THE WALL STREET
OPINION | September
18, 2013, 6:28 p.m. ET
Challenging the Imperial Boardroom
Dell is just one recent
example of a dysfunctional system of corporate governance.
I'm no political scientist,
but it doesn't take a genius to understand that voting is crucial to
democracy. When things aren't going well, citizens can vote the
leaders out. A lot of blood has been shed for these rights, and while
democracy isn't perfect, to paraphrase Winston Churchill, it's far
better than any other system of government.
What baffles me is that
voting rights really don't apply to public corporations. Shareholders
can vote, but boards can just ignore them under the "business judgment
rule" backed by state laws and courts. In the middle ages, feudal
lords asserted the "divine right" of royalty to justify their lordly
positions while plundering the peasants. Today's boards act like they
are vested with similar powers: the divine right of boards!
How did this board-centric
system ever come about? Years of lobbying by pro-management groups in
state legislatures produced a thicket of laws that protect the
impregnability of boards and CEOs. Shareholders have been relegated to
a "take it or leave it" status.
How can it be, for
instance, when a shareholder purchases 10% or 15% of a company's
stock, management can legally issue a flood of new stock to dilute
those holdings and thwart a takeover because it may cost them their
jobs? How is it fair that boards can simply ignore shareholder votes
and leave incompetent crony directors and CEOs in place? Or legally
ignore shareholder board nominations despite overwhelming evidence
that new ideas and strategies are essential to salvage a failing
Is it fair that CEOs make
700 times what the average worker makes, even if the chief executive
is doing a terrible job and thousands of workers are laid off? Why do
CEOs get awarded huge bonuses by friendly boards when the share prices
are down by double digits and then get their options reset to lower
levels as an "incentive"?
Dell is just one recent example of a ridiculously dysfunctional
system. Lacking strategic foresight, the Dell board for years presided
over the loss of tens of billions of dollars in market value at the
hands of CEO
Michael Dell. Instead of deposing him, the Dell board froze out
shareholders and last week voted to allow the CEO to buy the company
at a bargain price using shareholders' own cash.
This transaction deprives
long-suffering shareholders from benefiting from the green shoots of
its newer businesses that Mr. Dell has just recently been touting.
When shareholders earlier this year objected to the vast wealth
transfer and voted it down, the Dell board simply ignored these
results and changed not only the voting rules but the voting dates,
thus blocking alternatives and ensuring eventual victory.
It is practically
self-evident that if the system of corporate governance in American
business was improved, shareholders would greatly benefit. At the risk
of being immodest, I believe our record at
Icahn Enterprises LP proves this almost to a certainty. Over the
years, we have attained great success by religiously following the
If you invested in Icahn
Enterprises (IEP) for the period Jan. 1, 2000, to Sept. 10, 2013, you
would have a total return of 1,116% today, compared with the S&P 500
total return of only 49%. In addition, the total return for IEP's
hedge fund from Nov. 1, 2004, to Sept. 10, 2013, was 254%, for an
annualized return of 16%. During that period, the S&P gained 80% for
an annualized return of 7%. Year-to-date, our hedge fund is up by 30%
as of Sept. 10.
Our record was attained not
by investing in the "right" companies and hoping the stock would rise,
but by investing in underperformers and forcing them to change, often
by installing better managers. We never tell these managers how to run
the business or micromanage; instead, we provide oversight and demand
The value of activism is
further reinforced by Harvard Prof. Lucian Bebchuk and co-authors, who
recently conducted an in-depth study of some 2,000 activist campaigns
from 1994-2007. The study concluded that "operating performance
improves following activist interventions," and that these
improvements continue for years after the intervention.
Activist strategies are
fraught with challenges, which is why there are few consistently
CEOs, who are accustomed to
having their own way, invariably lash out publicly at activists
through media campaigns and fight tooth and nail to defend their
positions—often ending up in expensive court battles. In addition, the
capital needed for these campaigns can run into hundreds of millions
if not billions of dollars, and this capital can be tied up for years.
We believe without question
that holding boards and CEOs accountable and replacing them when
necessary will improve the economy, make companies more competitive,
increase employment and add to shareholder value.
To bring this about, laws
must be changed so that shareholder votes count and so that activism
can be effectuated by more than just a few stalwart activists with the
staying power to take on intransigent corporate managements.
With the advent of Twitter
and other media, I and my colleagues intend to make more shareholders
aware of their rights and what can be done to keep these rights from
being trampled on. We also think that mutual and index funds should do
more to exercise their power against incompetent managements and
We believe the time has
come for shareholders to stand up for their rights. To this end, we
have set up a Twitter account that already has over 80,000 followers.
We are also establishing a forum called the Shareholders Square Table
to further these aims.
What I said 25 years ago at
the Texaco annual meeting still stands: "A lot of people die fighting
tyranny. The least I can do is vote against it."
Mr. Icahn is chairman and majority shareholder of Icahn
Enterprises LP. He can be followed on Twitter: @Carl_C_Icahn.
of this article appeared September 19, 2013, on page A19 in the U.S.
edition of The Wall Street Journal, with the headline: Challenging the
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