Capitalism Should Return to Its Roots

As seen in the Wall Street Journal

President Barack Obama's plan to limit executive pay to $500,000 a year—plus restricted stock—for institutions that get government funding is understandable. Still, salary caps are only a stopgap measure that fails to address the root of the problem.

The real problem is that many corporate managements operate with impunity—with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.

Despite the fact that managements, albeit with some exceptions, have done an extremely poor job, they are often lavishly rewarded regardless of their performance. We must change this dismal state of affairs if we are to rebuild our economy in a sustainable way that rebuilds confidence. If we don’t, these problems will keep recurring as investors pile into the next Wall Street innovation or asset bubble, enabled by the kinds of managements that nearly sank Wall Street.

The problem, as I have long maintained, is that boards and managements have been entrenched by years of state laws and court decisions that insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.

What we need are fewer government rules at the state level that protect managements. We need to return capitalism—our great national wealth machine—to its roots, where owners call the shots to managements, not the other way around.

Currently, corporate law is largely the province of state governments, not federal. As a result, most corporations migrate to, and incorporate in, states that offer the most protection for managements.

Management-friendly states have a vested interest in attracting these companies because hosting them generates a substantial portion of state revenues. It’s a symbiotic relationship: The state offers management protections and, in return, receives much-needed tax revenue.

However certain states, like North Dakota, offer many more rights and protections to shareholders. Because shareholders own companies, they should have the right to move a company to a state that gives shareholders more protections.

What is needed, therefore, is a federal law that allows shareholders to vote by simple majority to move their company's incorporation to another state. That power is currently vested with boards and management.

This move would not be a panacea for all our economic problems. But it would be a step forward, eliminating the stranglehood managements have on shareholder assets. Shouldn’t the owners of companies have these rights?

Now some might ask: If this policy proposal is right, why haven’t the big institutional shareholders that control the bulk of corporate stock and voting rights in this country risen up and demanded the changes already?

This is because many institutions have a vested interest in supporting their managements. It is the management that decides where to allocate their company’s pension plans and 401(k) funds. And while there are institutions that do care about shareholder rights, unfortunately there are others that are loathe to vote against the very managements that give them valuable mandates to manage billions of dollars.

This is an obvious and insidious conflict of interest that skews voting towards management. It is a problem that has existed for years and should be addressed with new legislation that benefits both stockholders and employees, the beneficiaries of retirement plans.

I am not arguing for a wholesale repudiation of corporate law in this country. But it is in our national interest to restore rights to equity holders who have seen their portfolios crushed at the hands of managements run amok. The suggestions above would do a great deal to change the dynamics of corporate governance in this country. Such a change will make us more productive as an economy, generating more wealth for everyone.

The Wall Street bailout and economic stimulus packages may be unfortunate and necessary steps to revive this flagging economy. But it is important to attack the real problem by demanding more management accountability.

I have initiated United Shareholders of America to empower shareholders to institute changes and I encourage you to join our cause. A majority of the U.S. population owns shares. Their voices need to be heard—now—on Capitol Hill and in the boardrooms of corporate America.

Comments

[Brian]

Couldn't agree more with this statement and frankly am appalled why this is even an issue since the shareholders are the owners, hence should decide where the company is incorporated, period! These Senior "managers" are slying destroying corporations which in turn destroys stakeholders, meaning the majority of the 310 million Americans, along with the 100s of millions more living outside the USA, are seeing their standard of living severely damaged.

I created a group just about 3 months ago on facebook spreading the word to join the United Shareholders of America..The link is below, please feel free to join!

http://www.facebook. com/group.php?gid=42056051734#/group.php?gid=42056051734&ref=ts

[M. Adler]

Mr. Icahn,
I agree this would lead to more accountability and transparency. I believe it would also lead towards a transition to a more loyal investor for common shareholders. Besides the one idea to vote to move your company to N. Dakota, it seems like there should be more realistic and feasible ways to get towards this goal. How do we encourage awareness of any effort to reduce state laws to the people that make it happen and how can this be moved forward beyond a very educated rant?

