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It's Up to the Shareholders, Not the Government, to Demand Change at a Company

As seen on the Huffington Post.

Several years ago, I bought a big chunk of 'distressed' debt in a major company and landed on the creditors committee when it filed for Chapter 11. Shortly thereafter, the bankers who were hired by senior management told me that I would have to pay retention bonuses to keep its top managers from leaving.

The company, they warned, would crumble if these star managers left. Nine had already threatened to march out the door if they didn't get substantial bonuses. I told them I was fed up with retention bonuses. Where was the line waiting to hire these "star" managers who were responsible for bankrupting the company in the first place?

So I flatly refused. After much argument, the company's lawyers and bankers said, let's take it to the bankruptcy judge.

The judge said, "Mr. Icahn, why don't you want to pay retention bonuses?"

"It's simple, your honor," I replied. "It's because I don't want to retain them!"

"Hmm, good point," the judge said. "You win."

To make a long story short, we eventually replaced these allegedly irreplaceable managers and restructured the company. The net result? We saved $500 million in costs over two years and the company is in much better shape today than is has been in years.

I tell this story to make a point about AIG and other companies where managers have been awarded lavish retention bonuses. In my view, very few managers are irreplaceable, especially in this economy.

The AIG retention bonus imbroglio is emblematic of the same disease that afflicts many public companies across America. Managements are overcompensated in myriad ways, even when stockholders -- the owners -- take tremendous losses. How is this helping our national economy? Why do we tolerate it?

Retention bonuses are often little more than an employee racket in bankruptcy proceedings. Why should the very managements that got the company into trouble get enormous payouts? And yet this occurs all too frequently on the ill-advised reasoning that they might actually leave. In many cases, the companies are better off without them.

Another major problem is the so-called 'exclusivity rule,' where these same managements that got the company into trouble are given the exclusive right to come up with a restructuring plan for 180 days or more. Shouldn't creditors and other stakeholders also have the immediate right to devise a new plan?

House Financial Services Committee Chairman Barney Frank put it right when he said that a retention bonus is "a nice word, it turns out, for extortion."

"If it's people getting a small salary and some kind of an incentive bonus and it's a legitimate incentive bonus, that's not a problem," Frank told CNN, referring to Fannie Mae and Freddie Mac's plans to pay millions of dollars in retention bonuses to top execs. "But retention bonuses where people say, 'Bribe me and I'm going to quit the company and hurt you,' should not be allowed."

As the New York Times' Maureen Dowd puts it, Fannie Mae "brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco," referring to the Theater of the Absurd dramatist.

If only Obama had been as tough on AIG and others as he has been on General Motors, where CEO Rick Wagoner was forced out last month, a move soon to be followed by a majority of GM board members.

Wall Street Journal writer Paul Ingrassia said Obama's Automotive Task Force, headed by private equity luminary Steven Rattner, should be commended for replacing most of GM's board of directors, many of whom "put loyalty to Wagoner above duty to shareholders while the company imploded."

It is unfortunate that it took a force the size of the U.S. government to shake up the board and management at GM. In effect, the government has become the world's biggest activist investor, making the same kinds of demands that any activist or creditor should rightfully make in return for its investment.

Shaking up managements and boards is a no-brainer at underperforming companies for activist hedge funds and private equity firms, including Quadrangle Group, which Rattner co-founded. Why should investors tolerate poor performance? Why should taxpayers?

I have shaken up boards and managements at many companies in which I have invested, including Blockbuster, ImClone, Stratosphere, Philips Services, Federal-Mogul and many others. Generally, but not always, the net result has been very positive for the company and the shareholders. It is important to get new blood, new strategies and new ideas into underperforming companies.

As the saying goes, 'if you do the same thing all the time, you get the same result.' This applies to many managers. Too many are one-trick ponies. America is losing its economic hegemony because of it.

But most importantly, it is up to shareholders to step up to the plate and demand changes at their companies. For too long and for a variety of reasons, shareholders have been complicit in allowing management excesses and incompetence by not taking a stand.

"Shareholders have reelected these directors, have approved these pay plans and have been enablers for the addictive behavior of the corporate community," said Nell Minow, editor and co-founder of the Corporate Library in a recent BusinessWeek interview.

Let's hope the global economic meltdown causes shareholders to demand more changes on the part of their companies -- and not leave it to the government.


