The Icahn Report

Limit Company Size and Encourage Short Selling

Dylan Ratigan has established himself as a top financial anchor and reporter through his work on CNBC shows such as "On the Money" and "Closing Bell" as well as during his tenure at Bloomberg News, where he served as a Global Managing Editor and host of its "Morning Call" program. He is the anchor and co-creator of CNBC's "Fast Money"and the co-anchor of "The Call" and the 3 p.m. hour of the "Closing Bell."

By Dylan Ratigan

Warren Buffett recently urged us all to follow his lead in buying American stocks during this fear-driven down market, invoking his common sense wisdom of being greedy when others are fearful and being fearful when others are greedy.

While I appreciate and agree with Buffett that it may be a good time to invest in this great country's long-term future, I also think there is a lot the Warren Buffetts of the world can do right now to help ensure a prosperous future.

First, we need to take a realistic view of how we got into the current financial calamity.

Instead of creating a society that harnesses the powerful force of capitalism to benefit us all, which resulted in the development of light bulbs, automobiles and computers, we have created a system in which the spirit of innovation has been hijacked to find better ways to cheat society for personal gain.

We have to face the reality that regulators alone can never keep ahead of the cheaters. An unfortunate aspect of human nature is that some people will always try (and succeed) at "gaming" the system, no matter how prescient and attentive our regulators.

I believe the solution to the current and historical problems with capitalism is to enact two pieces of regulation.

First, we must never again allow any company to become "too big to fail." Companies, by their very nature, take risk. Because of the competitive nature of capitalism, there is no amount of regulation, transparency or prudence that can successfully prevent companies from occasionally failing. This is especially true of banks, which will always be tempted to increase profits by pushing the risk envelope and will always find ways to do so.

Just as traditional commercial bank regulators have the authority to curb an excessively risky bank, we need to enforce a limit on the size of non-bank financial entities. This measure could help stop the inevitable failures that cause the systemic failures for which we are all now paying.

Second, and the most pertinent to Mr. Buffett, is that we need to promote, not stamp out, short-selling. It is only through the use of the skeptical force of short selling that those who would seek to inflate their company’s value by hiding or manipulating information will be forced to provide transparency that regulations could never mandate.

The wonderful thing about a stronger system of upward and downward pressure is that it forces companies to be more accountable. And if there is anything lacking these days, it is accountability among managements.

So instead of an activist like Carl Icahn trying to take over the board of a company, he could simply raise a "short" fund to target companies that have loaded their boards with cronies and yes-men.

Or the next time Warren Buffett labels something like derivatives as "financial weapons of mass destruction," he could instead tell us which companies to bet against. This will force these companies to change their behavior more than any government regulation ever can.

There is a reason why CEOs who helped get us into this mess regularly blame short sellers for their failures.

It is because short selling forces CEOs to either disclose what they are doing or suffer consequences for their secrecy. But rather than admit to 40-1 leverage, they loudly stigmatize those who would dare to bet against their companies.

Unfortunately, merely choosing "not to buy a stock" is not enough to force this kind of necessary transparency, for there is always a "greater fool" down the road to buy it. We need to actively punish these companies and managers in our role as profit-minded investors.

In simplest terms, choosing not to buy a stock because you don't like the company is like refusing to be friends with a drunk. But shorting a stock is like sending a drunk into rehab. Many of these companies, drunk with money and neglectful of risk, should have been sent to rehab a long time ago.

Obviously, we can never again allow the system to become so vulnerable to inevitable future corporate failures. But just as obviously, we can also no longer trust government alone to catch the cheaters and liars that have bastardized American capitalism.

Let's apply the human nature that creates these problems to expose and punish them financially. We must no longer pay heed to disgraced CEOs who falsely claim that their downfall was caused by "those evil short sellers."

Let’s face it - sober people do not mistakenly end up in rehab because it is so easy to prove that they are sober. But when we discover they are regularly drunk at lunch, that's where we can send them.

I can think of no one better than Warren Buffett to be that kind of friend to both our country's companies and its citizens.

Agenda for a New President: Improve Corporate Governance

Nell Minow is the editor of The Corporate Library, an independent research firm specializing in corporate governance.

By Nell Minow

President Obama will come into office with very little time to head off a long-term economic downturn. The recent volatility we have seen shows that the need for better corporate governance has never been clearer or more pressing.

The 21st century’s version of "mutually assured destruction" does not require weapons; it is the global economy, one in which we all are now are inextricably intertwined.

Previous scandals – insider trading, the savings and loan abuses, accounting fraud, market-timing, backdated options, and more – could be compartmentalized, attributed to a few bad guys abusing the system.

But this latest mess is so pervasive and so – apparently – legal that it has called into question the most fundamental notions of trust in Wall Street and in the American economy. The impact of America’s sub-prime loan disaster is felt around the world just as economic crises in other markets affected us.

The new President will have to do a lot more than tweaking some rules and issuing some new lists of best practices and disclosure requirements.

And even a new administration will be limited in how far it can go in reminding corporate boards that good governance is more than simply compliance and check-lists. It is about transparency and accountability, but most of all it is about making sure we have board members who are committed to asking good questions and insisting on good answers.

If the transition team asked me for my to-do list for improving corporate governance, I would provide a combination of quick steps and long-term, more ambitious and far-reaching proposals including:

1. "Say on pay" - When an overwhelming majority in the House approved legislation to give shareholders the right to cast a non-binding vote on executive compensation, it was Senator Barack Obama who introduced it in the Senate. So we can expect administration support for getting it enacted promptly.

2. Race to the top: Shareholders should determine the state of incorporation, a more market-based approach that will encourage the states to protect shareholders, not management.

3. "Majority vote" – The law now permits a director to continue to serve without getting majority vote from shareholders if there is no dissident candidate. Nearly 30 directors currently serving on U.S. corporate boards did not get majority support from shareholders. One way to remind directors that they represent shareholders is to make it possible for shareholders to remove those who overpay executives and fail to manage risk.

4. Appointments – The Bush administration recently added new SEC commissioners, limiting the new President’s ability to change its direction. But it is the President who decides who will be SEC Chairman, and the Chairman has the greatest power in setting the agenda and making division-level appointments. There are also positions at Treasury that will be very influential. And it is important to remember that the Assistant Secretary of Labor - with responsibility for ERISA, which governs the largest group of equity investors - should be an expert in capital markets, not just benefits. The failure of ERISA funds to exercise share ownership rights as fiduciaries should be on the agenda for investigation and enhanced oversight.

5. Reorganization – Combine the SEC and CFTC and eliminate the "self-regulatory organizations" that continue to give the securities industry too much authority in regulation and enforcement. This antiquated structure has been out of date for decades and there is no remaining justification to continue it.

6. Corporate governance has to be reviewed from the "demand side" as well as the "supply side." It is not enough to focus on what boards and executives must do. We must also focus on what investors, especially institutional investors, must do. The US needs something along the lines of the UK’s Myners Report, putting the burden on institutional investors to explain why they are not doing more to demand action on issues like poorly performing boards.

The SEC must also stop blocking the "broker vote" rule to end automatic "for" votes on governance-related issues. ERISA funds and other private institutional investors should be required to disclose all of their proxy votes, their proxy policies, and report annually on their exercise of other ownership rights, including the filing of shareholder proposals, meeting with management, proposing director candidates, and litigation.

7. Regulatory policy – SEC rules almost always encourage a compliance-oriented approach and discourage innovation. We need a shift to a more flexible "comply or explain" approach that makes the rules the floor instead of the ceiling and encourages innovation. A fundamental, zero-based, 21st Century approach to all of securities regulation is long overdue. The SEC should also step up Chairman Cox’s efforts to use technology to make federal filings more user-friendly. There is enormous opportunity to use online technologies for bail-out related tasks, especially valuation.

8. Global coordination – As capital markets become seamless we need to work more closely with other developed and emerging markets to assure transparency and consistency.

