Economics

Carl Icahn Channels Adam Smith's Anti-corporatism

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Serious billionaire financier Carl Ichan says he "understands" the desire to cap executive pay, but that Obama is barking up the wrong tree. He offers the corporate version of power to the people instead: Power to the shareholders!

The real problem is that many corporate managements operate with impunity—with little oversight by, or accountability to, shareholders….

The problem…is that boards and managements have been entrenched by years of state laws and court decisions that insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures….

Management-friendly states have a vested interest in attracting these companies because hosting them generates a substantial portion of state revenues. It's a symbiotic relationship: The state offers management protections and, in return, receives much-needed tax revenue.

Sounds familiar. Adam Smith, anyone?

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  1. Obviously, he referring to Adam Smith’s cousin, Adam J. Smith, who was the local town drunkard in a small town outside of Cornwall…

  2. You know, what we need is someone who recognizes when the management of a company are behaving wastefully, and mounts hostile takeovers of the mismanaged companies. Then he could fire the poor managers, sell off the poorly performing assetts, restructure the business so that it is sound and profitable, and thereby protect sharegolder investments.

    Hmm, I wonder why nobody is doing that anymore.

  3. Katherine: Icahn, not Ichan.

    Understandable — I mistyped it myself the first time.

  4. Unless you meant 1chan, the unpopular predecessor of 4chan.

  5. Makes sense to me.

  6. I think a big part of this problem stems from technical investing. People just move money around the stock market based on patterns in the market itself. They don’t actually know anything about he companies they invest in since they don’t plan on holding stock for long.

    The real source of this problem is that people are willing to pay a great deal for the talent that puts their money to work. A lot of times people seem to fall for the price-quality fallacy in which expensive talent is good talent. Since business is nothing but an ongoing series of experiments in an ever shifting environment, investors often cannot tell before hand if an executive will be any good at running the company so they fall back on simply paying well and hoping for the best.

    Not an ideal system but far better than the moronic idea of having politicians set salaries. Like SabOx it will only serve to drive the creation of large privately held corporations answerable to know one.

  7. So is Carl planning on invading Delaware? Why not simply require all corporate officers to take an oath to be “nice guys” and “play fair”? Proposing a solution to a problem that has a less than zero chance of 1) being enacted and 2) functioning as intended if enacted is pretty much like trying to make sure that the problem, whatever it is, is never solved, which, I strongly suspect, is Carl’s intention.

  8. Since Icahn is in the business of taking over / putting the screws to companies, he’s not exactly disinterested when it comes to the balance of power between directors and stockholders.

    Moreover, Delaware (which must be the state he has in mind) did not gain its popularity by pandering to management. Investors like Delaware, too. If Delaware’s corporate law weren’t attractive to both management and stockholders, managers who chose to form corporations there wouldn’t be able to attract capital.

  9. This was a great topic to bring up. Unfortunately, Obama is a bit of a simpleton and believes spending and capping will solve all our problems.

    Instead of the simple solution of capping salary, a more nuanced analysis is needed. I would suggest doing as Icahn says and examining how government is destroying accountability. A free market with strong property rights and contract law would be far more accountable. Certainly much better than the corporatist system we have now. Oh and no bailouts. Executives at failing companies can stand in unemployment lines with the rest of America.

  10. Didn’t this pass the House 2 years ago, was strongly opposed by Republicans and then died in the Senate? That idea to allow shareholders to decide executive compensation?

    Didn’t Matt Welch diss McCain for saying “And under my reforms, all aspects of a CEO’s pay, including any severance arrangements, must be approved by shareholders.”

    I understand that now that the barbarians are at the gates, you want the more reasonable and logical people deciding compensation. However, why diss the reasonable idea when times are merely tough rather than at a time when people are super pissed off and reasonableness is out the window?

  11. Mo,

    However, why diss the reasonable idea when times are merely tough rather than at a time when people are super pissed off and reasonableness is out the window?

    Well, they’re not really reasonable ideas are they? In both instances you list, the government steps in an mandates how executive compensation is determined. Why not simply eliminate the government capture by the executives?

    Shareholders already vote on executive compensation when they elect the board. What good would it do to have direct votes on the matter when most stockholders don’t even vote for the board.

  12. WRONG! Obama has the right idea. Let’s cap salaries. Starting with ex-congressmen’s consulting fees: Daschle made 5.2 mil within two years, unconscionable! I’m sure those companies who paid him would sure like their money back.

  13. Federalizing corporate law is a terrible idea.

  14. Shannon,

    Considering that HR 1257 is a non-binding vote on pay, the government isn’t mandating how executives are compensated. I have little problem with laws that protect shareholders, who are the owners of the company. I see it as a form of protecting property rights.

  15. “If Delaware’s corporate law weren’t attractive to both management and stockholders, managers who chose to form corporations there wouldn’t be able to attract capital.”

    Do you know anything about DE corporate law?

    Although IIRC there have been some recent cases in Chancery Court that have been favorable to shareholders rights, its still a far cry from being “attractive to shareholders” in any meaningful way, and especially in the context of a shareholder derivative suit. Moreover, the Delaware state law limits of corporate restrictions of shareholders rights have almost nothing to do with the attraction of capital investment – that is ultimately driven by the investment outlook and performance of the company. It may be of some interest to takeover artists like Icahn and Pickens, but not for the vast majority of shareholders.

    Do you read the applicable state law provisions relating to shareholder rights for each company in your investment portfolio prior to buying their stock and use that information as a significant factor in your investment decision?

  16. The government ought to consider passing a law prohibiting banks controlled by limited liability corporations. If banks were run like Lloyd’s of London, the “names” (investors) would be personally liable to an umlimited extent for the behavior of the people they hire.

    Personal responsibility is absent in modern society. Everyone hides behind the group!

  17. Although IIRC there have been some recent cases in Chancery Court that have been favorable to shareholders rights, its still a far cry from being “attractive to shareholders” in any meaningful way,

    Most shareholders are not particularly interested in being subject to a legal regime that allows a few dissident shareholders to hold the company hostage, so soi disant “shareholder-friendly” laws are actually not attractive to many investors.

  18. Oh yeah, Carl Icahn is such a non-biased and objective person when it comes to raiding corporations and helping them to perform better and survive in troubled times. Just ask Motorola. He’s doing wonders there. And his little buddy Ralph Whitworth is really fixing things at Sprint too.

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