The Icahn Report

In The News

• CEO Use of Private Aircraft and the Delaware Approach to Compensation- Race to the Bottom
• Record number of M&A deals cancelled in 2008 – FT.com
• What Makes the Best CEO’s? Mergers Can Help – DealJournal
• Aer Lingus lambasts Ryanair bid – Telegraph.co.uk
• The Fallen Giants of Finance – FT.com

More Rights for Shareholders in North Dakota

North Dakota may be cold this time of year, but shareholder activists are looking to make it a hot destination for public companies.

©iStockphoto.com/csreed

Last year, partly as a result of a campaign I backed, North Dakota changed its laws to strengthen shareholder rights at public companies incorporated there.

Now some shareholders have proposed resolutions to be placed on corporate ballots in 2009 to relocate their companies to the state. More are expected to follow.

Long-time shareholder activist John Chevedden, for instance, said he has filed relocation proposals to be included on proxy statements at 15 public companies.

For Chevedden, the move is a no-brainer. Historically, states like Delaware, where a majority of U.S. public companies are incorporated, give shareholders little power to influence company affairs and strategy. But last year, North Dakota became the most shareholder-friendly state in the nation.

"If a company moved to North Dakota, it could cure five items of corporate governance at once," Chevedden told the Icahn Report.

The move is likely to meet opposition from company managements, since it erodes their control over companies that shareholders own. And when shareholders make proposals managements don’t like, they typically ask the SEC for a ruling to exclude these proposals from the company’s annual meeting proxy statement, in an effort to keep shareholders from supporting the measure.

The SEC, however, hasn’t previously shown much willingness to challenge shareholder resolutions to reincorporate in other jurisdictions, according to Race to the Bottom, a legal blog.

Chevedden said the SEC has already rejected one company request to discard a shareholder proposal from its proxy materials relating to jurisdictional relocation.

Still, under current law, to be binding, a corporate relocation resolution must be approved by the board. Therefore, the proposed shareholders resolutions being pressed by Chevedden are merely "precatory," or advisory, meaning that managements don’t have to adopt any shareholder proposal they don’t like. But Chevedden said if such proposals win widespread shareholder support, managements ignore them at their peril.

What’s different about North Dakota corporate law? Lots. And the state is looking to use the provisions to attract lucrative business from corporations that incorporate there, just as Delaware gains a substantial portion of its state revenue from companies incorporated in that state.

If companies choose to sign up in North Dakota under the provisions of the new law, they are limited from instituting anti-takeover provisions like poison pills and staggered boards. Such provisions thwart a company from being taken over and have its assets better redeployed under different managements.

In addition, it requires that the board chairman and CEO jobs be separated, and requires advisory shareholder votes on executive compensation.

It also allows shareholders owning five percent of the outstanding shares for two years or more to nominate directors and they must be put on a company’s proxy statement.

These rules and a number of others in the North Dakota statute vary significantly from Delaware’s and would go a long way to give shareholders more rights to bring accountability to managements.

There are numerous long-standing reasons why these changes are essential. But most importantly, they come at a time when shareholders need to exercise more influence at companies which have suffered massively this year as a result of the market meltdown.

Clearly, much of the meltdown occurred as a result of the failure of boards to properly clamp down on managements who took excessive risks that brought down their companies, particularly those in financial services.

This is unacceptable and must be changed. This is why I have founded United Shareholders of America – to give shareholders more power over the companies they own. It is only when large numbers of stockholders unite that we can push back against the entrenched and unresponsive boards and managements in this country.

Sign up for USA on my blog, The Icahn Report. www.icahnreport.com.

Group Asks Obama for Greater Proxy Access

Shareholders should have a right to know what risks their companies are taking, particularly after the white-knuckle 18-month market meltdown that erased trillions of dollars in wealth and a subsequent public bailout that jacked up U.S. national debt to exorbitant levels.

But the Securities and Exchange Commission, which was founded in 1934 to protect investors, has thwarted shareholder efforts to ascertain this risk, one investor group claims.

The group, led by attorney activist Sanford Lewis, is asking President-elect Obama to give shareholders greater rights to demand answers from companies on how specific risks may affect their business, such as exposure to volatile credit markets.

The group proposes that company managements be required to include such questions on its proxy statements for vote at annual meetings.