Thanks
Mike

[Elaine Decoulos]

An excellent idea. Is anyone in Washington listening? It's amazing how many conflicts of interest there are in the financial system. Hasn't anyone noticed this before? Carl, you appear to be the only voice on this one.

[Nick Choukair]

One can expect some change But within reason.

[thevoiced@voicedup.com]

I realize that there are numerous options in helping the economy but the one option I strongly disagree with is the nationalization of the banks. After having already spent 350bn via Tarp funds the idea of nationalizing banks should not even be a consideration for the government. Have we not seen the nationalization effects from other countries that chose to go down this path, how is Japan doing? France?India? The US banking industry today is one of the most regulated in the country, the housing bubble was caused largely by the government forcing banks to increase lending to the sub prime population. Once a bank is nationalized all decisions on investments must be approved by the government, there is no way that anyone in office can decide which investment is good and which is not. These decisions will most likely be made based on political influence, whoever lobbies most will get the prize. That is probably not a good idea for the future entrepreneurs of America nor any small business. During the 1990s banks were encouraged to loosen lending by the strengthening of the CRA act, this enabled individuals with insufficient funds to attain mortgages. Fast forward to today and we have the end result of reckless lending for nearly a decade. Still this could have all been prevented if not for the issuance of FAS157 effective November 15,2007 by the SEC and FASB . In the current market it would not be wise to sell any of the troubled assets based on fair market valuation as there are not enough buyers which drastically reduces the price of the asset.These assets should be removed from balance sheets, by creating a bad bank and transferring assets for 90 cents on the dollar although these assets may very well be valued at 50 or 40 cents on the dollar. By allowing banks to transfer these assets it will improve transparency and most importantly make them investable again. No more capital injections! This move only deters private investors from investing in equity. The higher the purchase price of these assets the higher the relief on the balance sheet of the banks. This would without a doubt improve overall economic conditions at a faster rate than any other solution and also affords the government the opportunity of this plan to cost taxpayers very little or possibly nothing. First, all loans should be returned back to the government which so far has amounted to 350bn. Next step would be for the “bad bank” formation and transferring all troubled assets here. An extra step here could be the banks that transfer assets are also forced to invest in the bad bank and in essence recoup a percentage of the losses but not to profit. A step further would be the government selling a portion of the bad banks to private investors sometime down the road.
If it was my decision I would choose to do nothing and let the game play out the way it should. Many banks would fail, lending would only get tighter and a global recession would still last shorter than nationalizing. Once all the failing players are held accountable and become extinct only healthy banks are left with real balance sheets and the recovery may begin, lending will loosen and so forth begins the next expansion cycle.

While this is not a quick fix lets not forget we are already in this mess and the best solution to minimize the effect of these troubled assets to the economy would be to have them removed from the balance sheet. I don’t believe a full recovery is likely in the event of this transfer to the “bad bank,” but unless there can be another accounting method to accrue troubled assets only when they mature it’s a start to the end of this mess and lets not forget the person asking for the loan is just as responsible as the one providing it. thevoice@voicedup. com/voicedup.blogspot.com

[AP]

Finally someone is making sense. I totally agree, the way to fix this whole problem is to give the power back to the equity holders of the corporations. We need major shareholder reform by the congress that needs to be signed into law. Major corporate changes (like salary pay) should be based on a majority of holders, not shares. Other smaller issues could be based on majority of shares.

[D.R. MacMaster]

I've come to the realization that when people criticize companies for only thinking about the "bottom line" they are way off the mark.

If companies were really centered on the bottom line, they'd be thinking about their investors and such. Instead management's eyes are locked on a couple of lines above the bottom line which are centered on their own compensation rather than the health of the company.

[Shalimar]

If shareholders were really concerned about making rational decisions, you might have more vocal stakeholders.