These steps would do more than make important changes in removing obstacles to the shareholder oversight that is an essential element of our markets' efficiency and resilience. They would send a powerful message that corporate managers will no longer be able to game the system for their own benefit.

In The News

• Citigroup directors looking to replace their chairman – Reuters
• The Daily Telegraph reports Morgan Stanley will cut 10% of its investment bank staff
• The US Government is on the hook for $5 trillion due to the financial crisis writes Forbes
• Canadian Banks are faring quite well according to Time. Says Minister of Finance Jim Flaherty, "The credit crisis we're facing is the result of unbridled greed. We need to bridle greed."

In the News

• The Philadelphia Inquirer questions whether WHYY’s board is paying CEO Wiliam J. Marazzo too much
• South Carolina Gov. Mark Sanford asked federal authorities to investigate a more than $12 million payday for a bank CEO ahead of the bank’s application for bailout assistance – www.thestreet.com
• Syneron Medical issues a poison pill – AP News
• Dear John Thain lays out the reasons for the crisis – among them are flawed compensation models and management pressure.
• Activist Investors are Gaining Support – TheDeal.com

In the News

• Truck Trend Blog discusses executive compensation of the Detroit 3
• Treasury says AIG must comply with executive pay curbs reports Reuters
• US taxpayers say Wall Street bonuses should be zero according to Blogging Stocks
• Shareholders’ proposals should not be advisory writes Race to the Bottom

Bonus Bonanzas Should End with Bailouts

The U.S. Treasury is spending some $700 billion or more in taxpayer funds to bail out scores of financial institutions that helped get us into this credit mess.

Now it turns out that a large chunk of this money may be going for executive bonuses. Where is the justice?

Elected officials including New York State Attorney General Andrew Cuomo and Rep. Henry Waxman are right to demand answers from these institutions about their plans to spend taxpayer money for bonuses, particularly since the government has taken big equity stakes in many of them.

"Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them," said Cuomo in a press release.

I totally agree. These banks should not be allowed to soak up federal funds and use the money to pay out large bonuses to those executives who got their banks into trouble to begin with through risky and ill-advised strategies.

While bonuses are often viewed as part of Wall Street compensation packages, executives should not be entitled to them if it can be proved that strategies they promoted failed, particularly at a time when shareholders and employees suffered as a result. It is time for the boards of directors of these banks to take a harder line on these payments.

Boards have a responsibility to shareholders – not just to senior managers. Rather than allowing managements be paid huge bonuses, they should make senior managements accountable for their performances.

Targeting egregious executive compensation on Wall Street and elsewhere, such as at Fannie Mae, Freddie Mac and AIG, is long overdue. I hope that these measures lead to lasting changes in how compensation packages are designed. It is extremely detrimental to our economy when executives bail out of their companies with millions of dollars in payouts for failed leadership.

There is some evidence that the tide is turning against executives who soak up egregious sums of compensation from institutions that stumble.

From 2006 to 2008, the number of Fortune 100 companies that have disclosed clawback policies has increased, according to executive compensation firm Equilar. But still more needs to be done. Clawback policies generally allow companies to seize compensation in the event of a financial restatement or ethical misconduct, according to Equilar, an executive compensation firm.

These days, we have seen much evidence that the seeds for many financial firms' recent stumbles were sown years before. And in many cases, it could have been avoided with prudent risk management policies. For instance, the AIG Financial Products division for years had been writing insurance policies on mortgage backed securities, known as credit default swaps. But it was only recently that these bonds began defaulting, leading to colossal losses for AIG which required a government takeover of the firm, backed with $120 billion in taxpayer dollars.

Faced with a legal challenge from the New York State Attorney General, AIG agreed last month to freeze any payments to former CEO Martin Sullivan’s $19 million employment contract. The AG also froze any payments out of a $600 million deferred compensation and bonus pool to AIG's Financial Products unit, including payments to Joseph Cassano who headed the unit and whose share was about $69 million, Cuomo said in a press release.

Regulators also said they are blocking multi-million dollar payouts to the CEOs of both Fannie Mae and Freddie Mac.

But there is clearly more to be done. National City Corp., the giant Midwest bank that stumbled badly from investments in subprime mortgages over the last year, paid its former CEO David Daberko a total of $64.8 million from 1991 to 2007 in salary, benefits and stock option payouts, according to Equilar.

It was Daberko who presided over the bank's aggressive push into subprime mortgages over the last half-dozen years which ultimately caused millions of dollars in losses, virtually forcing its sale to PNC Financial for a fire sale price this month, according to news reports.

And according to a recent shareholder lawsuit, Kerry Killinger, the CEO of the failed banking giant Washington Mutual, received over $33 million in total compensation, including at least $7 million in bonuses from 2005 to 2007 at a time when the bank was pushing forward into subprime lending that ultimately caused its demise.

Killinger, who was ousted by WaMu just weeks before the bank was seized by regulators in September, was entitled to a cash severance bonus of $16.5 million as part of his contract, SEC filings show. Should he receive this bonus for leading a bank that lost tens of billions of dollars in shareholder value along with the loss of thousands of jobs?

It is obvious that clawback provisions should be mandatory for all executive contracts these days in light of these debacles. Why should shareholders pay bonuses to executives who drove their institutions off cliffs?

Through my new advocacy initiative, United Shareholders of America, I am working to change laws to make executives more accountable for their performance or lack thereof. But it is only when large numbers join this cause that we will be empowered to change laws in Washington and state capitals that favor managements over shareholders, who are the true owners of corporations.

I am asking that you sign up for the campaign on my blog, the Icahn Report, www.IcahnReport.com. Put your name in the top right corner and join United Shareholders of America. It costs you nothing and may produce the changes we so desperately need.

Compensation Consultants Grease the Executive Pay Casino

Executive pay is out of control in this country.

CEOs of Fortune 500 companies now make about 520 times the average worker. Yale School of Management argues they make about three times more than their counterparts in Japan and more than twice as much as those in Western Europe.

This disturbing trend has gotten worse over the last few decades – a period when this country has increasingly lost its economic lead. The trend suggests that CEOs have become increasingly focused on their pay packages and not the welfare of shareholders, employees, stakeholders and our national economic well being.

A major reason executive pay packages are ballooning is because of the incestuous relationships between boards and CEOs who conspire to give lucrative pay-and-perk packages to each other. But it is also due to the egregious use of "compensation consultants" that soak up multi-million dollar fees to provide strategic counsel to boards and in addition advise ever higher pay packages to top managers they presume to oversee – whether they perform well or not.

The use of these compensation consultants, which are paid handsomely with shareholder money, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not.

According to a recent study by researchers at the University of Southern California, Executive Pay and "Independent" Compensation Consultants (2008), executive and director pay is higher at companies where consultants are hired. The study found that median CEO compensation is $1.5 million in companies not using consultants, $3.0 million in companies that purchase surveys but do not directly retain consultants, and $4.2 million in companies that retain consultants.

In addition, companies now may use multiple pay consultants from different firms to justify or legitimize pay packages that are unusually generous. A company using three or more consultants pays almost 25% more to its CEO than a company using only one consultant. Companies can bring together recommendations from multiple consultants to create a single generous package or ignore recommendations that the CEO is unhappy with. A 2007 study done for Representative Henry Waxman showed that 25 of the 113 Fortune 250 companies disclosed that they hired multiple compensation consultants in 2006.

There is a conflict of interest if a consultant provides both executive compensation advice and other services to the same company. The Waxman study concluded, "In 2006, the median CEO salary of the Fortune 250 companies that hired compensation consultants with the largest conflicts of interests was 67% higher than the median CEO salary of the companies that did not use conflicted consultants."

"Over the period between 2002 and 2006, the Fortune 250 companies that hired consultants with the largest conflicts increased CEO pay over twice as fast as the companies that did not use conflicted consultants," the report found.

