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.

Board members are often hand-picked by managers. The current proxy system is so biased in favor of management that any challenge is prohibitively expensive and generally guaranteed to fail. In theory of the corporation, the shareholders pick the board, and it in turn picks the management. In practice however, the system is turned upside down. Incumbent management picks the issues and board nominees for the proxy statements and distributes the ballots. The shareholders vote and sign their names to the ballots and then send them back to the incumbents, who count them and announce the outcome. And so, there is no true election. There is only one list of nominees! The system is similar to a dictatorship; the difference being that the goon squads protect the dictator, but lawyers protect the board.

And what is the result? Most recently, a financial crisis. Listen to Spitzer. "Boards of directors were also missing in action over the past decade; not only did they not provide answers, they all too often failed even to ask the appropriate questions."

This failure of corporate democracy has left shareholders virtually powerless. The system must be fundamentally reformed to give shareholders more rights – to nominate board members, to eliminate excessive takeover defenses and to have the ability to vote to incorporate their company in another state.

Simple legislation (see my post Shareholders Should Decide Where Companies Incorporate) would make tremendous progress toward resolving the power mismatch that managements and their boards have over shareholders. With true competition for board seats, accountability can be restored and managers would be compelled to work for value maximization on behalf of shareholders and not work simply to enhance their pay and perks and entrench themselves in highly paid positions.

Truly independent board members could also insist on performance based compensation plans and other programs to align management’s interests with shareholders. Then public shareholders could realize the full potential of their companies. But currently, the best opportunity for shareholders is to sell their shares and stand by while, in many cases, the same management team that ran their companies into the ground reap additional millions for a job poorly done.

These reforms are not just grist for academic debate. Reforms of our current system like 'Say on Pay' and golden parachute modification have received increasing support and several prominent corporations (including Aflac, Vodafone and GlaxoSmith Kline) have voluntarily adopted policies like Say on Pay.

At the very least, these reforms are essential to enhance management accountability for our corporations. Equally important, they would restore a basic democratic right to the owners of corporate America.

While the financial crisis continues, shareholders should have the option to protect their rights and make America's boardrooms accountable. Make a difference and join United Shareholders of America. This is where we start. It is where we grow stronger. It is where change begins.

Comments

[Trent]

Mr. Icahn,
The current business structure foundation is, The Shareholders have a Right to Participate not Vote/Impact. If you're not a part of the initial selection process for board members to be elected, you are participating not voting.

An Old Jedi Mind Trick...

[Paul Carr]

"One of the penalties of refusing to participate in politics is that you end up being ruled by your inferiors"

PLATO

[The Reformed Broker]

performance-based compensation will only work with long enough time frames...one of the problems with short term performance bonuses is the tendency to "stuff the channel" or recognize revenue early

TRB

[Joe G.]

The independent director concept furthers the notion that the board serves as the patsy of incumbent management. Independent directors are handpicked yes men that often lack the basic knowledge of the company on which they serve.

The solution is less "independent directors" and more creditor representation.

[Nick Choukair]

Carl,

It is time for it! - Nick

[adam's rib]

Since when do men in locker rooms (uh..hum...boardrooms) feel compelled to be accountable? To challenge each other intellectually? To ask questions when everyone is comfortable? Any effective reform will include, as a central theme, a balancing of the representation of the sexes here, not only in numbers, but in genuine respect.

[Nav Mehta]

Mr. Icahn,

You've hit the nail right on the head with this blog. Thanks for starting it.

In a lot of public companies, management has a "wink-wink" relationship with the board, where both approve each others' salaries. The current system is set up for management to eat away cashflow belonging to shareholders either directly through compensation, by spending carelessly in growing their empires, or investing in riskier or dying business models with their heads stuck in sand to not look at any risks.

I wonder if a lot of the decisions made by non-owner management of public companies would be same if it was their own 100% of liquid net worth that they were spending. Maybe system can be revamped by changing compensation structures so that management gets a percentage of net income, or starts with a base salary out of which a percentage of the cost structure is deducted.

I'll be graduating from law school soon, and maybe we could team up to bring some of these culprits to the court of law to try to change the system.

[Nikita Kondraskov]

Yes, I agree. The corporate governance needs some fresh ideas.

One of the interesting moves would be to make the board members and the higher-paid staffers more personally responsible for their actions.