However, the top holders of most companies are either mutual funds or ETFs (showing up as Barclays or State Street). The largest pools of stakeholders turn out to be passive, non-return sensitive owners. Over the past few years, it's has been hard for more conscientious investors to influence the decisions of management - mainly due to the price barrier. A side effect of this has been the growth of IR-oriented CFOs, who exist to cater to the needs of the "institutional client", i.e. passive shareholder.

Carl, have you heard of any good recommendations addressing this fundamental problem of asset pooling/allocation?

[Cristian]

Adam Smith's Value of Labor - " Labour, therefore, is the real measure of the exchangeable value of all commodities. " ( End of Paragraph 1, pg 33, Chapter 5 - ' Of the real and nominal price of commodities, or of their price in labour, and their price in Money ' ) Also, " Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver,but by labour,that all the wealth of the world was originally purchased." ( End of Paragraph 2, pg.34,same chapter ). Also, " Labour,therefore,it appears evidently,is the only universal,as well as the only accurate measure of value,or the only standard by which we can compare the values of different commodities at all times and at all places. " ( Start of the 17th Paragraph ). Also, " The sole use of money is to circulate consumable goods. " ( pg.382, 'Of the accumulation of Capital,or of the Productive and unproductive Labour.' ) " Labour of the whole country, the real wealth and revenue of its inhabitants. " ( pg. 381 ). The evidence from Adam Smith's work - " The Wealth of Nations " is to recognize the value of Labor by any individual who has worked for a state/government entity and that this Labor is an investment to the state/government entity. Today, we are facing one of the most daunting task to preserve a society and state from a possible economic collapse. This collapse will bring instability and chaos to many nations which some possess weapons of mass destruction. Question is: How do we avoid this catastrophe? How do we restart an economy and preserve atleast its middle class.

Most important part to restart the Economy: " Direct Capital Reimbursement Stimulus check " to the working people of the U.S.

Adam Smith used to call the Netherlands during his time - "emporium" of the world. Today, the United States of America is the "emporium". Today in this world we are in a unique situation which will involve a bold approach to the current economic and financial crisis. Today, there is an absence of large scale war which would have produced some jobs to reinvigorate an invisible financial bubble. This reinvigoration was always possible as long as wars were waged in a way that created a robust economy. Especially in the past of World War II which created totalitarian leaders like Adolf Hitler. Today, this scenerio no longer exist because of non-conventional wars and the threat of nuclear annhilation of humanity. Two factors which would eliminate any substantial rebound in any (war) directed economy. Now, we will have to reintroduce a non-war type of economy and financial system to replace the old cycle of business and trade. I present the new system as ' Market Foundationalism ' which concentrates on the moral intention of the invisible hand, an idea created by Adam Smith, and recognizes the need of a free market. Right now, the small term or the micro economic approach has to be revealed to save the U.S. economy and therefore the global economy. I was thinking about the 'Law of Averages' to come up with a solution that would cover these factors: Auto crisis, Credit crisis, Mortgage crisis,etc. without hyperinflating the market place at the same time. I figured out if I was able to get the average price of an automoblie it would solve the problem. The average price is $ 28,400 which is much higher than my initial estimate of $19,000 , however, close enough. I decided to get 12% of the current estimate of the Stimulus Bill which is debated in the Senate and House of Representatives. The estimate by the Congressional Budget Office concerning the price tag of this Bill is $300,000 for each individual in the U.S. I therefore, decided to get 12% of this estimated and started multiplying the possible ranges for the taxpayers who earned this amount. It is the taxpayers who have earned any financial bailout and not banking entities with the TARP fund eventhough TARP was needed but was mostly mismanaged by the Bank entities. Therefore, the new economic philosophy concentrated on the well being of the people. Totally different form Karl Marx ideas of state control of finance and different from Adam Smith's total confidence in financial entities. This proposed idea would also save the individual states problems in the allocation of money. I propose that each individual that each individual which has worked in the U.S. within 10 years should receive $36,000. If this individual worked in the military or is cuurently in the military or is Veteran and has served in the military they would receive double the amount which is $72,000. Students would also receive the initial $36,000 but if they are in the previous categories (both an employee/temp also and was in the military) within 20 years it would triple to $108,000. Also, anyone above 55 years of age would also initially receive $36,000 but if they fit all of the previous categories they would receive $144,000. All of this would be offset by the past bills which has overall impacted the economy because consumer confidence determines if a corporation and company would hire and keep jobs. Those who have a mortgage would decide to leave their contracts and get another house in a later date. However, the average price of delinquent credit cards are $1,000 or more and by paying their debt it would help the Credit Market which could lend out more money and support other projects. Plus, by the 'Law of Averages' some would save all or some their disposable income and this would truly stimulate the economy. Yes, the some spending programs do help and yes tax cuts help also but these measures are simply peripheral support to a true stimulus action which should be in a form a check.