I couldn't agree more with this post, but as you noted here and as I wrote in this article at http:// AIG, etc. are not being put through the same hoops that the manufacturers are and I believe this is because of the cronyism of the Wall Street Bunch, which is unacceptable in my opinion.


but I'll bet the managers you let go were hired again by other companies willing to pay them a lot...strange how Cxx level people can always land their next gig, even if they've left their previous company in shambles

I am curious as to which company Mr Icahn was talking about in his article concerning "not paying" retention bonuses?

Mr. Icahn,
I totally agree with you, I've alway felt that the federal government was responsible for the lack of corporate governance. But the shareholders must reinforce that measurement of expectations by being knowledgeable owners of these companies. It's only fitting that our government servants of all three branches get their act together and start representing its citizens.
The individual investors/shareholders are educating themselves and I believe these friendly structured corporate leaders and boards are starting to take notice. Average working Americans are the single largest investors in the world, they are called invidual investors. Sir keep in mind that most proxy voters are held hostage due to the fact that they work for the company and feel either intimadated to vote down party lines or for some sad identification they feel much better about themselves if they are represented/associated with a millionaire hapless CEO.
The taxes you and I pay should be represented by the service of our government which should allow us the fortitude to act as you have done. We are starting to demand results for our investment into these companies, funds, 401k, products, goods, etc. I feel the CEO should be the ultimate employee not the elite boss prancing around town talking about nothing being the life of the party.
Activist shareholders are like abolishionist in that they are representing those that can't represent themselves for whatever reason. What you have brought and are bringing to the forefront is that this inappropriate corporate behavior threatens our National Security!
It's time that individual investors started representing their investments versus letting their investments represent them. Sitting back letting fund managers, CEOs, government officials and others perform without accountability or appropriate representation!

The movie release "Individual Investors with a Brain," coming to a boardroom near you!!! Run for the Hills!

Unfortunately, the idea of excessive compensation is engrained in our society. Look not only at Executive pay packages, but Athletes, and Entertainment stars. As long as the public (as shareholders and stakeholders) continue to allow it, excessive compensation for some will continue to be the norm.

I completely agree, it is mystifying to me how much egregious mismanagement and overcompensation is tolerated by shareholders. I believe it is as a result of the increasingly short term nature of many investors (traders, really). They are looking for short term profits and do not plan on sticking around long emough to institute any type of fundamental change.


The Return of Shareholder Value ???
It has been stated that this has been the worst decade for shareholder value. Yet it would be a mistake to write off stockmarkets entirely. The market is now filled with shattered balance sheets and with credit hard to come by managers won,t have much choice but to get that money from their shareholders. That means we will have to be well rewarded.
Corporate managers have no where else to turn to now for capital.Prior to the crash we shareholders were simply an irritant as managers could get all the capital they needed from banks, the bond markets or private equity firms. The only alternative shareholders had was launching hostile takeovers,which sadly resulted in the board recieving handsome payouts.
The decade ahead will be see the pendulum swing back in the favour of shareholders as banks won,t be lending tons of money the bond markets will be busy feeding billions to governments that have run up vast deficits and private equity won,t be on stand-by waiting to buy a subsidary at vastly inflated prices.
So the credit crunch has the market going back to what it originally was designed for,a place where business could raise capital for projects ,equipment and expansion etc.

So in summary we will hear less bla,bla,bla,about shareholder value and probably actually see more of it.

Galileo said that mathematics was the language of God,I dare say that God hasn,t had anything positive to say as of late on Wall St. Agreed ?

This article is the best explanation I've seen for why people without much money and influence should not invest in the equity of public companies. The model is broken for small investors. Invest in something YOU have control over, such as real estate. It is not worth the time and effort for a small-time investor to do the amount of research required to find the rare company that pays for real performance. Because you know your broker isn't going to do it for you.

i just want point out that after Mr. Icahn purchased his shares and said no to the board of executives for bad job that the company was still positive. Why cant there be more private investors who stand up for thier capital? If i am investing in anything that is mine and I view my money as my hard earned dollar then i should have a right to know what is going on at that company. There is no reason that I as a private stock holder should not be able to demand change but allow taxes on my stuff and my future generation aka a financial bailout for an error that I did not commit and would be given a chance to help fix. This is something that should be my given right as a shareholder. There is no reason we as private equity holders should be supporting a bad job and not be able to demand change..

Since it seems you got a wider-than-usual audience with this post, I'm a little disappointed you didn't bring your message about why shareholders don't have the clout they used to. You could come across to some, especially those who haven't read your other essays, as just another one of Them, just another deregulation-mad Capitalist Pig. (Capitalist Pig you may be, in fact...but capitalism is better than what we have now, and your interests re: corporate governance coincide with us small investors.)