It also said that compensation consultant conflicts of interest are widespread. Over 100 large publicly traded companies hired compensation consultants with substantial conflicts of interest in 2006. The study found that in 2006, over two-thirds of the Fortune 250 companies that hired compensation consultants with conflicts of interest did not disclose the conflicts in their SEC filings. To list whether there is a conflict of interest in a SEC filing should be required. The study found that in 30 instances, the companies informed shareholders that the compensation consultants were "independent" when in fact they were being paid to provide other services to the company.

Watch this.

The use of compensation consultants is clearly growing. Of the 880 firms included in a recent study at University of Pennsylvania’s Wharton School of Business called The Role and Effect of Compensation Consultants on CEO Pay, 86% used a compensation consultant. "Little is known about the role of compensation consultants in the design of incentive schemes or how they influence executive pay levels," the researchers wrote.

The failure of a company's board of directors to take charge and adopt responsible executive compensation policies has forced more shareholders to take notice and demand tangible progress on this issue. To stop these practices we must demand change in Washington. We have to beat back dominant lobbying groups like the Business Roundtable, which protects the status quo. To fight this, we must show Congress that a large number of shareholders are fed up. Our objectives can be accomplished if you sign up for United Shareholders of America.

100 Million Reasons Why We Need Governance Changes Now: Join USA

The number of people who own stock in this country, through individual accounts, mutual funds and others, is higher than it ever has been, an estimated 100 million people.

So it logically follows that what is good for stockholders is good for at least a third of the nation, which is a huge constituency. But it is more - when people buy stock, it benefits companies that sell the stock, which helps them create jobs and drive more commerce in goods and services.

Stronger companies in turn generate more tax revenue for government services from which we all benefit, including the military, schools, roads, healthcare, etc. In short, strong companies benefit the nation.

It is therefore in our collective self-interest that we promote strong and well-managed companies.

The problem we face today, however, is that too many of our companies are clearly mismanaged by entrenched and self-serving boards and managers. And there are many laws that have allowed these directors to perpetuate this tyranny, often against the wishes of shareholders, the owners of companies.

The most obvious recent result of this is the wholesale meltdown in the financial sector, a result of executives' lemming-like drive into risky and little understood investments like mortgage-backed securities, many of which blew up, causing a global stock and credit market meltdown.

Now we all are paying the price with the multiple failures of long-established Wall Street firms. Tens of thousands of people lost jobs and life savings, the government has been forced to borrow and pay out hundreds of billions of dollars and commercial banking services have ground to a halt in many cases. The entire economy is suffering from the acts of a very few.

This colossal meltdown is a travesty of mismanagement and greed. We could be paying the price for years to come. And to add insult to injury, while billions of dollars were lost and thousands have lost jobs to recover nothing, the top managements have mostly gotten off scot-free, just like the owner of the Titanic. We as an economic nation will get through this, eventually. But our job is to learn from this experience. The question is, how can we make our companies better managed to prevent future systemic meltdowns?

CHANGE THE LAWS

United Shareholders of America, an advocacy initiative I am spearheading, believes the solution is simple: we need to change laws so that it is easier for shareholders to organize and remove errant and entrenched managements and boards. It was, after all, the managements that got us into this mess overseen by boards that apparently did little.

Unfortunately, there are many state and federal laws that impede stockholders from having greater power over managements. We intend to work to change many of them and propose new rules that are more shareholder-friendly. But it is only when great numbers of people get behind such a move will it happen. Here are a few for starters:

1. The "poison pill." This device, which is permitted in many states, allows a company to issue a plethora of new stock when a potentially hostile investor acquires a large stake, such as 15 percent. The provision has the effect of blocking any offer for a company, no matter how beneficial it may be for shareholders. According to the Corporate Library, nearly one-third of U.S. public companies have a poison pill in place, but others can simply institute them if they face a threat.

2. The staggered, or "classified" board. This device, also permitted in many states, allows a company to hold elections for only a minority of board members each year, effectively blocking stockholders from removing an entire board and instituting change.

3. "Advance notice" provisions. These corporate bylaws allow companies to demand an array of often arbitrary and irrelevant data from any investor wishing to propose a resolution for vote at a company’s annual meeting, including board candidates or resolutions on director pay, etc. These demands can be significant hurdles for any shareholder wishing to propose resolutions and often are simply pretexts for company to deny a vote on a proposal.

4. The "right of domicile" provision. We are proposing a new rule that would allow a majority of shareholders to have the ability to approve moving a company’s legal domicile to another jurisdiction, such as a different state. In many states, it is the sole right of management to determine where a company is incorporated, meaning they often domicile in management-friendly jurisdictions.

5. Division of CEO and chairman role. The CEO is the chief manager of a company, while the chairman is the main representative of stockholders. Unfortunately on many boards, this role is occupied by the same person, which often poses a conflict of interest.

6. Supermajority vote provisions for major transactions. These rules generally require that well over a majority of shareholders must approve major transactions like mergers or charter amendments, which is often an onerous impediment to change. A simple majority is sufficient for all such changes.

Altering these and other laws would be a huge step in giving shareholders more power to influence their companies. And most importantly, it will make "do nothing" boards more accountable in the companies they oversee.

Too many board members believe their main responsibility is to take the corporate jet to the Super Bowl or the World Series and soak up lavish pay and perks. This is wasteful and irresponsible and contributed to the economic crisis we face today.

Many studies over the years have found a direct correlation to good governance rules and corporate success. And over the coming months, I will be working tirelessly to change and improve corporate governance laws in this country.

But it is only when great numbers of people rise up to demand these changes can we be effective. That is why I am asking that thousands of people join this cause. You have nothing to lose and everything to gain.

Sign up for United Shareholders of America on my blog, The Icahn Report. www.IcahnReport.com

Paulson Demands Too Little from Banks on Exec Pay

Treasury Secretary Hank Paulson, appearing on CNBC last week, seemed proud of the fact that the CEOs of the nation's nine largest banks agreed to restrictions on golden parachutes, salaries and bonuses in return for a massive, $125 billion taxpayer infusion.

I mean, some of these guys nearly wrecked the global financial system with reckless gambling on products they barely understood and "agreed" to cut back on their already bloated pay packages? How generous of them.

This is akin to giving the Titanic's owner, White Star Line Managing Director Joseph Ismay, a commendation for driving the ship so fast on its maiden voyage that it slammed into an iceberg and sank, claiming 1,500 passengers.

Ismay, of course, escaped on his own lifeboat and survived, unlike his captain, Edward John Smith, who went down with the ship. In corporate America these days, there are far too few Smiths and far too many Ismays.

One reason that Paulson may have gotten the banks to agree to the restrictions is that they do very little to actually restrict compensation. It only covers the CEO, the CFO and the next three most highly compensated executive officers.

This means that other highly paid executives aren't covered, such as Joseph Cassano, the head of AIG’s Financial Products unit who made $280 million in the last eight years writing credit default swaps that caused AIG's collapse, according to Congressional testimony this month.

And according to the Wall Street Journal, Peter Kraus, the head of strategy at Merrill Lynch for only two months, is leaving his firm with a $10 million bonus, even though Merrill's failed strategy led to its takeover by Bank of America, which accepted $25 billion from the Feds.

Additionally under Paulson's plan, golden parachutes are limited to three times an executive's average annual salary, so if the CEO made an average of $20 million a year, he or she could still take home $60 million in shareholder-paid severance.

Some restrictions!

This is what is wrong with corporate managements these days! It's heads I win, tails you lose when you get to the top, shareholders and employees be damned. Where are the non-existent boards? Out on shareholder-funded "pheasant hunts" perhaps?

This is what I aim to change with my new advocacy initiative, United Shareholders of America. We need better corporate governance in this country. We can't afford the kind of mismanagement that got us into a financial crisis that nearly caused an economic collapse.

Paulson's plan is a baby step in reforming executive pay but I have a better idea: why don't we give shareholders of any bank accepting a government bailout the immediate right to call a special shareholders meeting to elect new board members?

