NBR Transcripts-March 21, 2008
Friday, March 21, 2008Trouble at the Top-Proxy Fights 2008
PAUL KANGAS: Over the past few months, stockholders of many companies have been hit with a steady stream of bad news, including record losses, write downs in the billions of dollars and plunging stock prices. Some shareholders blame the trouble on mismanagement, which they trace right to the top of their firms. And rather than just complain, shareholder activists are getting set to take action against those whom they hold responsible at the corporate ballot box. As Erika Miller reports, that could lead to a record number of proxy fights in coming weeks.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The board members and management of financial companies will be squarely in the spotlight at upcoming annual meetings, when they face angry stockholders. Rich Ferlauto is the shareholder advocate at the American Federation of State, County and Municipal Employees. His group, whose pension funds hold shares in many financial firms, is vowing to hold company directors responsible for not sufficiently managing sub-prime risk.
RICHARD FERLAUTO, DIR., PENSION AND BENEFIT POLICY, AFSCME: The ire of shareholders is going to be focused where there were the biggest market failures. And certainly if the bank liquidity and credit crisis leads to a recession, you're going to see a lot of activity at these annual meeting.
MILLER: He and others are outraged that while many financial firms were losing money, top brass still received lavish pay-outs. Michael Garland, who manages pension investments for a group of unions, is furious at directors for not tying the pay of their top executives to performance.
MICHAEL GARLAND, DIR., VALUE STRATEGIES, CTW INVEST. GROUP: When you see the CEO of Merrill Lynch removed for a failure that cost shareholders $35 billion and he walked off with $160 million in severance, I mean, the link between pay and performance has been not only severed, but I think fatally severed in a situation like that.
MILLER: Merrill Lynch declined to respond. But executive pay packages are shaping up as an election issue on the proxies of many companies. Advocates have filed over 100 say-on-pay resolutions at a wide range of firms, demanding that companies give shareholders an advisory vote on executive pay.
FERLAUTO: We want to establish, particularly at these companies, a say on pay that would allow shareholders to weigh in on the compensation packages that's given to the CEO, so that we could see whether those pay packages are really deserved or not.
MILLER: This year, activist hedge funds are also electioneering at companies that they see as underperforming, trying to replace board directors with their own slates. That's what happening at the "New York Times," for example, although the stronghold on the company by the founding Sulzberger family makes the challenge an uphill battle. Experts say there would have been more challenges for director seats this year, except that the Securities and Exchange Commission recently made it harder for shareholders to nominate their own candidates.
Another trend is an increase in motions on environmental issues. Investment groups are targeting dozens of companies, asking for them to release environmental impact statements and show how the firms are responding to global warming. Carolyn Brancato of the business research firm the Conference Board says what's new is the type of investors pushing these initiatives.
CAROLYN BRANCATO, DIR., CONFERENCE BOARD GOVERNANCE CTR.: The green issues have moved from a nice to do to a financially required to do. And that has brought in all the big financial institutions to the side of the social funds.
MILLER: Some shareholders are pressing for another kind of green: cold, hard cash. They want firms, especially tech companies with large coffers, to award shareholders with special dividends or spin-offs. Companies rarely talk about proxy challenges. Many feel the motions are a distraction and a drain on resources. Some experts predict the next big area of shareholder scrutiny will concern the influence of sovereign wealth funds, which have bought large stakes in many troubled companies.
BRANCATO: We're not really clear exactly what is going to happen with the presence of these sovereign wealth funds from the Middle East and from China and from Norway, because they want to clearly have the companies increase long-term value, but some of them may be aligned to certain government organizations. MILLER: Most proxy resolutions are sponsored by big institutional investors because they tend to be the largest shareholders. Win or lose, they are hoping to send a strong message to management: you report to us, not the other way around. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Carl Icahn, Chairman, Icahn Enterprises
SUSIE GHARIB: Perhaps more than anyone else, the person associated with leading proxy fights these days is Carl Icahn. He calls himself a shareholder activist. He uses funds from his firm, Icahn Associates, to buy stock in a company that he considers undervalued and pressures management to take measures he thinks are necessary to turn it around. If they don't, Icahn often tries to get his own directors elected to the company's board.
I sat down recently with Carl Icahn and began by asking him how he rates his chances of success in proxy fights over the next couple of months, now that hedge funds and mutual funds are joining with him.
CARL ICAHN, CHAIRMAN, ICAHN ENTERPRISES: We think they're pretty good. It depends on the proxy fight of course. We're going to be in two of them that we see coming up: Motorola and Biogen.
GHARIB: So you think you're going to be pretty successful?
ICAHN: We hope so. But again, the best way to win the war is not to fight it and if we can make certain - if the companies will do certain things, then we might not have to do the fight.
GHARIB: You have said that corporate democracy is almost non-existent, because the boards of American companies are allowed to quote rule arbitrarily. If the system is rigged against shareholder activists like you, why do you even bother with proxy fights?