"Unfortunately, for the last five years, the SEC has gradually been closing the door to important shareholder concerns," the group said in a Dec. 11 letter to Obama signed by more than 60 investment firms and others. "Shareholder proxy requests that had been allowed in previous years asking for better disclosure of financial risks to companies have been stymied."

Shareholders have a right to make proposals to be included in proxy statements. But companies have a right to ask the SEC to exclude proposals they don’t like. The group claims that the SEC has taken an increasingly pro-management line in excluding proposals that are of valid investor concern.

For instance, it says that the SEC struck down a proposed resolution for the Washington Mutual proxy in the last year that would have asked the bank to "discuss its potential financial exposure as a result of the mortgage securities crisis." The crippled mortgage lender was sold to JPMorgan Chase a few months ago for a knock-down price.

The demand for increased proxy access is only the latest in a long-running controversy over how much power shareholders should have in imposing demands on companies through proxy resolutions. Activists want increased influence on board director nominations, management compensation and other issues.

Last year, the SEC voted down a proposal for wider proxy access, but some are optimistic that the incoming Obama Administration will appoint a new SEC chairman who will look more favorably on shareholder proposals. –D.H.

Links:

Sanford Lewis Group

Letter to President- Elect Obama

KLD Blog

In The News

• Executive Pay Limits may Prove Toothless – Washington Post
• JDSU to pay CEO $400K bonus within week of leaving – Docu-Drama via San Jose Mercury news
• Poison Pills in the Oil Patch – Motley Fool
• Why punish powerless and innocent shareholders? – Financial Times
• Corporate Governance Slammed by Shareholders – St. Petersburg Times

Change the Rules for Proxy Voting

In 1992, after 25 years as a civil engineer for the City of New York, Phillip Goldstein and partner Steve Samuels co-founded what is now Bulldog Investors, a value oriented investment firm that focuses primarily in closed-end funds, small-cap operating companies and SPACs. Goldstein is a veteran of numerous proxy battles and has served as a director of a number of closed-end funds. He is currently a director of the Mexico Equity & Income Fund, ASA Ltd. and Brantley Capital Corp. Goldstein is widely-quoted on topics involving closed-end funds, hedge funds, value investing, investor activism, corporate governance and securities regulation.

By Phil Goldstein

What is fundamentally wrong with corporate governance in America? In a nutshell, it is difficult for stockholders to hold management accountable for its misdeeds.

This is not a new insight. In 1776, Adam Smith wrote in The Wealth of Nations: "The directors of such companies, being the managers rather of other people’s money than of their own, will not watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Negligence and profusion therefore must always prevail in such a company."

Let's fast forward to 1934. Here is what Congressman Lea of California said in the Congressional record of May 1, 1934:

"In the main, the men controlling these great corporations are not large owners of the stocks of the corporations they control. Too often they have yielded to the temptation to control these great business institutions to their own interests, and with a zeal out of proportion to the loyalty they have shown their stockholders. Thus in recent years we have seen the directors of corporations, without the knowledge of their shareholders, voting themselves vast bonuses out of all proportion to what legitimate management would justify. We have had revelations of salaries paid to directors and officers of great corporations which showed shameful mismanagement; which showed that the men in charge of some of these corporations were more concerned in managing its affairs for their own benefit than for the benefit of the stockholders."

It is now 2008 and it is fair to say that the lot of shareholders has hardly improved, considering the trillions of dollars in lost shareholder value over the last year, along with the egregious bonuses and salaries paid for this dismal performance.

Next year, the Securities and Exchange Commission, for the umpteenth time, is likely to reexamine the rules governing proxy access, which have historically been weighted heavily in favor of incumbent management. Better proxy access would make it easier for shareholders to place director candidates and resolutions on the ballot for vote at annual meetings.

Once again the SEC will be inundated with comments from management advocates insisting that nothing is broken. It will also face a barrage of comments from those that see corporate elections as a way to advance causes unrelated to enhancing shareholder value.

Here is my two cents.