In my view, it was the boards of directors at institutions like Citigroup, Morgan Stanley and Merrill Lynch, Lehman Brothers, Bear Stearns, AIG and others that failed to stop management from pursuing risky strategies that crippled their firms.

In his latest book "Where Have All the Leaders Gone?," retired auto executive Lee Iacocca writes, "Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder!"

"Name me an industry leader who is thinking creatively about how we can restore our competitive edge in manufacturing," wrote Iacocca, adding, "The most famous business leaders are not the innovators but the guys in handcuffs."

I’m not saying I totally agree with Iacocca, because we do have some great business leaders in this country. But there is definitely too little shareholder outrage over self-serving executives who get massive paychecks for deeply flawed performances.

It was only after the threat of legal action that AIG, the collapsed insurance company that required $123 billion in federal loans, agreed last week to help recover millions of dollars in payments to its former CEO Martin Sullivan and to others, including Joseph Cassano, the head of the unit that caused massive losses at AIG.

But there are far too few of these clawbacks taking place.

Under pressure by New York Attorney General Andrew Cuomo, AIG also agreed to terminate some $10 million in severance payments to Stephen Bensinger, its departing CFO. It also said it would cancel 160 executive junkets and conferences for a savings of more than $8 million. Recent trips included a $440,000 executive trip to a California resort and a $90,000 U.K. trip for pheasant hunting, according to news reports. But it shouldn’t have taken the threat of government prosecution for AIG to take these actions. How much money is also wasted in other junkets, perks and salaries at other crippled firms that we will never know about?

Sarbanes-Oxley was aimed at making corporate board oversight stronger in the wake of the collapse of Enron, WorldCom and others. But when we see the kind of debacles that occurred over the last year, obviously that legislation is only part of the solution.

What we need is millions of shareholders to rise up and demand more accountability on the parts of boards and managements of the companies they hold.

Why, for instance, don't AIG shareholders demand a new non-executive board at AIG instead of continuing with one that presided over billions of dollars in lost value and a federal bailout over the last year? The fact that the AIG debacle occurred is reason enough to demand a change in shareholder representation.

This is why we are asking people to join our cause by signing up for United Shareholders on my blog, the Icahn Report. It costs you nothing and we need as many people as possible to demand change in Washington – NOW.

Some might say we should be concerned that we may not be able to attract top performers to executive positions without huge pay packages. I say we don’t need executives whose main concern is looting their companies and pillaging the Treasury no matter how matter how poorly the company performs.

I believe if an executive is good, he or she should be willing to accept a decent income and annual bonuses based purely on performance. I have no objections to executives getting substantial compensation as long as shareholders also win - over the long term.

Unfortunately, the latest Wall Street debacle demonstrates that many managements simply devised short-term routes to profits and bonuses in strategies that laid the groundwork for the crippling of their enterprises. This is outrageous and demands a serious and sustained shareholder response.

The Buck Doesn’t Stop Anywhere with the Paulson Plan

The latest U.S. government plan to take preferred equity stakes in financial institutions is a great step in the right direction. But it lacks one key element - the government should give shareholders enhanced rights if they wish to replace the boards and managements of companies that accept government aid.

In a speech to the Economic Club of New York yesterday, Fed Chairman Bernanke stressed the importance of attracting large private investors and institutional money into the banking system.

But how can we expect private money to take big stakes in banks if they are put at the mercy of the same managements which got us into this mess to begin with? This is totally unrealistic.

As discussed in the Oct. 13 Lehman commentary on this blog, many boards at financial institutions abjectly failed in their oversight responsibility. Too often these boards gave managements virtually unchecked freedom to pursue risky, leveraged strategies that board members, and in many cases managements, obviously didn't understand.

How can we be sure that these same boards and managements won’t make the same mistakes again now that the government is backing them up? Shouldn't taxpayers and investors be better protected?

It's like a town with a chemical factory run by a bunch of mad scientists that blow up the plant and cover the town with toxic fumes! Should the town be forced to fix the plant but still keep the same mad scientists?

As in other countries, shareholders should have the immediate right to call special meetings to elect new boards at companies. These new boards should demand more answers and accountability from management - as boards are designed to do.

I strongly agree that private investment is an essential component in recapitalizing the banking system. There are trillions of dollars in capital allocated to private funds in this country and there is no reason some of this money can't be funneled into many of the 8,000 or so banks in this country.

But laws need changing to attract private money.

The U.S. Federal Reserve recently relaxed bank ownership rules to allow an investor to buy up to a 15 percent voting stake in a financial institution without becoming subject to an array of regulations.

The rules need to be changed to allow private investors to take control of these companies. Many such firms specialize in restructuring faltering companies and this kind of expertise is sorely needed.

In Japan, U.S. money managers including Ripplewood Holdings and W.L. Ross & Co. have turned around major banks by taking controlling stakes and restructuring the firms. The same should be encouraged here.

This month, I launched United Shareholders of America, a new initiative that aims to increase shareholder rights by working to change the many laws that favor managements in this country.

Managements and boards are employees of companies, which are owned by shareholders. Too often company executives forget this salient point.

Importantly, shareholders should have the right to move a company's legal domicile to other states that give shareholders more rights. Too often, companies incorporate in states which have pro-management laws with blatantly inadequate corporate governance rules.

In my view, it was egregious corporate governance failings that allowed the managements of financial institutions to drive their institutions off cliffs while raking in huge salaries and perks. It is only fair that investors and taxpayers should have a much stronger voice in corporate governance, especially in a bailout situation where executives nearly wrecked our financial system.

The latest plan has merits, including a government backstop for all new senior debt issued by banks for up to three years, which is essential to bring confidence and liquidity back into the stalled inter-bank lending market.

And importantly, the plan restricts executive compensation, bonuses and golden parachutes, but doesn’t go far enough in my opinion. It is too vaguely worded to have much real impact. As I said, why should the mad scientists be allowed to be rewarded for blowing up the plant?

It is only with strong boards and management accountability that we can avoid the kinds of messes that imperiled the global economy in recent months and put all of our economic futures at risk.

Join United Shareholders of America by signing up on my blog, The Icahn Report, www.IcahnReport.com. It costs nothing and I need your support. It is only by having a large number of voices in Washington that we will be able to make changes and it will advance the cause of shareholder rights and democracy.

Where was the Lehman Board as the Crisis Unfolded?

The collapse of Lehman Brothers, with its massive losses for shareholders and employees and near-catastrophic market consequences, obviously reflects an abject failure of management in risk oversight.

But who allowed the management to take these risks? Where was the Lehman board of directors in all this?

For too long in this country, managements have been given free rein to do as they please by timid boards who don’t make waves or hold managements accountable. In many cases, these boards are appointed by the very managements that they oversee.

Shareholders deserve better, which is why I urge everyone to join my new initiative, United Shareholders of America. Only with numbers will shareholders be able to compete with the Business Roundtable and get legislation passed in Washinton to finally make boards accountable.

Evidence of the Lehman board failures was blatantly apparent in hearings last week before the House Oversight Committee.

The Lehman Finance & Risk Management Committee, for instance, met only twice a year in 2006 and 2007 - years when Lehman’s crisis was brewing, according to testimony by the Corporate Library research group.

"A company in this sector should have a risk management committee that is vitally involved and has a great depth of expertise," Corporate Library editor Nell Minow testified to lawmakers. "A company that had $7 billion in losses after becoming embroiled in the global credit crisis had a risk management committee that didn’t understand or manage its risk."

"The board was too old, had served too long, was too out of touch with the massive changes in the industry, have too little of their own net worth at risk and was too compromised for rigorous independent oversight," Minow testified.

Incredibly, only a few Lehman board members actually had financial industry experience, Minow testified. "Most of their working lives were tied to a different era - the one before massive securitization, credit-default swaps, derivatives trading and all the risks those products created," he said, citing a Wall Street Journal report.

For too long, boards of directors in America have for the most part simply been sounding boards and rubber stamps for managements with little accountability to shareholders, who are the true owners of America’s corporations. We need boards who exercise a stronger hand and hold managements accountable.

