The Icahn Report

In The News

• GE CEO Immelt Declines 2008 Bonus – The Street
• TARP Reform and Limits on Executive Compensation- Race to the Bottom
• Soup-Kitchen Accounting for Banks - Dealbook
• No Easy Way for Banks to Actually Demonstrate Viability – Seeking Alpha

Corporate Boards That Do Their Job

As seen in the Washington Post.

The entirely preventable financial catastrophe we have watched unfold over the past 18 months has many culprits: reckless executives who gambled with their company's futures, feckless regulators and somnambulant boards of directors.

But while executives and regulators have justifiably taken heat for this multifaceted debacle, board members have largely been let off the hook. Why?

It is a board's responsibility to oversee management and to ensure a company's long-term survival. Its job, in short, is to represent the owners -- the shareholders.

With the tumbling and collapse of dozens of major financial and other institutions, can we draw any conclusion other than that those directors utterly failed in this regard?

Yet, increasingly, we are hearing apologists rise to the defense of boards, evidence that the process of obfuscation of the boards' guilt has begun. This is dangerous.

Evidence of this trend includes a recent Business Week article, "How Much Blame Do Boards Deserve?" by Jack Welch, the former chairman and CEO of General Electric, and his wife. Now, I have a great deal of respect for Jack Welch. But this defense of boards was wrong.

Non-executive directors at our battered and bankrupt financial institutions could not have been expected to understand the risks of complex, highly leveraged derivatives that brought about our financial crisis, the Welches wrote. That is nonsense. A board member should be able to understand when a company is leveraged up to 40 times the value of its assets, as some were. In my view, many were just not doing their jobs.

Jack Welch believes that some boards' members should have pressed managements more on their risk strategies. Chances are that some directors did take this approach. But did they demand any change of course? Or did they just accept the management line that certain risks are necessary to generate returns?

I think we have a right to expect more from directors. The system of checks and balances between boards and executive teams has, in too many cases, disintegrated. In this global meltdown we are seeing that many board members were demonstrably unqualified, abjectly remiss or simply too cozy with management.

Clearly, we must strengthen boards at public companies. Some measures must include splitting the role of chairman and chief executive; eliminating "staggered" boards, which allow for only a minority of members to be elected in any one year; and giving shareholders the right to propose board members and resolutions on company proxy statements.

Non-executive board members are fiduciaries to shareholders who choose and oversee managements, and the chairman is the main shareholder representative. How can the chairman oversee the CEO if the job is one and the same, as it is at a majority of Fortune 500 companies? Splitting these roles would eliminate this inherent conflict.

Similarly, how can shareholders exercise greater power if managements are allowed to thwart them from being nominated to company boards? In many states, provisions such as staggered boards, which are meant to prevent a full board takeover in any one year, and "poison pills," which effectively block takeovers by new managements, are perfectly legal.

The dictum of the new White House chief of staff Rahm Emanuel, "You never want a serious crisis to go to waste," applies to our financial and economic situation. Inept -- and often very well-paid -- managements and boards got us into this mess. Let's respond by making lasting changes to make them more accountable to stakeholders, which includes everyone in this country.

Corporate law is largely the province of states, which to varying degrees protect flawed governance models. What is needed is a superceding federal law that gives shareholders the right to vote by simple majority to move their company's legal incorporation to states that uphold greater shareholder rights.

North Dakota, for example, is recognized as having the most shareholder-friendly corporate laws in the nation, thanks to recent legislative action. By incorporating in the state and adopting its provisions, a public company would in one easy step improve rights for its shareholders and eliminate the often too-cozy relations between managements and boards.

I want to be clear: Jack Welch did a masterful job as the chairman and chief executive of GE for two decades, until 2001. But with GE Capital soaking up $139 billion in government loan guarantees, it's fair to ask whether the board demanded answers from its current CEO and chairman, Jeffrey Immelt, about the risks embedded in that critical division. Alarm bells should have gone off in the boardroom long before this blue-chip company sought taxpayer help.

Our disastrous market meltdown makes clear that it is high time for shareholders to demand and receive more accountability from the boards and managements of their companies. I have created the United Shareholders of America campaign to focus on just these issues. Only by concerted action can we make changes to how our companies are managed.

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.

In The News

• Frank Backs Regulator for Systemic Risk - WSJ
• Marty Lipton Takes Aim at Hedge Funds – Dealbook
• Obama to announce limits on executive pay – MSNBC
• Dimon Says ‘Not Every Company’ Responsible for Wall Street Pay – Bloomberg