The Economy Needs Corporate Governance Reform

As seen in the Wall Street Journal.

In his inaugural address this week, President Barack Obama said "our economy is badly weakened, a consequence of greed and irresponsibility on the part of some," and due in part to "our collective failure to make hard choices."

He's offered few policy specifics other than saying we need to undertake massive new infrastructure and education programs. But he is right, there are a lot of hard choices we need to make. And one of them is the decision to fix the way public companies are managed.

Private enterprise forms the basis for our economy. It provides most of the jobs we enjoy and creates the wealth that raises living standards. New government spending can only do so much to repair the economy. Reshaping corporate management can do much more.

The problem with doing nothing is obvious. Faltering companies are now soaking up hundreds of billions of tax dollars and they are not substantially changing their management structures as a price for taking this money.

How does it serve the economy when we subsidize managements that got their companies into trouble? Where is the accountability? More importantly, where are the results?

The economy continues to sink, jobs are being lost, the markets continue on a downward course. Changes are needed and can come if Congress insists on reforms that make corporate boards and managers more accountable to stakeholders.

First, Congress needs to pass legislation giving shareholders enhanced rights to elect new boards, submit resolutions for stockholder votes, and have far more input on executive compensation and other issues. As companion to these reforms, Congress needs to pass legislation that prevents managers from making it more difficult for shareholders to exercise their ownership rights.

Managers often come up with creative ways to perpetuate their reigns of error. These include myriad takeover obstacles like poison pills, bylaw provisions and others devices that thwart shareholder efforts to hold managers accountable.

If Congress is reluctant to make wholesale changes at the federal level, it can enact one simple provision that would allow many of the needed changes to take place on the state level: It can give shareholders the right to vote to move a company’s legal jurisdiction to a more shareholder-friendly state such as North Dakota. Currently that decision is in the hands of company boards.

It is not reasonable to expect managers with failing track records to improve their performance on their own. They will only improve if they are placed under greater pressure by shareholders empowered to exert more influence on management decisions. Nothing will do more to improve our economy than corporate governance changes.

What we need are measures that let the capitalist system produce jobs and economic activity, with minimal but effective government oversight. Government spending is an important catalyst to economic gains, but we need to focus on improving the way private companies are managed so private capital can flow into them.

Our private sector is the greatest wealth creation machine ever devised, far outperforming any other economic model. Still, major improvements could do a lot to mitigate what Mr. Obama calls "the sapping of confidence across our land."

Lax and ineffective boards, self-serving managements and failed short-term strategies all contributed to the entirely preventable financial meltdown. It is time for battered shareholders to fight back.

Mr. Obama was right when he said that "it has been the risk-takers, the doers, the makers of things . . . who have carried us up the long, rugged path towards prosperity and freedom."

I hope that this means that the day of reckoning has come for those executives who simply feed at public and private troughs, putting little or no capital of their own at risk, and who produce little of value for the national economy.

It is time for change and the place to start is in the corporate boardrooms of America.

Comments

[Mark Yamada]

While I agree wholeheartedly, the new administration must lead by example. The inability (so far) to attach structured accountability provisions with TARP and other bailout funds is a huge governance gap. While stronger provisions to protect and hear shareholders is good, parallel provisions to allow taxpayers, through elected representatives, some transparent oversight with hooks for failing would be a good precedent.

[Trent]

Wow, great body of work! One of the root causes of our economical downturn was the lack of oversight with prudent lending pertaining to credit worthiness. I would venture to predict the same credit measuring entities that provide these measurement metric will continue to miss the boat of appropriate representation for individual and institution credit worthiness.

These voo doo credit rating entities will raise the numerical bar and baseline for credit worthiness and or scores. In an effort to hide their hands of accountability to this credit mess rather than be an effective solution. The mentioned manipulation of credit scores will only further hinder the recovery process because their efforts will undermine opportunity, prosperity and economical development. Totally misrepresenting and addressing the underlying issues/root cause elements; inappropriate lending practices.

Whatever happened to work history, earning power, consistency in employment, ability to pay, references, etc. being the base line metric for credit worthiness. (Not Debt Promotion)

I could be wrong but these mad scientists of the numbers planet are definitely out of touch or they're still reading the news from chiseled rocks/boulders. Why promote stimulus, manufacturing, infrastructure investment, American jobs and prosperity for all when credit worthiness will be underscored to further deplete buying power and opportunities for recovery/American made products. Unconsciencely sending the working class into higher interest rates. Good luck auto manufacturing, housing, durable goods, etc; insurance companies and back room poker players are still playing with fellow Americans prosperity chips.

Mr. Icahn, our government, fellow good Americans will definitely have their hands full with getting every entitity to understand the significance of our economy future and the possible hope of self governance or prudent descision making.

We have a bright future ahead of us if everyone bear the responsibility of Country First!

[Anthony J. Alfidi]

(Sorry, last comment went out incomplete.)

Carl, you are absolutely correct that shareholders need more legal tools to keep corporate management in line. Boards can continue to design and review executive compensation plans, but final approval of those plans should be subject to shareholder approval at annual meetings.

[D.R. MacMaster]

As a new reader of your blog, I have to say Amen Mr. Icahn.

How can business expect to attract new investment when shareholders are forced to sit back and watch a large number of CEOs sink the companies while pocketing massive salaries and bonuses that have little or no relation to their performance.

I have no problem with CEOs being rewarded, but I'm a firm believer in that such rewards must be earned, and not taken. The disdain many in top management hold for their shareholders is not real capitalism, because capitalism is all about that moment where both sides of a deal exchange thank yous, because both sides got what they wanted out of it.

What's killing business these days isn't capitalism run amok, but a new form of corporate feudalism. It's feudalism because those at the top have been acting like 18th century French monarchs. They rule by some sort of divine right, and not by their ability to serve their shareholders, and henceforth feel free to take beyond what they deserve and to hell with the peasants who own shares.

Anyway, I don't mean to ramble, excellent blog though.