Why, for instance, did the Lehman board allow Richard Fuld to occupy both the chairman and CEO role? The CEO is the chief manager of the company but the chairman’s job is to look after shareholders interests. Clearly these two roles should have been separated a long time ago, as they should in most companies.

And why did the board’s Compensation and Benefits Committee approve $20 million in payouts to two executives who were fired just days before the Lehman’s Sept. 15 bankruptcy filing?

According to Congressional testimony last Monday, one "involuntarily terminated" executive was Andrew Morton, the head of fixed income who got a $2 million payout. Wasn’t it highly leveraged exposure to fixed income securities that got Lehman in trouble to begin with?

And why did the chief operating officer for Europe, Benoit Savoret, get a $16.2 million bonus when he was also fired?

Fuld testified in Congress that this money was owed to Savoret as part of a contractual obligation. But wasn't this contact rejectable in bankruptcy court, which would have made it simply an unsecured claim? Therefore was this simply an excuse to give a gift to a departing executive? In my opinion, this money should be returned to the Lehman bankruptcy estate.

It is completely incomprehensible that the board would allow these payments when other workers had their contractual severance payments simply cancelled, according to reports in the New York Post and Bloomberg. Many Lehman employees, the owners of 30 percent of Lehman’s equity, were wiped out in this debacle.

To make matters worse, the bonus gifts came at the same time that Fuld was imploring Treasury Secretary Paulson to bail out the bank with taxpayer money. This rightfully gives Wall Street critics fodder for their complaints about undue executive compensation.

The Lehman failure arguably was a big cause of the current crisis. The ensuing lockup of the credit markets caused by banks to stop lending to each other for fear their counterparty might end up in bankruptcy court like Lehman.

This sorry episode on Wall Street only does further to highlight the need for better corporate governance controls to reign in reckless CEOs and spur ineffective boards. We need a change in corporate America.

Join our cause and sign up on this blog.

Join the United Shareholders of America: The Icahn Plan

One of the biggest problems we face today is the egregious mismanagement and reckless incompetence of many American corporate boards which utterly fail to do their primary job of holding managements accountable.

Many board members are often beholden to managements for lavish pay and perks they get for very little work and oversight. The credit crisis we find ourselves in is a direct manifestation of board members' lack of oversight. Alarm bells should have gone off in board rooms as crisis loomed, but many boards looked the other way.

Our economy has floundered for nearly two years because boards allowed their companies to make vast leveraged investments into faltering mortgage-backed securities. These investments vaporized trillions of dollars in shareholder value and left the banking industry in crisis. Boards gave permission to CEOs to take these risks, which often times they misunderstood, which is like giving the fox permission to guard the henhouse.

Incredibly, some board members make as much as $10,000 a week and soak up expensive trips to the Super Bowl and Augusta aboard corporate aircraft - simply to go to four or five board meetings a year.

Many of these same boards and managements are members of such groups as the Business Roundtable and the U.S. Chamber of Commerce, which annually spend huge sums of money in Washington to pass laws favoring managements and boards. These laws are often at the expense of shareholders, which are the true owners of America’s corporations.

We need an aggressive plan to combat this, which is why I am launching United Shareholders of America – a voice for large and small shareholders. We must have a strong voice in Washington to combat the pro-management forces.

United Shareholders of America will aim to push back against board entrenchment and make it easier for shareholders to promote change in companies they own. I am asking that you join this cause by signing up on my website, the Icahn Report, www.icahnreport.com.

It is easy to point fingers at those who may be responsible for our current crisis. But we are seeking long-term changes. And the only way to make these changes is for large numbers of shareholders put pressure on lawmakers. Remember, shareholders vote.

As I have said, a lot of people die fighting tyranny. The least we can do is vote against it. If our country is to get back on its feet, we as shareholders should stand up and demand changes to laws that insulate managers from shareholders.

It is sometimes difficult for outsiders to see the sheer extent of this mismanagement. Granted, there are a lot of good boards and managements. But in my 40 years in the financial markets and service on many boards, I have observed first-hand the egregious blunders and ineptitude of over-paid and self-serving boards who have little loyalty or accountability to shareholders. For sheer entertainment value, board antics rival skits on Saturday Night Live, but this value destruction is not entertaining.

On a regular basis, we see:

- Board compensation committees that approve ever-higher pay packages to top-level executives allowing them to walk off with millions of dollars even when the companies later fail due to bad management decisions.

- Boards that cozy up to managements so they can enjoy $300,000 annual salaries and perks like the use of the corporate jets and golf junkets in return for a few hours of work each month to rubber-stamp management proposals.

- Timid boards that fail to ask or research the relevant questions over risks a business faces for fear they may incur the wrath of a CEO and be forced to resign.

- Boards that approve decisions that thwart stockholders from proposing candidates to company boards and having a say in company decisions, even when a majority of stockholders approve.

- Board chairmen who fail in their fiduciary responsibility to act in the interest of stockholders and demand that managements be held accountable for financial performance.

- Boards that use every means at their disposal to thwart shareholders from placing resolutions for vote at annual meetings.

- Boards that allow managements to place the blame elsewhere for their dismal performances.

- Boards that refuse to allow their shareholders to decide for themselves if they wish to accept an offer for their shares that is well above the selling price of the stock.

- Boards that vote to enact anti-shareholder devices like poison pills and staggered board elections designed to aid in their entrenchment and power.

- Boards that approve millions of dollars in signing bonuses that can’t be taken back when a CEO leaves after a short period, even when the company collapses.

The list goes on and on.

Now consider the recent costs of this board neglect and malfeasance:

Besides the financial services industry, others are teetering or in crisis: airlines, automobiles, homebuilders, real estate, textiles, retail – to name a few. Manufacturing has largely moved overseas. Government deficits are soaring. Unemployment and inflation are rising.

America is losing its economic hegemony as evidenced by a falling dollar, vast trade imbalances, millions of jobs lost, an eroding manufacturing base, a financial industry in shambles and out-of-control government spending.

It doesn’t have to be this way. We as a nation can – and must – do better.

In an ideal business world, shareholders in faltering companies could simply vote out incompetent and crony-ridden boards and managers that helped create this mess.

Unfortunately, there are mountains of state and federal rules favoring managements that were supported by years of work by pro-management groups like the U.S. Chamber of Commerce and the Business Roundtable, a powerful group composed of 160 or so CEOs of the nation’s biggest corporations.

It is time for a change. A big change.

United Shareholders of America aims to create a grassroots movement of large and small shareholders who are looking to press boards to be more responsive to stockholders.

My campaign is designed to change state and federal rules that favor entrenched boards that allow executives to receive bloated compensation packages for lackluster performance and perpetuate themselves indefinitely in office.

Millions of shareholders will benefit from this campaign.

The list includes public pension funds that invest working peoples' money, institutional investment funds that manage corporate pension funds, endowments that fund college educations and the legions of retail investors and other stakeholders in our economy. In short, it is in the self-interest of all that we see a campaign to make business run better succeed.

This is why I am asking you to join us and support us. Like my friend Boone Pickens who is running a campaign for national energy independence and my friend Pete Peterson who is running a campaign to cut down on our staggering national debt, I am determined to make this campaign succeed. But I need your support.

In coming weeks, I will be outlining our plans to press lawmakers, policy makers and others for changes that we are advocating. I will also ask for your ideas, feedback and input in this. We are looking to create a grassroots movement - it is long overdue.

Let's not forget the most salient point: we all rely on business for our livelihoods and standard of living. Business and entrepreneurship are the engines of America's growth. We must not let this great nation’s economy erode as it has in recent years due to self-interested and incompetent corporate managements.

Please join in supporting this call for action.

Bailout Plan Must Include Corporate Governance Changes

With the shocking collapse of multiple banks and financial institutions in recent months and staggering losses to shareholders, Congress clearly needs to forge a bailout package to stall the economy from further downward spiral.