In the News

• Corporate Leadership and the Crisis by Carly Fiorina – WSJ
• Scott+Scott LLP Files Class Action Lawsuit Against Elan Corporation, plc On Behalf of Investors – Reuters
• JPS board votes to eliminate executive bonuses – Fort Worth Star Telegram
• Is bad corporate governance what ails GM and Citigroup? – The Deal.com
• CEOs and Market Woes: Is Poor Corporate Governance to Blame? – Knowledge@ Wharton

United Shareholders of America

This post was also published on Harvard Law School Corporate Governance Blog

Eliot Spitzer offered up some insightful commentary (Nov. 16, Washington Post) on the public corporation's fall from favor and rightly pointed to basic issues in corporate governance that need reform. He states, "…our corporate governance system has failed. …Boards of directors, compensation and audit committees, the trio of facilitators (lawyers, investment bankers and auditors) whose job it is to create the impression of legal compliance, and shareholders themselves – all abdicated their responsibilities."

If by shareholders, Spitzer means mutual funds and pensions have not actively held boardrooms accountable, I agree with him. Put simply, boards have failed. Why should shareholders stand by on the sidelines? There is no axiom stating that public shareholders have to stand by and witness the demise of the most powerful financial engine in history.

Why should public shareholders be forced to leave so much value on the table because of risks taken by unaccountable management teams and boards? Spitzer says that when his office and the DOJ warned that, "some of AIG’s reinsurance transactions were little more than efforts to create the false impression of extra capital on the company's balance sheet," they were "jeered at for attacking one of the nation's great insurance companies, which surely knew how to balance risk and reward." Clearly, many boards such as AIG did not know how to balance risk. And they certainly did not know how to balance reward.

As owners, why would we allow this? The theory of the public corporation is not bankrupt, the practice is. We need critical changes in corporate governance that would go to the heart of the blameworthy lack of accountability between managers and shareholders.

CEOs of Fannie, Freddie Blamed for Collapses

(From time to time, starting today, the Icahn Report will be publishing news of interest written by staff.)

The CEOs of mortgage giants Fannie Mae and Freddie Mac were warned repeatedly by their risk officers about the dangers of investing in subprime mortgages, but pushed ahead anyway into the strategy that ultimately caused their collapse, Rep. Henry Waxman charged at a House Committee on Oversight hearing on Tuesday. The two government-sponsored entities, which buy mortgages from banks and lenders, were seized by the government in September and given access to $200 billion in capital.

Rep. Henry Waxman, the outgoing head of the House Oversight Committee, said risk managers "raised warning after warning about dangers of investing heavily in subprime and the alternative mortgage market. But these warnings were ignored."; Waxman, whose committee obtained nearly 400,000 documents from both companies, also said Freddie fired its chief risk officer after he warned of the dangers of targeting borrowers who would have trouble qualifying for mortgages.

"The CEOs of Fannie and Freddie made reckless bets that led to the downfall of these companies," said Waxman. The strategy, he said, was "tremendously lucrative" for the CEOs, who took home over $30 million between 2003 and 2007. "Their irresponsible decisions are now costing the taxpayers billions of dollars," Waxman said. –D.H.

In The News

• MD Rep. Cummings questions AIG retention payments – AP News
• Finally, Some Semblance of Rationality to Wall St.'s Compensation Structure – Seeking Alpha
• IPOs and Executive Compensation – Race to the Bottom
• SEC poised to finalize rule on interactive data format – Accountancy Age
• Former NY Fed Chief Tells Congress Credit Default Swap Debacle Was Risk Management Failure – Jim Hamilton’s World of Securities Regulation

Tax Relief for Golden Parachutes? No Way!

Let’s say you're the CEO of a big company and your friends on the board have awarded you a big "golden parachute" severance package so you’ll be set for life if the company gets taken over. Nice deal for you.

©iStockphoto.com/PeskyMonkey

Then, your company then gets a takeover offer that your board accepts. Bingo! You win the grand prize – about two-thirds of the Fortune 500 companies paid out an average of $61 million in golden parachutes, according to a recent RiskMetrics study.

Then you see the tax bill. It's a whopper. Thankfully, your company doesn’t want you to suffer, so they pay your taxes for you, using shareholder money.

Sound incredible? Not in today’s corporate America.

According to RiskMetrics, the parent of Institutional Shareholder Services, about two-thirds of the Fortune 500 companies will pay the taxes on your golden parachute. They even have a name for these payouts: gross ups. So you can take home that $61 million scot-free.

Just when you thought the outrageous greed at the top of the corporate ladder couldn’t get any worse, we find more eye-popping examples.