[Trent]

Mr. Icahn,
I must commend you for your efforts and another excellent attempt to solidify investor representation.
I am looking forward to the next attempt to stimulate the economy and gain investor/citizen trust in the market. I believe the next stimulus will be called the D.U.M.P.S; Domestic Utilization of Monetary Pompous Services.
What is the ultimate goal or risk assessment of a company or corporation when it incorporates in business friendly states? And have quarterly meetings at locations that very few shareholders, 401k investors, etc. can afford to attend let alone constructively participate?
I would venture to say they want an atmosphere of very little accountability, investor representation, lack of governance and financial association to the true owners of the company.
If we have learned one thing in this unfortunate wave of events associated with our economy and prosperity. It's that the largest amount of investors in the country have been taken advantage of by numerous entities and the institutions put in place to protect us have failed miserably.
Let me make a few points as a citizen that truly love my country and the fabric that have been woven by our country's history and experiences.

*Lets blame hard working Americans for this turmoil because they were taken advantage of by predator lenders

*Lets make it harder for working Americans to borrow by raising the individual metrics for credit worthiness/interest rates as a result

*Don't give Americans tax breaks/write offs when they make purchases of significant value to create growth

*Lets continue to let insurance companies raise the cost of health care, homes, vehicles, recreation items, etc. to the point of none affordability

*Lets continue to let boardrooms, states, prosperity robbers continue to deflate shareholder value and representation to stimulate growth

*Lets continue to let the capable scholars sit on the sidelines while the less capable continue to create fancy acronyms

*Lets set a platform for companies with insufficient leadership to declare bankruptcy without adequate representation for the largest shareholders (Individual Investors/Common Shareholders)

*Lets continue to take the American voters, individual investors and the largest buying potential group for granted..(Average Citizens)

Most Americans just want to feel safe and that their futures as well as their investments are being protected. How can we blame working Americans for wanting a home for their families regardless of their income. I'm pretty sure they had an income, regardless of what others may feel or think. These people had an investment in which they lost a significant amount as well. Just like the upper tier is losing a significant amount.

Mr. Icahn, I don't know how many are getting your message or even understand that we are all link to each other in the end as fellow Americans for overall protection from the good ole boy clubs. Regardless of my humble personal status or earning power, my dollar at one time passed thru your hands as yours did mine. If my hands touched your dollar and yours touched mine what does that make us?

I love my country and I will continue to have faith that we will understand that we are all responsible for each other and that we are a nation of Servitude and Integrity. Some where along the way we have forgotten the true meaning of our existence as a people. We must support our new President of the United States with new innovative ideas that promote prosperity for all Americans and put safe guards/laws in place to protect us against the next group of predators. Most great leaders lead with their Hearts not their approval ratings. We must get behind this President and put our diversified differences aside!

[Marty Dorio]

I believe the bigger issue is that SHAREHOLDERS don't care. They vote in less than large numbers. They vote WITH management the large majority of time. And they take no active role in governance. Did we all forget the Home Depot annual meeting? That is typical! So, changing the laws to allow shareholders to do blah bah blah will not have much effect at all. It will actually only allow activist shareholders (ahem) to do what they want, and enrich themselves further.