In my view, the primary factor that got us into this mess is the egregious mismanagement and short-sightedness of boards and CEOs of these institutions, who took inordinate and leveraged risks with stockholders money, not simply external factors like the housing market slump.

Business cycles happen. Obviously, responsible managements should have planned for this possibility and not blindly invested in subprime mortgages and other toxic instruments.

Unfortunately this has been a disaster for shareholders, many of which are pension funds for working people. These shareholders are paying for the mistakes, while managements are leaving with huge bonuses, such as the $2.5 billion package for Lehman executives after the bank collapsed.

I have long maintained that there are too many laws in this country that protect inept managements and don’t give stockholders enough power to throw out these managers. The banking industry is a prime example.

The bailout is one answer. But perhaps the most important solution is to bring private money into these institutions. We need to have management accountability to induce private money to come into the financial industry.

The U.S. Federal Reserve recently relaxed bank ownership rules to allow an investor to buy up to 15 percent voting stake in a financial institution, up from 9.9 percent. In certain circumstances, an investor could have up to two seats on a bank’s board.

These are baby steps in the right direction, but they won’t do enough to attract enough private money that the industry desperately needs during this crisis.

Private equity and hedge funds control hundreds of billions of dollars and many, including Carlyle Group and JC Flowers, have stated that are interested in investing more heavily in the financial services industry.

But now that top buyout fund TPG likely lost $1.35 billion in its minority investment in the failed Washington Mutual, many will be understandably reluctant to pour money in unless laws are changed to allow for more control over their investment.

The financial services industry has historically been one of the most profitable investment sectors. If laws were changed to allow for more private investment and management changes, the sector can be nursed back to health, backstopped by government funds.

Democrats and Republicans alike were right to challenge Treasury Secretary Hank Paulson’s sweeping $700 billion plan to buy the toxic debt of financial institutions – mainly because it contained no provisions to make managements accountable for their mistakes.

If private equity money were allowed to invest more heavily in financial institutions and manage them, they would be better able to value the illiquid assets that got them in trouble to begin with.

The Paulson plan will likely go through in some form, but legislators are right to demand provisions that would allow oversight and review of the Treasury’s action for this kind of taxpayer money.

Importantly, lawmakers should pass enhanced "clawback" provisions that allow for the recovery of CEO bonuses, as well as restrictions on executive compensation for firms that sell their assets to the government.

In my view, there is nothing more egregious than a CEO or other top executive getting multi-million dollar payouts after the company they were overseeing goes under.

This certainly applies to Stan O'Neal, who left Merrill Lynch as CEO last October with about $130 million in stock grants and options at a time when Merrill was deeply involved in the mortgage-backed securities market. The firm took billions of dollars in losses as a result, prompting its sale to Bank of America.

Before the U.S. taxpayer pays a dime to Merrill and Bank of America to buy its junk loans and derivatives, it should explore whether it can take back egregious compensation packages paid to current and former top executives.

That should also apply for any other bank participating in the program, including Citigroup’s former CEO Chuck Prince, Bear Stearns' Jimmy Cayne, Lehman’s current CEO Dick Fuld and all the others.

The hapless taxpayer should not be punished for the mistakes that drove these financial institutions off a cliff.

This clawback should also apply to Lehman, which set aside some $2.5 billion to pay bonuses to top executives of the firm, the bulk of which is being sold to Barclays. Again, they shouldn’t get these bonuses if taxpayers are forced to buy their toxic assets.

Similarly, the government must have the right to take substantial equity stakes in companies that participate in the loan buyout program and demand transparency on the part of the Fed so taxpayers can know what they hold, where the assets were purchased and for what price.

This kind of transparency is essential if the program is to achieve its objectives in reviving the debt market and not simply rewarding incompetent managements.

We live in a capitalist, free-market economy. There must be accountability at companies, especially those seeking public aid to discourage further raids on the Treasury. It is the only way our system will survive.

Say On Pay

John McCain and Barack Obama finally agree on something: corporate accountability.

'Say on Pay' has become a hot topic in the 2008 elections and highlights our faulty corporate structure. 'Say on Pay' may be the first step in emphasizing to our political leaders how important corporate governance is to the United States economy.

The other day, I watched CNBC anchor Melissa Lee say, "…both presidential candidates railing against high executive pay at failed firms Fannie Mae and Freddie Mac and certainly the GSEs (are) not the only troubled firms giving multimillion dollar send-offs to departing CEOs. It has happened at Merrill Lynch, it has happened at Citigroup, the list goes on and on." Now executives at Lehman’s New York office that may be directly responsible for the world’s largest corporate bankruptcy are to share a $2.5 billion bonus courtesy of its deal with Barclays. Should a top executive pocket big bucks even if the company is failing?

Good question. The answer is NO.

Aflac, run by CEO Daniel Amos, became the first public U.S. company to allow shareholders a nonbinding vote on executive compensation. This is now referred to as 'Say on Pay.' Although shareholders did not secure the power to determine executive pay at Aflac, they did obtain the ability to present their views on compensation awarded the year prior. This might seem like a big improvement, but it is in actuality a baby step in the battlefield for improved corporate governance. Mr. Amos' comment, "it’s symbolic, but it’s an important symbol," is true but nonbinding clearly does not give shareholders much say at all.

The Say on Pay bill was passed by the House of Representatives on April 20, 2007 after being introduced by Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. The Aflac vote was held at its May 5 annual meeting where 93% of shares were voted in favor of Say on Pay. With elections around the corner, it might be beneficial to highlight what candidates have said about Say on Pay and executive compensation:

Obama: Senator Obama introduced a companion bill in the U.S. Senate on the same day the House bill passed requiring public companies to give shareholders an annual nonbinding vote on executive compensation.

An Obama speech attacks CEOs "who are making more in one day than their workers are making in a year." He states, "It's about changing a system where bad behavior is rewarded so that we can hold CEOs accountable, and make sure they're acting in a way that's good for their company, good for our economy, and good for America, not just good for themselves."

The WSJ reports in an article entitled 'Candidates Target Executive Pay' that, "Obama staffers … renewed his request for Senate hearings on the measure. If the 'say-on-pay' bill doesn’t pass this year, 'it will be a priority for Senator Obama as president,' campaign policy director Heather Higginbottom says."

This past week Obama stated, "The American people should not be spending one dime to reward the same Wall Street CEOs whose greed and irresponsibility got us into this mess. Not one dime." CEO accountability is probably the only issue where Obama and I agree. But Obama should demand it be binding.

McCain: Sen. McCain joined in under his proposed reforms. BusinessWeek’s 'McCain Seeks Shareholders Say on Pay,' says the candidate believes that "all aspects of a CEO's pay, including any severance agreements, must be approved by shareholders."

McCain also takes a strong stance on corporate accountability: "Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road. If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors."

In regards to Fannie and Freddie he states, "We’re looking at a costly government-led restructuring of our home loan agencies and we need to keep people in their homes, but we can’t allow this to turn into a bailout of Wall Street speculators and irresponsible executives."

I agree. I don’t think we should bail out irresponsible executives either.

Even Senator Hillary Clinton introduced a bill (S 2866) to the Senate on April 15, 2008 that would require a shareholder advisory vote on a company’s executive compensation package. In addition, it would revise Section 304 of Sarbanes-Oxley, which would surrender incentive-based or equity-based executive compensation if an issuer is required to restate an accounting statement due to misconduct, and to increase the observation period to 36 months from 12 months. The bill includes a definition of misconduct to incorporate the backdating of stock options and accounting irregularities.

Say on Pay is important for its acknowledgement of shareholder rights and for its placement of this issue on the national political scene. That is why I supported this first step by recommending Blockbuster's adoption of Say on Pay. This should lead to legislation with real substance; legislation that will protect the shareholder franchise and ultimately strengthen the management teams that run the greatest engines of our U.S. economy – public corporations.

Join the campaign.

