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

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.

Mr. Icahn is chairman of Icahn Enterprises, a publicly traded diversified holding company.

Comments

[ProgressiveVoice]

You don't say how long it took or how much money you spent to stand before a judge and hear him say you win. IMO, it would be difficult to organize stockholders to launch or pay for the legal battle it would require to get any change they may demand. The corporate managers know this which is why they feel they can tell the stockholders to sh**ve it, as one poster mentioned.

It's up to government to impose regulations giving stockholders more oversight and power and in the meantime, do what shareholders cannot.

[Texas Aggie]

Just a point of fact that has to be taken into account is that there are strong legal blocks that prevent shareholders from exerting as much control over executive pay as they would like. Stockholders have been trying to get more say into how companies are run, but not just the power structure but also the legal structure makes this very difficult. And stockholders aren't the ones who pay the lobbyists so the laws aren't going to change in our favor.

[slarabee]

True. That is true unless that company is seeking tax payer moneys to stay afloat. And then we the American people and by extension our government are essentially major share holder and we do have a right to apply pressure to see that OUR money is used wisely and not just given away to rich spoiled children that do not know how to run a business in the first place.

[Popsforza]

If the shareholders want exclusive control (and really, when was the last time shareholders had the kind of control we're talking about?) then they should have the exclusive responsibility to bail the company out.

[trudem2]

Mr. Ichan, to your statement that " very few managers are irreplaceable,", let me say:

NOBODY is irreplaceable.

Period.

[magic3400]

Dear Mr. Icahn,

BRAVO!!! A voice of reason in a sea of insanity.

The CEO has failed, the Board of Directors have failed, the top managers have failed and at the end of all of this failure they want a "retention" bonus or they will leave?

Picture this, you have a machinist working on a very expensive piece, he reads the blueprint incorrectly and drills the holes in the wrong place, when his boss tells him you just ruined this part the machinist says, "yeah, but I'm the only one that can fix it and by the way I need a million dollar retention bonus or I'll leave"

You are his boss, do you:

A. Look at him as if he has a third eye in the middle of his forehead.

B. Take the part and beat him over the head with it.

C. Call security and have him escorted off the property.

D. Pay the bonus, give the company billions in bailout money, wait a few months and then give them billions more.

Correct answer A, B, C

Some how we are suppose to believe that executive malfeasance is less important than worker malfeasance.

[DogLeg]

There is an underlying message here by the illustrious Icahn that, I believe, is being overlooked or obfuscated. Now I may be misinterpreting, but that is my reason for commenting.

Mr. Icahn makes generalized statements that could be construed for ANY MANAGEMENT not just a corporate management. He seems to believe that an organization such as the CFA which represents the faculty of the California State University System is the same as the management structure as General Motors or, more precisely, that the AFL-CIO of Autoworkers, etc. are the equivalent of major banking enterprises, as well as the rip=off insurance industries, etc. that are digging this hole deeper and deeper for the American working class. That is a mis-statement of fact and of reality to set up a false argument for responsibi­lity.If only the unions in this country were given the equivalent in bailout funds and deregulation this country would not be in the fix it is today, irrespective of so-called NAFTA trade agreements, etc.

Thanks for the word limit.

[breakingpoint]

Wasn't it at a EXXON share holders meeting where the CEO told a group of stock holder, 'you don't like what we do sell your stock.'

Let's see, if a CEO and board is beholden to their share holders first and not the nation and if the CEOs and boards can tell their stock holders to shove it and kick them in the teeth, I'd say we have a conflict of interest and a big problem here.

The big problem is corporations getting too cozy with government (including the bailouts), and that's Corporatism (Fascism) or if you like a Plutocracy which is what I think the American People are living under.

Until we face this and resolve the problem very little will change.

Let's hope it will be by peaceful means.

[tweedledeedumb]

HEAR HEAR!!!

[AMERIKA]

Lets say I agree with you...what if we are a major, no, THE major shareholder. what then?

[GrahamInCanada]

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.

With all due respect, Mr. Icahn, some might say that this is the kettle calling the pot names.

