A Watershed Moment for Stockholder Participation By: Carl C. Icahn
For many years I have been a proponent of active participation by stockholders in public companies. Stockholders are like any other business owners – those who pay attention, carefully weigh decisions and present important ideas to be considered by their partners (who in public companies are their fellow stockholders) are more likely to own valuable, dynamic businesses. Obviously, a business that operates solely through employee control and without owner influence would be missing a critical element for success – decision-makers with real skin in the game who can provide the necessary checks and balances to otherwise uncontrolled power. Simply put: How much candy would be left in the candy store if employees reported only to themselves?
As was noted long ago by Sir John Dalberg: “Power tends to corrupt, and absolute power corrupts absolutely.” The corrupting power embedded in the simple mechanics of the system through which directors at public companies are elected is sufficient to cause all stockholders to be concerned. Imagine if the U.S. Senate was itself, as a body, entitled to pick and endorse those who would run for the Senate in each election and, on top of that, had unlimited access to funds at the U.S. treasury to support those campaigns – would anyone doubt that rampant corruption would result? Yet, that type of self-perpetuating process is exactly what we have in corporate America under the current system, wherein board members themselves nominate candidates for election to the board and use the corporate coffers to fund their election. The SEC sought to eliminate this crucial flaw in the corporate voting system years ago through promulgation of a new rule that would have facilitated the election of directors nominated directly by stockholders, thereby enabling business owners to circumvent the self-perpetuating board nominating committee. Not surprisingly, those efforts were thwarted by litigation and political lobbying from The Business Roundtable and the usual cast of characters from the corporate bureaucratic establishment, including executives and their highly-paid advisors, who remain aligned against stockholder rights.
It is those same anti-stockholder interests that promote the alternative model to active stockholder involvement, which entails corporate ownership residing in passive, absentee stockholders and leaves bureaucratic managers and directors controlling our public companies. Although there are exceptions, I believe that the passive stockholder model ultimately leads to mediocrity, complacency and a tendency towards a form of the very corruption identified by Sir John Dalberg long ago, whereby businesses are run with an inappropriate focus on enriching management and board members instead of stockholders. The massive compensation and self-dealing that has occurred at many public companies, even in the face of poor results and labor force reductions, highlights the risks inherent in the passive stockholder model. To put it simply, in business, as in all things, you cannot let the fox guard the henhouse.
Sadly, in the case of eBay, it is abundantly clear that management favors the passive stockholder model. In a recent interview with the Financial Times, eBay CEO John Donahoe lamented the fact that he had stockholders to answer to, saying that “business should be allowed to innovate without shareholder distractions.” The article further quotes Mr. Donahoe as saying: “Every new Silicon Valley company has a dual class of stock to prevent this issue, because innovation has a long-term time horizon.” In any rational world, dual class stock, which is an outrageous scam, would be illegal for public companies. But we thank Mr. Donahoe for honestly stating his view of the proper role of stockholders, which we interpret as essentially “sit down and shut up.” Sir John Dalberg would, we think, have had no problem recognizing the impact of power on Mr. Donahoe in this regard.
At the risk of being immodest, I believe my record proves that when you have the farmer guard the henhouse, instead of the fox, better results occur. From November 15, 2008 to November 15, 2013 (a five year period), my nominees joined the boards of directors of 20 public companies. A person that invested in each company on the date that my nominee joined the board and sold on the date that my nominee left the board (or continued to hold through November 15, 2013, if my nominee did not leave the board) would have obtained an annualized return of 28%. My success did not occur because my nominees micro-managed these companies. Rather, it is simply a result of diligent oversight and properly focused priorities.
There are a number of great dangers facing our country. Our pension funds are underfunded. Unemployment remains frustratingly high. The Federal Reserve continues to artificially prop up the economy. But throughout history it has been proven that the corruption that results from unchecked power, whether criminal or otherwise, exacerbates all other dangers. It diminishes morale, reduces productivity, hinders development and encores cynicism. Nevertheless, defenders of the corporate bureaucratic establishment continue to refine entrenchment devices, such as the pernicious poison pill, with its ever-decreasing ownership thresholds, that are designed to strip power from away stockholders and insulate self-interested managers from having to be accountable to their constituents. The dual class voting stock championed by Mr. Donahoe is similarly designed to take money from investors while restricting their ability to have a say in overseeing their investment. It is entrenchment devices like these that hold back corporate democracy, thwart efforts to have full, fair and transparent elections of directors and ultimately imperil our most valuable assets, which are embedded in the public companies that make-up the backbone of our economy.
Until recently, professional corporate managers and directors and their highly paid advisors and defenders, all of whom can generally be considered the bureaucratic establishment of corporate America, have criticized activist stockholders, and those voices have had a disproportionate effect on the dialogue regarding corporate governance. A recent news story, however, serves as a clear reminder that stockholders who blindly trust managers, directors and advisors are living in a fantasy world. In headline grabbing news, the SEC charged the film and television distribution company Lions Gate Entertainment Corp. (please indulge me if I refer to this affair as “Liar Gate”) with failing to fully and accurately disclose to investors key information relating to management’s participation in a set of extraordinary corporate transactions that put over 16 million newly issued company shares in the hands of a management-friendly director at a price of $6.20 per share (the price of those shares was $33.26 per share at market close on March 12, 2013 (the day before announcement of the SEC’s order), creating a total spread of almost $440 million that could have inured to the benefit of all Lions Gate shareholders had such transactions not occurred). In settling with the SEC, Lions Gate admitted to violating federal securities law, agreed to pay a financial penalty of $7.5 million and acquiesced to the SEC’s demand to cease and desist from future violations. The “Liar Gate” matter is notable not only for the direct findings against management and the board but also for the criticism that has been leveled against Wachtell, Lipton, Rosen & Katz, the company’s legal advisor (and, not surprisingly, the same law firm that has been tapped to represent