Corporate Waste Brings this Nation Closer to the Brink

Few things bother me more than the titanic government debt load this country carries from years of reckless government borrowing and spending. We really have no ability to repay this debt, other than by continually issuing new debt to pay the interest on the old debt.

The Peter G. Peterson Foundation calculates that we as a country have racked up a staggering $53 trillion in government obligations. That’s $455,000 per household and growing at the rate of $2 trillion to $3 trillion a year "on autopilot," the respected think tank says.

Just this week, we added another $85 billion to these obligations with the bailout of insurance giant AIG. Add that to the $200 billion in potential obligations to Fannie Mae and Freddie Mac, the $29 billion to back up Bear Stearns toxic credits, and $300 billion for the Federal Housing Authority and a possible $25 billion to $50 billion in low-interest loans for Detroit’s Big-3 automakers and we’re talking nearly $700 billion on top of this.

The debt and obligations we carry as a nation, combined with our miniscule savings rate and monster trade deficit, is truly frightening.

But what is even worse is the sheer amount of waste in corporate America that impedes our ability to generate revenue needed to finance these obligations. Already many infrastructure projects across the nation are suffering from declining tax revenue.

America’s corporations need to be run more efficiently or tax revenues will continue to fall far short and we will be even more in hoc to foreign lenders. Inefficiency and mismanagement on a colossal scale is causing our corporations to lose their economic hegemony in the global marketplace every day. For the past 30 years, I have warned in countless articles and interviews that we as a country are losing our economic preeminence and my predictions are unfortunately becoming a reality.

I am not claiming to be another Jeremiah or Biblical prophet here, because you don’t need divine inspiration to ascertain this. But it is obvious that our diminishing economic state reflects poor corporate management in America. We have all the resources to succeed, so there is no reason why we should lose on the economic battlefield. The recent debacles on Wall Street only further erodes our economic clout in the world.

EBITDAT

The situation has gotten so egregious that we half-jokingly use a measure called EBITDAT when evaluating companies, i.e. earnings before interest, taxation, depreciation, amortization and theft. In my view, this theft is a measure of how much senior executives and boards of directors blithely take out of companies in lavish salaries, perks and benefits, even though they may be running their companies into the ground.

I have observed first-hand the sheer amount of waste and inefficiency at a few companies that I have taken over.

For instance, when I took over a rail freight car company called ACF during the 1980s, they had 12 floors in a Manhattan office building which was filled with workers. I couldn’t figure out what they did. I really tried to find out what these people did and even went so far as to pay $500,000 to a consultant to study the issue and get back to me. After weeks of research, even the consultant couldn’t figure it out. So I shut down the division and it had no discernable impact on the performance of the company, which I own to this day.

This experience, in my view, is emblematic of the extent of waste in corporate America. There are few companies that you can’t come in and cut 30 percent of operating costs and no one would know the difference.

I don’t fault salaries and perks for executives that perform – they make money for all shareholders. It’s the ones that are paid for failure that really make me mad.

Why, for instance, should Daniel Mudd, the outgoing CEO of Fannie Mae, be eligible for an exit package reportedly worth some $9.2 million after he presided over one of the worst financial debacles in American history, and one that could possibly cost taxpayers hundreds of billions of dollars?

The regulators who oversee Fannie Mae now say Mudd won’t be getting that exit package, but he still soaked up a rich salary in previous years. Last year, when Fannie was jumping heedlessly into risky Alt-A and subprime mortgages that caused its demise, Mudd earned $11.6 million.

This week we find out that Robert Willumstad, the CEO of collapsing insurance giant AIG, is eligible for an exit package worth over $8 million, according to an estimate quoted in New York Times.

This comes as AIG is brought to its knees by vast overexposure to credit default swaps to the tune of some $440 billion, virtually requiring the Feds to pony up a staggering $85 billion in loan guarantees in return for warrants for nearly 80 percent of its stock.

Will AIG ever repay this loan? Will taxpayers ever get a return on this investment? Given the 46 percent fall in AIG stock after the deal was announced, the markets are skeptical about any AIG rebound, at least in the near-term.

Examples of egregious pay-for-failure abound in corporate America these days as though management is playing a game called "loser-take-all," only the shareholders are the real losers and are often left with nothing.

Stan O'Neal recently left Merrill Lynch as CEO with a pay package of $160 million, while Charles Prince left Citigroup with a $40 million deal. The boards of these companies should have taken every legal means not to pay these egregious golden parachutes. At companies I have been involved with, including Blockbuster, I was able to significantly reduce this kind of egregious payment, even though prior boards has forged them.

Other boards must do the same and reverse this destructive trend.

CREDIT EXCESS

The collapse of Fannie, Freddie, Lehman, AIG, Merrill and IndyMac and over a dozen regional banks is emblematic of the era of credit excess on the part of banks and abdication of government oversight in lending standards.

What we’ve really seen over the last three or four years is greed gone wild and now we’re paying the price for it in a monster hangover.

The fact is, we could end up in a major recession or even a depression with all the reckless lending that banks have done over the last few years, thanks to low interest rates, overabundant liquidity, lax lending standards and the wholesale offloading of risk to who knows where.

Obviously, a major business downturn will have a huge impact on government tax revenues, so our national debt could balloon even more in the next few years. Over 80 percent of government spending is non-discretionary and tied up for pension obligations, Social Security, Medicare, etc. So there is really very little spending that can be cut from the budget.

And with the "baby boomers" starting to retire, these costs are just going to keep inexorably rising.

I have read about many financial crises, from the Holland tulip bulb crash to the Mississippi bubble to 1929 and I think John Galbraith he summed it up best.

"All crises have involved debt, which in some fashion or another becomes dangerously out of scale to the underlying means of payment," said Galbraith.

The engine of our economy is business, a vast portion of which is conducted at public companies. If we have any hope of balancing our budget and paying our obligations, the revenue will have to come from taxes on business earnings, wages and capital gains made by investors - all of which is contingent on the success of business.

We simply cannot afford to allow our businesses to be run by hobbyists who parade around with the trappings of success like country club memberships, fancy limos, corporate jets, 50-yard line seats, skyboxes, golf outings, fishing trips, etc, all at shareholder expense, and pretend that they do a job that they abjectly fail to achieve.

The evidence that board members and managers are failing is screaming at us from the front pages of every newspaper and the talking heads on every television show.

This must change - and change fast.

We Pay So Much For So Little

With the monster financial meltdowns of the past month, the time has clearly come for shareholders to exert their rights and bring about major changes in corporate governance in America.

I intend to use this blog as a forum and a focal point to push for legislative changes to make corporate managements more accountable to shareholders, who are the true owners of America’s corporations.

I don’t claim to know what went on inside the boardrooms of these companies. However, based on my close involvement and knowledge concerning how many boards operate, it is difficult to see how one could reach any conclusion other than that the boards of directors of a number of these imploded financial firms utterly failed to successfully implement some of their primary tasks - to oversee management and monitor and evaluate risk controls.

This is unacceptable and intolerable. The financial pain and job losses these meltdowns have caused is now reverberating through the economy and this will likely continue for months or even years.

What has transpired in recent weeks with Lehman Brothers, AIG, Fannie Mae, Freddie Mac and Merrill Lynch is shocking. The dominoes keep falling on Wall Street from a mismanaged credit crisis, causing economic disarray, huge job losses and pain on a global scale.

In each case, the root cause seems to be excessive risk-taking by managements, or worse, managements that weren’t sufficiently aware of the risks their companies were taking and how it may impact their businesses.

Who was supposed to be watching these managers? Where were the boards of directors that are supposed to be overseeing these executives? I’m not going to judge the individual boards of these companies in what they did or should have done, but consider the following.

All too often compliant boards are intimidated by managements in their cushy, well-paid worlds and refuse to rock the boat by asking hard questions and demanding CEO accountability. Why is this so? Because of excessive board compensation and allegiances to those who provide it.

A new study shows that total remuneration for directors at the top 250 U.S. companies has risen 22% over the last three years. Many large companies pay board members almost $10,000 a week and what do these members do? In many cases, their job is simply to attend four to five board meetings per year.

