Carl Icahn has a new message today, and for once, it doesn’t have anything to do with Apple Inc. (NASDAQ:AAPL). Today he’s heaping coals on the heads of companies which are adopting a certain kind of bylaw without the consent of shareholders. In short, his message, via his blog at Shareholders’ Square Table, is: “Do not let incumbent directors limit your most vital right as a shareholder—the right to elect directors of your choice.”
Explaining the “Director Disqualification Bylaw”
Icahn picks up on an interesting trend in corporate governance. He notes that while there are many “good, independent boards,” there are also many “ineffectual boards composed of cronies of CEOs and management teams. He said these kinds of board devise certain mechanisms like the well-known poison pill, also known as a shareholder rights plan. One of the newer mechanisms he has observed is the one which “disqualifies certain people from seeking to replace incumbent members of a board of directors.”
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Under this type of bylaw, someone is deemed to be ineligible to be elected to a company’s board of directors if a shareholder has nominated the person and agreed to pay them for time spent serving on the board.
Icahn blasts disqualifications
Carl Icahn calls this bylaw “totally misguided” says it’s “absolutely offensive” for a board to adopt one like it without the approval of shareholders. If shareholders are offered a chance to vote on such a bylaw, he says they should reject it.
At the end of November 33 public companies elected a Director Disqualification Bylaw without the consent of shareholders. Last month, ISS said it could recommend a vote against or withhold approval from directors who adopt a bylaw like this without the approval of shareholders. Icahn said he agrees with the firm and, in turn, blasts law firm Wachtell, Lipton Rosen & Katz LLP. The firm came out against ISS, saying that there’s no evidence that being able to pay board nominees improves corporate governance and ignores the risks these arrangements bring in connection with “fiduciary decision-making and board functioning.”
Why Carl Icahn disagrees
He said in reality, however, that the other side isn’t providing evidence that being able to pay board nominees for their time serving on a board carries any risks. In fact, he said there are more risks to disqualifying directors based on compensation they will receive from a shareholder because it enables directors to “unilaterally disqualify potential candidates without consequence.” In general, it is usually activist investors like Carl Icahn who pay their board nominees, which explains why he is against this type of bylaw.
He also said that by boards passing Director Disqualification Bylaws without shareholder consent, they are effectively limiting the right of shareholders to elect board members.
Icahn praises activists
Of course the post wouldn’t be complete without highlighting why he thinks activist investors like himself should be allowed to pay their board nominees. He said between 2008 and 2013, his nominees joined the boards of 20 public companies. Investors who bought shares on the day his nominee joined the board and either sold on the day the person left or continued to hold through November 2013 if his nominee remained on the board saw annualized returns of 28%.
In addition, he pointed to a study conducted by professors from Harvard Law School, Duke University and Columbia Business School. That study looked at approximately 2,000 activist campaigns between 1994 and 2007 and found that in most cases, they were followed by a “five-year period of improved operating performance.” Because of this success, he thinks that many companies are just continuing to put up new barriers like the Director Disqualification Bylaw which threaten “to deprive shareholders of the increase in value and improved operating performance that often comes when an activist shareholder campaigns (at its own expense) for change at an underperforming company.