I think you could have done more good tempering your message about what you don't want government to do with what you do want government to do.

To find better managers must also mean to look for more talent at unusual places.
Let's seek, find, reward and grow.

Example: I have discovered several excellent managers in less than two year old start-up companies who preferred to excel aggressively than to try to continue on the corporate ladders.
Innovative managers who lead from the front.

None of our 'great' banks would give them a dime. But they made it to excellent success, anyway.

The naked and scary truth about our capitalistic system is that today there does not exist a critical mass of investment management who can go out and “shake-up some boards.” Hence, steps-in the Government to "watch the watchers." First after the Enron collapse, and now after the recession floated a lot of f.m. to the surface, the State has become a much bigger economic player than we ever feared possible... in fact, to the point where Russia now criticizes the United States for too much state influence over the economy!

In 1990's the West told the Eastern European and former Soviet countries that they should mass-privatize and de-regulate. This was followed with lots of advice for developing financial markets and corporate governance. Development agencies, such as IFC and USAID were particularly worried over the consolidation of control in newly mass-privatized public companies. I was arguing instead for facilitating the consolidation of control over the dysfunctional mass-privatized companies because the thieving "red directors" controlling these companies at that time could only be usurped by agents capable of doing so in their own self-interests. (See for example: http://www. and http://www. ).

I do not know with what color some of the modern American corporate directors should be labeled. However, if a critical mass of private sector investors focused on the corporate governance does not emerge, we may be living under a whole lot more state influence than we ever feared before. Hope is good, but advocacy, lobbying and investor education is needed to make this happen.

Mr Icahn,
That makes so much sense. Why garnish a mangement team with bonuses when they run a company into the ground. Change can only be productive when clearing the 5th floor along with the head of the human resource departments along with all the helpers who put into action the bad management decisions of them. It seems a wise decision to make changes. I applaud you for your efforts and strength to do what is necessary.

Why not start a shareholder pool for voting. It would be very simple. Many shareholders including myself refuse to vote or waste time voting due to the fact that that it makes little or no difference. I own 1 - 2% of a public company and i don't vote my shares because it will not make a difference.

Great Post Sir.


I would like your comments on bonuses and commissions for rank and file and this:
“$100 Million Payday Poses Problem for Pay Czar”

On the one hand he did make the commission but on the other hand it was with house (and now taxpayer’s) money.

You really are right on this issue agree that the article was very good congratulations

Good morning, as an early supporter of the ideas of this website, I was wondering if anything new is going to be posted or if the site and the reasoning behind it has taken on less of a need in the new economic environment??

Mark all good fights, it has gone underground.Rightouness and goodwill isn,t a crowded room many can fake but few make it.

Retention bonuses are just in some situations and not in others. To say that management is overcompensated provides a skewed perspective. Management should be well through investment in the company. If they are a majority shareholder, then they have the same interests that you do.

Mr. Icahn i would like to know what u believe on the alan carnagie strategy were any CEO should not make 17 times more then the lowest person on the corporate ladder...should non-productive mangers be subject to penalty or compensation if they are over this carnegie theory to the lowest man on the corporate ladder or the company itself....

Dear Mr. Icahn
This time the situation is largely more catastrophic than in previous situations, this is not about 'retention-bonuses'.
This is one of the signals that came out denouncing the end of free markets in America and the end of democracy.
These bonuses were paid to avoid whistle-blowing and blackmails in a totally colluded and bribed economic system.
I'll stop my comment here, but there would be a lot more to say and even more to do since everyone gets distracted by the effects while nobody fixes the causes.
Best Regards,


Why do you not have a book published? I wuld love to see you write a fusion of memoir, investor, keys to success book. Maybe similar to what Victor Neiderhoffer has done. What do you think?



I want to say thank you for fighting the corporate mishandling of executives that are otherwise untouchable by us little people.

Your blog mimics many of the thoughts I have about the same issues and if it were up to me I would have done the same and axed most if not all the executives at losing companies. As you point out, executives are a dime a dozen with a line 10 miles long applying for each position. To say that current exec's are irreplaceable is nothing more than nonsense and a means to create FUD (and thereby leverage for extortion). It is arrogant (and incorrect) of execs to assume that they are more intelligent and more fit for their position than anyone else on the planet. As a friend of mine always likes to remind me, power corrupts (as an friendly reminder due to my current success's).

It is unfortunate that there are not more people like you with similar resources out there fighting against other wealthy unethical people.

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