Total director remuneration at the largest American corporations is running over $1,000 per hour, according to the study by Steven Hall & Partners. With many U.S. corporations struggling, why are we paying board members all this money? Lehman's board members, for example, were paid just short of a half million dollars each last year.

Given the massive bankruptcy filing at Lehman, I would appreciate it if someone would advise me of what those board members did to deserve that compensation? Can any board member of these collapsed financial institutions claim to have truly monitored the risks their companies were taking? Did any of them speak up? We may never know, but the effects of their action or inaction is apparent.

Maybe the loss of these cushy board seats and compensation packages will be a lesson to board members everywhere. What did they do to prevent these great ships from going down? Were they enjoying lavish lunches and fine wines in the officers' dining rooms or were they on the bridge challenging the captain? Or was the captain even there?

If the boards did their jobs, many of the problems today would probably not exist. Unfortunately many boards have failed miserably. (Just count the corporate jets at the Superbowl or at Augusta.) Boards fail because of a pernicious symbiotic relationship between members and the CEO. Amazingly, in many cases board members are afraid the CEO will terminate them if they are too critical.

I’m not the only one attributing events of the last week to a failure in corporate governance. Dealbreaker’s John Carney spoke about it in a post as did Larry Ribstein of Ideoblog. Even John McCain and Barack Obama have expressed concern. "I warned two years ago that the situation was deteriorating and was unacceptable, and the old boy network … is directly involved," McCain said. Said Obama, "This isn't 9/11. We know how we got into this mess. What we need now is leadership that gets us out."

Why are we paying boards so much to oversee CEOs who are doing a terrible job? To be a board member is a job- not a privilege - and board members should be compensated according to their performance. To continuously increase boardroom pay for dismal performance is outrageous. But more preposterous is the fact that boards allow so many of our companies to deteriorate.

It is time to stand up. Join the blog and join my cause.

3 Senseless Steps in A Proxy Contest

Proxy contests are expensive and time consuming partially because they are littered with inane technicalities. Technicalities that seem to exist solely to exasperate the shareholder. In this post, we evaluate a few to illustrate the absurd steps an entrenched board takes - using your money as a shareholder.

The Shareholder List

In a proxy contest, the dissident investor contacts shareholders using a list provided by the target company (under state law or federal proxy rules). Typically the list is sold to the investor at an outrageously high price. There are the obvious costs of assembling it, but why must investors spend up to tens of thousands of dollars to receive the list? There is no valid reason I have heard that merits the high cost for a list that is really just an electronic file. It is a completely senseless charge and one that I believe is exploited by companies as a nuisance to dissident shareholders.

The investor is left with a Hobson's choice - he can pay the company its fee or hire a lawyer to challenge the excessive cost. This is a game companies can play since the cost of pursuing such a lawsuit would be far in excess of the inflated cost that it has demanded.

The Use of Shareholder Funds

When an investor announces an intention to seek representation on a target company's board, the directors (who are meant to be fiduciaries protecting the shareholders' assets) use shareholders' money to mount a "defense." The amount spent by target companies to prevent a shareholder from being elected to a board is often staggering - some in the tens of millions of dollars.

A company can engage multiple law firms, investment bankers, proxy solicitation firms, printing companies, public relations experts and others. Who pays for all this? The shareholders. An apt analogy would be a situation where a store manager raids the cash register and uses those funds to hire security guards to prevent the store's owner from entering the store to make suggestions on how the store is run.

The Monopolization of Professionals

Often, the investor running the proxy contest must hire the same types of campaign professionals that the target company employs. The difference, of course, is that the individual investor is responsible for funding those services.

The hiring process becomes a competition - an investor must engage the top professionals before the target company. In some cases the competition has been so fierce that although the target company decided against hiring a certain professional, they warn that if they conduct business with the investor they risk losing the company's future business. This influence peddling is not restricted to professional services. Often, a company will attempt to incorporate local or national politicians in their attempt to thwart the investor's campaign.

Why is this allowed? Shareholders must rise up and fight these atrocities that prevent investors from having a say in issues affecting companies they own.

Lipton Defends the Indefensible, Again and Again

Marty Lipton, the prominent Wachtell Lipton lawyer whom I have sparred with on numerous occasions, is no stranger to hyperbole about the "sanctity" of the corporate boardroom, but his latest comment about Anheuser-Busch is way over-the-top.

In a July 24 memo to clients (Corporate Governance Ratings Debunked), Lipton pointed out that the giant beermaker recently changed its bylaws to allow for yearly elections of directors, rather than every three years. As a result of this, the company was subjected to a hostile takeover by Belgian beermaker InBev, which was poised to run a proxy battle to get new directors elected to the board, asserts Lipton.

"Anheuser Busch is the latest US company to fall prey to a hostile takeover shortly after repealing its classified board in the name of adherence to best practices in corporate governance," Lipton said in the memo.

Unfortunately, Lipton has it all wrong in this classic anti-shareholder view. His opinion suggests that it is a good thing that the maker of Budweiser should be protected from takeovers to maintain the cozy "status quo" of its boardroom.

Fortunately, the directors of Anheuser Busch didn’t listen to Wachtell Lipton, but responded to shareholders who saw the InBev takeover as a positive thing – at the right price.

The deal, at $70 per share or $52 billion was a great thing for shareholders, sending the stock up to record highs. (We don’t hold Anheuser-Busch).

Lipton’s views are emblematic of the anti-shareholder views exemplified by pro-management groups like the Business Roundtable.

Over the years, Lipton has built a very lucrative law practice advising big corporate clients on some very clever ways to keep shareholders like hedge funds from having a strong say in companies they hold. He is credited with inventing the poison pill, one of the most anti-shareholder provisions ever devised.

The memo seems designed to scare more corporate clients not to change their bylaws for fear that they may be subjected to hostile takeover offers and lose their lucrative and cushy management jobs.

Lipton elaborated in a June 25 speech to the University of Minnesota Law School, where he decried a wave of new laws and court rulings that have favored shareholders in the wake of corruption scandals like Enron, Adelphia, Worldcom and a spate of others that lost billions of dollars for pension funds.

"Boards merit the vote of confidence of shareholders and the public markets," asserts Lipton. "History has proven this vote of confidence to be well deserved."

"I believe it is the only way to assure that public corporations will be able to compete with the state corporatism that is transforming the economies of China, Russia and other rapidly industrialized countries," he adds.

Actually, it is just the opposite. Shareholder activists are making their voices heard more often precisely because American corporations are failing and losing their economic hegemony globally to the detriment of our national economy.

This is happening because many boards didn’t challenge managements to address global threats that have been brewing for years. Board members must select managements that have the vision and the foresight to get ahead of the competitive curve.

The University of Michigan speech also contains some astounding contradictions and mental gymnastics in defense of the indefensible.

On the one hand, Lipton decries the fact that union-backed activist CtW Investment Group threatened a "vote no" campaign against 22 directors of six major banks unless they could provide satisfactory answers to what efforts they took to manage risk exposures at their banks.

This of course is a perfectly legitimate – and imperative – inquiry to bank directors whose institutions have taken billions of dollars in losses and threatened the viability of the entire financial system.

But Lipton’s response is basically, 'don’t bother the directors – they have too much on their plate.'

"We cannot afford continuing attacks on the boards of directors at a time when their full commitment and their most talented members are so acutely needed," says Lipton.

If billions of dollars in losses is what their full commitment and most talented members bring, they should seek employment elsewhere. We can’t afford directors like this anymore.

Response to WSJ Opinion Piece 'Why Carl Icahn Is Bad for Investors'

There will always be those who will defend the status quo in corporate governance and attempt to justify the indefensible. The Aug. 1 Wall Street Journal op-ed article, "Why Carl Icahn is Bad for Investors," by UCLA law professor Lynn Stout is a good example of this.

In my opinion, the article was so wrongheaded that I am surprised that it