to 'eat' their investments. I find it troubling that Lehman Bros, a company that was around for 150+ years and survived the great depression, has needed to seek chapter 11 protection. I feel this is just the beginning and everyday that the Federal Reserve pumps money it does not have into these failing companies, we are heading towards another depression. As always, thank you for your opinions and I wish you much luck in your next fiscal move despite the faltering economy.

As I've said before on this site, we all agree with you Mr. Icahn, but the only way to change this atrocious corporate malfeasance it is to have somebody who shares our vision in the power position...i.e. replace the woeful current SEC chairman Chris Cox with I don't know, Mr. Carl Celian Icahn. I believe Mr. Paulson is doing his job relatively well along with Chairman Bernanke for that matter but the third individual really helped in creating this mess by getting rid of the 75-year old uptick rule on July 3, 2007. Ever since then, to the day, we've had highly volatile markets with BSC, LEH, FNM, FRE, AIG, etc. and many others going up in smoke due to their stocks getting crushed artificially low with naked-short selling and no uptick required. These stocks obviously deserved to be lower with toxic "assets", however they could have offered some stock when capital was needed and that would have at the very least bought them time and at the best have them still be operating providing jobs. Of course, since they were pushed to prices so low, any type of equity offering was not feasible.

You continue to be a voice of reason in the vast wilderness. This should be printed on the front of every newspaper, and also every annual report. Why isn't this guy running for president???

Carl, you are so right but will anyone listen. The boards are in the pockets of CEO'S. I think only the boards of high profile public companies will now start to change. The others will just hide until they are forced by regulation and run them as if they are private institutions.

As painful as this financial crisis is for those of us who grew up in the belief that banks were a safe place to invest and save, it must be allowed to run its course without further nationalization of firms, regardless of their systemic importance.

In the end, the bankruptcy courts will do a better job than the government of redistributing the assets to creditors. When the choice is "conservatorship" or bankruptcy, it's clear the shareholders are left in the cold.

The real villains in this drama are the elected officials who have accepted bribes from lobbyists as part of a smug insiders conspiracy. It's disgusting to see senators who are utterly complicit blaming the greed of investors for this state of affairs.

If you are really sincere about the rights of shareholders, please take the fight to the Congress. I will believe that progress has been made when we see some politicians jailed for their abuse of power.

Mr. Icahn,

Millions of Americans are starving for real leadership from either government or industry. We need a voice like yours.

As the global economy becomes more competitive, the ridiculous practices of the corporate US will phase out, in my opinion. We will simply not be able to afford the outrageous salaries for these CEOs. This lack of accountability, lack of performance standards, and corruption will be too expensive to continue funding.

Desperation will lead to efficiency and innovation. Once again, we will learn the hard way.

It's scary to entrust money at these institutions. My mother owns annuities at AIG, and the company used that money to insure billions of risky credit-default swaps with no one on the board to oppose excessive risk-taking. I hope AIG will be able to make good on those contracts. Reminds me of reading about a long time ago in the 1980s when a certain insurance company got a AAA credit rating through a scheme in order to borrow at low rates of 5%, then used that money to buy junk bonds paying at 10-15%. AIG has used its stature and high credit rating in order to use innocent people's money and paying only 3-4% return while taking excessive high risk.

Absolutely Mr. Icahn. I am in total support of this. This has been caused by highly irresponsible boards who have probably not understood their core responsibility was to get some strong governance in. Of course, management & CEO are at fault, but that was why boards were kept in the first place as a checkpoint.

Is it the case that the primary function of the management of a public company is to increase the share price?
If so is it not inevitable that they will be driven to take ever-greater risks to provide this, especially when the financial rewards for doing so are so great?
What can be done about this?

I recommend a very interesting article written by Francesco Guerrera and Peter Thal Larsen and published on FT on June 26, 2008 titled “Gone by the Board?” ( on why the directors of commercial and investment banks failed to spot the credit risk.

The article examined the boards' of Citi, JPMorgan Chase, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns. According to the biographies of board's members on the companies’ websites, "more than two-thirds of the occupants of those board seats had no significant recent experience in the banking business. Fewer than half had any financial services industry experience at all."

Guerrera and Larsen point out also that "many of the directors without a financial background happened to sit on highly technical board committees. At Lehman, for example, Roger Berlind, a theatre impresario and private investor, is on both the board’s audit committee and the finance and risk committee. At Citi, John Deutch, a former head of the CIA who is now a physical chemistry professor at the Massachusetts Institute of Technology, sits on the audit and risk management committee. Similarly, Tommy Franks, the retired top US Army general, is on the audit committee of Bank of America".

Thank you for your comments, Carl. I am reminded of Muckrakers and Carpetbaggers, the latter being greedy board members and special interest groups. Keep raking up the muck; perhaps social responsibility will catch on.

I spoke with my boss yesterday and she said, "oh the market is just correcting itself." I don't think so. We are seeing huge, sound corporations fail. We haven't seen this kind of panic since 1929. What followed was our nation's worst economic time for 10 years. We need to brace ourselves to see huge massive layoffs and some of the similar issues as we saw with the Great Depression. Government has got to stay involved but not with bail-outs. I agree that government needs to force integrity of CEOs. Government needs to regulate unfair trading practices even more and we need to get back to teaching investors what smart investing looks like. Shareholders are oblivious to perspectices and key financials. And yet the truth is smart investing and intelligence still could not save AIG and Lehman. Now Morgan Stanley and Goldman are headed for the same fate. Not good news at all!

