The Icahn Report

Compensation Consultants Grease the Executive Pay Casino

Executive pay is out of control in this country.

CEOs of Fortune 500 companies now make about 520 times the average worker. Yale School of Management argues they make about three times more than their counterparts in Japan and more than twice as much as those in Western Europe.

This disturbing trend has gotten worse over the last few decades – a period when this country has increasingly lost its economic lead. The trend suggests that CEOs have become increasingly focused on their pay packages and not the welfare of shareholders, employees, stakeholders and our national economic well being.

A major reason executive pay packages are ballooning is because of the incestuous relationships between boards and CEOs who conspire to give lucrative pay-and-perk packages to each other. But it is also due to the egregious use of "compensation consultants" that soak up multi-million dollar fees to provide strategic counsel to boards and in addition advise ever higher pay packages to top managers they presume to oversee – whether they perform well or not.

100 Million Reasons Why We Need Governance Changes Now: Join USA

The number of people who own stock in this country, through individual accounts, mutual funds and others, is higher than it ever has been, an estimated 100 million people.

So it logically follows that what is good for stockholders is good for at least a third of the nation, which is a huge constituency. But it is more - when people buy stock, it benefits companies that sell the stock, which helps them create jobs and drive more commerce in goods and services.

Stronger companies in turn generate more tax revenue for government services from which we all benefit, including the military, schools, roads, healthcare, etc. In short, strong companies benefit the nation.

It is therefore in our collective self-interest that we promote strong and well-managed companies.

The problem we face today, however, is that too many of our companies are clearly mismanaged by entrenched and self-serving boards and managers. And there are many laws that have allowed these directors to perpetuate this tyranny, often against the wishes of shareholders, the owners of companies.

The most obvious recent result of this is the wholesale meltdown in the financial sector, a result of executives' lemming-like drive into risky and little understood investments like mortgage-backed securities, many of which blew up, causing a global stock and credit market meltdown.

Now we all are paying the price with the multiple failures of long-established Wall Street firms. Tens of thousands of people lost jobs and life savings, the government has been forced to borrow and pay out hundreds of billions of dollars and commercial banking services have ground to a halt in many cases. The entire economy is suffering from the acts of a very few.

This colossal meltdown is a travesty of mismanagement and greed. We could be paying the price for years to come. And to add insult to injury, while billions of dollars were lost and thousands have lost jobs to recover nothing, the top managements have mostly gotten off scot-free, just like the owner of the Titanic. We as an economic nation will get through this, eventually. But our job is to learn from this experience. The question is, how can we make our companies better managed to prevent future systemic meltdowns?

Paulson Demands Too Little from Banks on Exec Pay

Treasury Secretary Hank Paulson, appearing on CNBC last week, seemed proud of the fact that the CEOs of the nation's nine largest banks agreed to restrictions on golden parachutes, salaries and bonuses in return for a massive, $125 billion taxpayer infusion.

I mean, some of these guys nearly wrecked the global financial system with reckless gambling on products they barely understood and "agreed" to cut back on their already bloated pay packages? How generous of them.

This is akin to giving the Titanic's owner, White Star Line Managing Director Joseph Ismay, a commendation for driving the ship so fast on its maiden voyage that it slammed into an iceberg and sank, claiming 1,500 passengers.

Ismay, of course, escaped on his own lifeboat and survived, unlike his captain, Edward John Smith, who went down with the ship. In corporate America these days, there are far too few Smiths and far too many Ismays.

One reason that Paulson may have gotten the banks to agree to the restrictions is that they do very little to actually restrict compensation. It only covers the CEO, the CFO and the next three most highly compensated executive officers.

The Buck Doesn’t Stop Anywhere with the Paulson Plan

The latest U.S. government plan to take preferred equity stakes in financial institutions is a great step in the right direction. But it lacks one key element - the government should give shareholders enhanced rights if they wish to replace the boards and managements of companies that accept government aid.

In a speech to the Economic Club of New York yesterday, Fed Chairman Bernanke stressed the importance of attracting large private investors and institutional money into the banking system.

But how can we expect private money to take big stakes in banks if they are put at the mercy of the same managements which got us into this mess to begin with? This is totally unrealistic.

As discussed in the Oct. 13 Lehman commentary on this blog, many boards at financial institutions abjectly failed in their oversight responsibility. Too often these boards gave managements virtually unchecked freedom to pursue risky, leveraged strategies that board members, and in many cases managements, obviously didn't understand.

How can we be sure that these same boards and managements won’t make the same mistakes again now that the government is backing them up? Shouldn't taxpayers and investors be better protected?

Where was the Lehman Board as the Crisis Unfolded?

The collapse of Lehman Brothers, with its massive losses for shareholders and employees and near-catastrophic market consequences, obviously reflects an abject failure of management in risk oversight.

But who allowed the management to take these risks? Where was the Lehman board of directors in all this?

For too long in this country, managements have been given free rein to do as they please by timid boards who don’t make waves or hold managements accountable. In many cases, these boards are appointed by the very managements that they oversee.

Shareholders deserve better, which is why I urge everyone to join my new initiative, United Shareholders of America. Only with numbers will shareholders be able to compete with the Business Roundtable and get legislation passed in Washinton to finally make boards accountable.

Evidence of the Lehman board failures was blatantly apparent in hearings last week before the House Oversight Committee.

The Lehman Finance & Risk Management Committee, for instance, met only twice a year in 2006 and 2007 - years when Lehman’s crisis was brewing, according to testimony by the Corporate Library research group.

Join the United Shareholders of America: The Icahn Plan

One of the biggest problems we face today is the egregious mismanagement and reckless incompetence of many American corporate boards which utterly fail to do their primary job of holding managements accountable.

Many board members are often beholden to managements for lavish pay and perks they get for very little work and oversight. The credit crisis we find ourselves in is a direct manifestation of board members' lack of oversight. Alarm bells should have gone off in board rooms as crisis loomed, but many boards looked the other way.

Our economy has floundered for nearly two years because boards allowed their companies to make vast leveraged investments into faltering mortgage-backed securities. These investments vaporized trillions of dollars in shareholder value and left the banking industry in crisis. Boards gave permission to CEOs to take these risks, which often times they misunderstood, which is like giving the fox permission to guard the henhouse.

Incredibly, some board members make as much as $10,000 a week and soak up expensive trips to the Super Bowl and Augusta aboard corporate aircraft - simply to go to four or five board meetings a year.

Many of these same boards and managements are members of such groups as the Business Roundtable and the U.S. Chamber of Commerce, which annually spend huge sums of money in Washington to pass laws favoring managements and boards. These laws are often at the expense of shareholders, which are the true owners of America’s corporations.

We need an aggressive plan to combat this, which is why I am launching United Shareholders of America – a voice for large and small shareholders. We must have a strong voice in Washington to combat the pro-management forces.