Marty

Former chairman, president and CEO of CLARK Material Handling Company

[Dan]

Hi Carl, could you please give some examples of specific laws on the state level that favor management over shareholders? I always thought that a vote by shareholders determines the Board of Directors so in theory all we need is for shareholders to exercise their voting rights. Clue me in. Thanks, Dan

[Lou Shapiro]

We're so grateful to have you around, to be vocal and tell it like it really is

Thank You

[Rita@Goldivas]

Shalimar makes a good point, we need to address that issue.

[Ralph C. Williams, CPA]

First we had the failures of corporate governance that created the need for Sarbanes-Oxley and the accompanying literature that outlined the almost total lack of corporate governance. Now we have evidence of the failures of corporate governance that has placed our entire nation at risk. The nation and her hard working honest citizens have not been served well by those entrusted to protect our assets and our very way of life. Capitalism is a privilege that requires responsible behavior if the nation and her citizens are to place their trust in the free market system. No group is more responsible for the nation's economic troubles than the members of the boards of directors whom have provided us with what amounts to inept leadership and a deprave lack of responsibility that all know is morally wrong.

[Johnin mx]

I think that a lot of the problem is the basis of the selection of the CEO. After 23 years in the military and three years in an older corporation I was fortunate to be hired by a company where the founders still were in charge. I stayed there 23 years and rose in middle management. These founders were not egotists, but recognized that growth was achieved by the efforts of the people below them in the structure. When it came time to retire, unfortunately they often chose those who had the qualities they felt they lacked. Often these qualities were less consequential than those of the founders; vision, recognition of subordinates, etc. The new upper managment was only concerned about appearances and short term results. That is a lot of the problem we face today.

[Larry Eissa]

Just brilliant.
God bless you Mr. Icahn

[Shankar AVSB]

Hello Carl, thanks for sharing your view on how we can tackle the problem at the root level.

Yes, a majority of retail shareholders just rely on the 'good faith' of the boards/managements of the companies in which they hold stock.

In fact, I have seen many financial planners who suggest to retail investors that presence of large Institutional Investors is good because they will take care of everyone's interests. But that's not necessarily true, as you pointed out because sometimes there is conflict of interest position due to incoming pension funds.

Whether we re-incorporate a company in North Dakota or not, the Boards have to work in a sincere manner, and they should be made to answer questions from investors, and not just stock analysts.

Even if 10 retail investors ask questions to the board every quarter, I think that will be a good start for positive change.
Thanks/Shankar

[Tod Engelskirchen]

Mr. Icahn,

Have you considered that what we need is a better educated investor class in the USA. With the demise of defined benefit plans and the rise in 401K's, that means all of us. When I was working I tried, with a job title involving training, to get financial education offered at least to the staff nearing retirement. My management told me that this was not a good idea because "they would only sell their profit sharing and we don't want that stock to go on the market."

We need to read the damn proxies, vote against pay packages which are not deserved (many), vote against compensation committee members who are not doing a good job, and in the worst of the worst cases vote against all board members. The problem is, as has been described above, we are a minority -- mutual funds and ETF's own too much of a company to give most individual share holders a real voice.

Again, we need to give the public a lot more financial education and we need to find a way that corporations cannot ignore the shareholders.

I have nothing against anyone making money. However, why was it fine for an average manager to make maybe 40 times what a school teacher made 40 years ago but now the same guy needs 400 times the teachers pay? Pay for performance. Fine. Just show me the performance. As in Lake Wobegone, we must all be above average.

tod

[The Disfactor]

Actually I disagree, this entire philosophy is based upon the belief of a "good Czar" that the Czar is not evil, it is really his advisors that are evil. Owners are also chairmen of their own companies and chose to have their board to the CEOing for them while they sat back and make money. I do agree that owners need to remain in control of their companies which makes sense as well as holding management responsible, but who is going to hold the company owners responsible. Why do we keep forgetting the real source of wealth in the Capitalist story disposable labor -- aka slavery and lots of it. Corporate owners relied upon disposable labor from every continent. As long as there is greed in all men there is a need to protect the powerless from the powerful.
We need government regulations