For decades, have you not been preaching this same gospel?

And for decades, have not vultures been pouncing on the weak companies, slashing workforces, moving jobs overseas, and then smiling and telling everybody that you, too, can be just as rich as me...

There is a problem with compensation models and income disparity in the United States, that you sir stand on the wrong side of, that is not the responsibility of small, arms length stockholders to solve, it is the responsibility of the government to solve, easily, through the tax code.

[SusieQ]

The culprit here isn't the shareholders, exactly. We'd have voted the bums out long ago, except that we don't vote our shares. Heck, most of us don't even know what we own. We own pieces of shares because we own mutual funds. We own mutual funds because that's what the companies we work for put our 401ks into and if we want to participate, we have no choice in the matter. We want to participate because the company matches at least a part of what we contribute, which makes it a good deal, so there ya' go.
I have been an advocate for a long time of buying shares in companies that I think are bad and then voting those shares..
Lately, I sold off a lot of stock and invested the money in low rent property. I thought that the housing bubble was about to blow and bought a tax sale place last summer in an iffy neighborhood where things were renting slow. Now that it's almost done, there isn't anything vacant there. Suddenly there are a bunch of people in that income zone, and do you know what? They almost all have mutual fund 401ks.

[guajiro]

Ahhh, SusieQ. What you say is true enough, and that's probably the case with all of America; we own shares that are controlled/managed by a company our employer hires to take care of our employee stock plan. To top it off, the CEO's of those companies in question, are alloted thousands upon thousands of shares per year as part of their compensation and the thousands of us working stiffs couldn't match our puny shares to theirs. There's just no way the current system can bring responsibility to America's corporate world. The majority stockholders are either part of the company (CEO's, Vice Presidents, Chief Operating Officers, etc, etc, etc) or the scions of the founding partners, in which case the public is left OUT of a controlling interest. A better solution to the management of the compnay would be for the Union to use the union member's stock as voting proxys when the issue of compensation to management for failing companies is brought up.

[DogLeg]

Well which is it? You had income invested in mutual funds or you had shares you invested in as an individual through a broker? Or did you do both but do not wish to reveal that? You are not being truthful. You state that "...shareh­olders aren't the culprits..­." in the same breath as "....we own...piec­es because we own mutual shares." Anybody who has a 401 in mutual funds has no say on the investment management of that mutual fund except the group investor who responds to those majority owners. However, you continue with the idea as an individual investor outside of a mutual fund in order to make your false analogy work. Sorry you flunked the course.

[joedabear]

To answer the question that your article title asks, I say; "When you belly up to the slop trough of Socialism for the rich, which we have had for nearly the last thirty years, you takes what you gets and likes it."
Bravo for you when you turned the turkeys out.

[bannorhill]

The key was the company filed Chapter 11. At that point the company was restructured and had no obligation to pay bonuses. If the government let normal business prevail without stepping in with bail outs, the bankruptcy judge could disallow the big payouts. THEN the companies could be bailed out if needed.

The problem was not run away capitalism but capitalism that was stopped before its natural conclusion.

[DogLeg]

Sure. And that natural conclusion was guaranteed how, by whom, what? The market?? The Courts? Congressional rewrites?

[bannorhill]

The natural conclusion is to let failing companies fail. Then those who invest and run such inefficient organizations are "punished" for their actions.

[daedalus43]

Dear Carl,
Once they take money from me (the public), I become a "de-facto" shareholder. If you don't like the terms, don't take the money.

[LINY516]

It's quite obviousl that people like Ichan and the other pro business folks forget the simple proposition that if you don't want the government to control salaries, run your company properly and don't ask for taxpayer bailouts. How simple is that MR. ICHAN????

[billw8017]

Read the article. Don't think it's all in the headline. Icahn says, it's a pity that it took the federal government to do what the directors should have done well before. He recommends the government's action.

[tailgateshirts]

well if the shareholders wont do it, then someone has to and now the gvt is the shareholder in alot of these places, so whats the problem?

[TeeLolly]

Tim Geithner? Larry Summers?