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Carl Icahn to Shareholders: When it Comes to Incentive Comp, Just Say No
Legendary investor and shareholder rights activist Carl Icahn wrote an article that appears in the Huffington Post, and on his Blog The Icahn Report- “It’s Up to the Shareholders, Not the Government, to Demand Change at a Company.” In this excellent article, Mr. Icahn describes how he addressed the issue of retention bonuses at a company that he was saving from bankruptcy:
Several years ago, I bought a big chunk of 'distressed' debt in a major company and landed on the creditors committee when it filed for Chapter 11. Shortly thereafter, the bankers who were hired by senior management told me that I would have to pay retention bonuses to keep its top managers from leaving.
The company, they warned, would crumble if these star managers left. Nine had already threatened to march out the door if they didn't get substantial bonuses. I told them I was fed up with retention bonuses. Where was the line waiting to hire these "star" managers who were responsible for bankrupting the company in the first place?
So I flatly refused. After much argument, the company's lawyers and bankers said, let's take it to the bankruptcy judge.
The judge said, "Mr. Icahn, why don't you want to pay retention bonuses?"
"It's simple, your honor," I replied. "It's because I don't want to retain them!"
"Hmm, good point," the judge said. "You win."
To make a long story short, we eventually replaced these allegedly irreplaceable managers and restructured the company. The net result? We saved $500 million in costs over two years and the company is in much better shape today than is has been in years.
What a novel idea- shareholders actually saying no to undeserved executive compensation. But let’s take this a step further. How about shareholders of financial services firms paying attention to the decisions that it’s managers are making regarding leverage, risk management, off balance sheet transactions, and speculative trading activities? In other words, the very decisions that got our financial institutions into the crisis that we have found ourselves in. A lot of professional money managers held huge positions in our financial institutions, but were too busy counting their profits to pay attention to how much risk was being assumed in the creation of those profits.
While a lot of attention is being paid to the failure of our government to adequately regulate the financial markets (and rightfully so), I would contend that there was also a failure on the part of shareholders to ensure that the firms that they owned were being managed responsibly. It seems inconceivable to me that sophisticated investors that have considerable experience at analyzing and assessing corporations failed to see the warning signs of the excessive risks being assumed by the firms that they were so heavily invested in. Why are large institutional shareholders so passive when it comes to the management of the firms that they own? Is it due to the short term focus of many investment managers these days? Your insight would be greatly appreciated.
Please also comment on my blog: http://FinancialServiceIssues.com
Carl Icahn, “It’s Up to the Shareholders, Not the Government, to Demand Change at a Company,” The Huffington Post, April 15, 2009.
http://www.huffingtonpost.com/carl-i..._b_187421.html
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I like the premise, not sure whether most shareholders would be up to the task of restructuring companies. Would love to hear all your thoughts on it.
Legendary investor and shareholder rights activist Carl Icahn wrote an article that appears in the Huffington Post, and on his Blog The Icahn Report- “It’s Up to the Shareholders, Not the Government, to Demand Change at a Company.” In this excellent article, Mr. Icahn describes how he addressed the issue of retention bonuses at a company that he was saving from bankruptcy:
Several years ago, I bought a big chunk of 'distressed' debt in a major company and landed on the creditors committee when it filed for Chapter 11. Shortly thereafter, the bankers who were hired by senior management told me that I would have to pay retention bonuses to keep its top managers from leaving.
The company, they warned, would crumble if these star managers left. Nine had already threatened to march out the door if they didn't get substantial bonuses. I told them I was fed up with retention bonuses. Where was the line waiting to hire these "star" managers who were responsible for bankrupting the company in the first place?
So I flatly refused. After much argument, the company's lawyers and bankers said, let's take it to the bankruptcy judge.
The judge said, "Mr. Icahn, why don't you want to pay retention bonuses?"
"It's simple, your honor," I replied. "It's because I don't want to retain them!"
"Hmm, good point," the judge said. "You win."
To make a long story short, we eventually replaced these allegedly irreplaceable managers and restructured the company. The net result? We saved $500 million in costs over two years and the company is in much better shape today than is has been in years.
What a novel idea- shareholders actually saying no to undeserved executive compensation. But let’s take this a step further. How about shareholders of financial services firms paying attention to the decisions that it’s managers are making regarding leverage, risk management, off balance sheet transactions, and speculative trading activities? In other words, the very decisions that got our financial institutions into the crisis that we have found ourselves in. A lot of professional money managers held huge positions in our financial institutions, but were too busy counting their profits to pay attention to how much risk was being assumed in the creation of those profits.
While a lot of attention is being paid to the failure of our government to adequately regulate the financial markets (and rightfully so), I would contend that there was also a failure on the part of shareholders to ensure that the firms that they owned were being managed responsibly. It seems inconceivable to me that sophisticated investors that have considerable experience at analyzing and assessing corporations failed to see the warning signs of the excessive risks being assumed by the firms that they were so heavily invested in. Why are large institutional shareholders so passive when it comes to the management of the firms that they own? Is it due to the short term focus of many investment managers these days? Your insight would be greatly appreciated.
Please also comment on my blog: http://FinancialServiceIssues.com
Carl Icahn, “It’s Up to the Shareholders, Not the Government, to Demand Change at a Company,” The Huffington Post, April 15, 2009.
http://www.huffingtonpost.com/carl-i..._b_187421.html
================================================== ======
I like the premise, not sure whether most shareholders would be up to the task of restructuring companies. Would love to hear all your thoughts on it.