I have worked with board members for the last 17 years, and it is not this simple. I can imagine the sentiment will be popular for the next few years, that boards are ultimately the shareholder watch dog of risk and these directors failed. It requires a complete reworking of the structure of boards if that is to be a practical process. Boards of these global companies meet or confer at best 40 hours a month, and that is too little time to even ask all the questions about the soundness of every strategy in every geography that might be hiding a risk that can bring a company to its knees. Board agendas are largely controlled by the CEO, not the board so if the CEO wants to avoid topics, it can be invisible to the board member. If we want these directors to be the ultimate risk managers of the company they need a pretty large staff of people that are full time risk analysts that have the authority to go anywhere and do what every it takes to get the whole story. The analysts could not work side by side with the employees and would have to report only to the board. And we will need to pay directors to give up a huge amount of time to make sure this third responsibility is properly done. Third? We pay directors to pick the right CEO, compensate him and judge his performance, and we pay them to make sure that the financial statements are accurate, that is it. Please do not underestimate how difficult that job is. John Thain was the right guy for the job...well we could argue that but I think yes he was, and there is no evidence of fraud or false reporting. So did the Merrill board fail?
Or did the risk management system fail and who is going to be in charge of that system in the future?


While I would hope that the Board of a bank would be up to speed to derivatives and CDOs/CDS...I would also hope that our presidential and vice presidential candidates would demonstrate a similar familiarity.

Oh, and by the way, WHERE IS OUR PRESIDENT?

Amen! I was eager to hear what you were going to say about this debacle. I love your blogs. I have learned so much. Thank you for being there.

Many board members may be asleep. What the diligent board members need are independent resources. Currently they are beholden to management to get questions answered. Auditors nominally report to the board but are controlled by senior officers.

Boards need to assert their control and responsibility and not just wait for an annual audit. No one fails on the annual audit. The crisis hits well before that point.

Responsibilities mean a separation of powers. Look at Congress and the resources independent committees have.

Mr. Icahn,
Thank you for your insight. I have been shocked that there has not been outrage from shareholders everywhere. The financial meltdown of the last few days will affect every individual in the US whether through job loss, investment value loss, or tax revenues diverted to this cleanup. We should be outraged. However, we are silent. One of the reasons we are silent is because the inference that the root cause of the collapse was people who received “subprime” loans. In some circles, Fannie Mae and Freddie Mac executives are portrayed as modern day Robin Hoods that took from the rich and gave to the “undocumented” poor. The poor in their usual fashion were ungrateful and defaulted on the loans leaving Freddie and Fannie to carry the bag.

Although a great made-for-tv storyline, the truth is that Fannie and Freddie made millions from these loans everyday. They were not offering a community service. They were tricking people into signing risky loans and selling the risky currency for huge profits on the open market. In the absence of any oversight or regulations, the AIGs of the financial market bought and sold this high-risk paper or added to their asset portfolios. When the value was deemed over-valued or worthless, everyone in possession of this high-risk paper felt the heat.

Shareholder should not be hesitant to demand answers and hold people accountable. Yes, materialism did play a part but so did a whole lot of GREED.

Carl: I don't agree that the quote of Sen. Obama shows concern, or leadership for that matter. Said Obama, "This isn't 9/11. We know how we got into this mess. What we need now is leadership that gets us out." Mr. Obama's remark was a reproach to Senator McCain's earlier recommendation to create a commission to study the turmoil in the nation’s financial markets. I believe Mr. McCain's recommendation is precisely what is needed and shows leadership. This is a complex situation which I myself find difficult to wrap my mind around. I consider it far more complex than the shock of 9-11. Senator Obama is simply exploiting the anxiety and frustration of every day Americans about this crisis for his own political gain. I sincerely hope the American electorate wakes up to this dangerous McCarthy-esque manipulation.
Your angle on the situation has a lot of merit and I hope you are invited to serve on or testify before any future commission.

Board members and CEOs all turning their heads or not doing there jobs for personal monetary gain. In any event, notoriously greedy. Gate keepers who will let anyone through for a price. To give up mortagages destined to foreclose and then leverage your firm beyond all reason.

Let's not even get into the abuses of Naked-Short Selling...

What goes around comes around...and the world forever rotates.


Mr. Icahn,

I am an Indonesian. Even though I am not living in the US, I feel that what you said about the too much pay for the CEO is beyond adequate salary. I can not understand why a Corporate America has been committing such a great error in letting the corporation under the mercy of the CEO,while the real owners are at bay in determining the policy of the corporations and also the magnitude of their salaries.

We in the developing countries have always taken as a comparison what are practiced in the US because most of our business textbooks are from the US. So your report is very fresh look on what are going on in the US.

Thank you Mr. Icahn

Great treatise on so many issues VITAL to the survival of this nation. We have lost our way in so many areas. There are many of us who have fought for this country and want to enjoy some of what we have and who care about our children's future. Pls keep up the pressure as a meaningful, powerful voice of reason. Your TV appearance today was terrific - that's the awareness-of-message needed to reach the American people! b

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