ICAHN: The reason I bother with it, if you're willing to put up a lot of time, a lot of effort and a lot of capital, you can win proxy fights. And you can make inroads. But the system is completely inept. There really is very little corporate democracy. I think economic historians will look back at this period -- provided we don't blow ourselves up or whatever -- and look back and marvel at why the shareholders, who do have the votes, haven't done more about this. And I want to say there are many good CEOs and many good boards. But for the most part in this country, the CEO isn't the fellow that should be running the company.
GHARIB: Why do you think boards have approved CEO salaries and bonuses that many people consider are way out of line?
ICAHN: Because the boards are all buddies with the CEO. You can't nominate your own board unless you do what I do and have a very expensive proxy fight. It's ludicrous. And it's very difficult to go and say, well, we're going to pay you less. What a board should be doing is exactly that and unfortunately the boards don't make most of these guys accountable until it's too late -- like at Enron or finally at WorldCom they made them accountable, but that was way to late.
GHARIB: You noted recently that you've increased shareholder value in public companies by more than $55 billion over the last few years by prodding CEOs and boards. So what does this tell investors about the level of -- the job that American managers are doing?
ICAHN: That's a perfect example of what I'm talking about, Susan. They're not doing a good job and it's a very sad commentary for our economy. That's why I'm so interested in it because I feel strongly about this. I mean I make a lot of money doing this and I'm almost talking against my own job because what we should do is change the rules. And you don't want big government. But government actually in these states protect these guys and what you want to do is make these guys accountable. I can go into any company, almost any company and I'm not a manager and I say this at the risk of being immodest, and I can knock 30 percent off costs because there's so much waste and the CEO is out there playing golf. And I used to say the only time you get him off the golf course is when I file a 13-D.
GHARIB: Let me ask you something else. You mentioned that you've targeted Motorola and that you're going to have a proxy fight. What do you hope to accomplish there?
ICAHN: What I want to accomplish and I really think I'm making inroads in this and I think hopefully we're on the same wavelength here. They should take the hand-held business and spin it off to the shareholders and make it a separate business where you can get a top management team in there - a management team that understands it, a management team that will know what to do. And that company is an extremely valuable company. I mean the hand-held business, they put -- even last year I think they put in two and a half billion just in research. They put billions and billions and billions over the years into it. This is a really top company. It's very hard to enter into the hand-held business, many barriers of entrance. But the business is falling on the vine and evaporating, because this board has failed to act up to now.
GHARIB: Mr. Icahn, don't take this the wrong way, but some critics call you an unlikely Robin Hood, that it's not so much that you're a shareholder activist, but that you're somebody looking to make a quick buck and that some of the fixes that you put into these companies may be good for the short run, but they're not always in the best long-term interests of a company. What do you say to that?
ICAHN: Well, there's two questions. One, I'm not telling you I'm a Robin Hood. I do it because I'm a fiduciary for my fund, a hedge fund. I'm a fiduciary, really to the people who invest with me and I'm one of my own investors, so I'm a fiduciary to myself, OK? I'm not here to tell you that I'm Robin Hood or doing it for anybody else. But it does work out inordinately well for shareholders. They did make $55 billion in the last year, if they were just invested in the companies we went into.
GHARIB: But the long-term.
ICAHN: OK, let's talk about that. Every company that I've gotten into -- every one -- without exception, we've put millions, if not hundreds of millions of dollars into these companies. We're not against investing, so that's nonsense to say that we're just looking for short-term fixes. We're looking to save costs and stop the waste. I just got into Imclone six to eight months ago. We've saved hundreds of millions in costs, but we're spending a lot more on clinical testing and research. So we're not against it. We're just against waste. So that's a completely -- that criticism in my mind absolutely makes no sense.
GHARIB: Mr. Icahn, thank you very much for your time. ICAHN: A pleasure being here.
GHARIB: We contacted Motorola about Icahn's charges about actions by the company's board, but Motorola declined to comment.
Shareholder Rights
PAUL KANGAS: The shareholder rights movement has been building strength for the past several years. And now, shareholder activists are going beyond proxy fights at individual firms, with their sights set on making major reforms in the American system of corporate governance. Correspondent Stephanie Dhue reports on the progress they've made so far and what items are next on their list of priorities.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The collapse of Enron in late 2001 raised questions about that company's board and why the directors didn't act sooner. It also galvanized shareholder activists to fight for a greater say about who is elected to corporate boards. Congress responded by passing the Sarbanes-Oxley law, requiring public companies have more independent directors. But lately shareholder activists have been less successful in efforts to gain access to the corporate proxy. Last August, the Securities and Exchange Commission refused to require companies to send shareholders information on non-company board nominees. That makes it expensive for board challengers to get elected. In the meantime, shareholder activist Nell Minow says investors are not standing still.
NELL MINOW, CO-FOUNDER, THE CORPORATE LIBRARY: There's a new category of proposal that is another sort of end-run around that proxy access issue and that is called reimbursement. And what that means is, instead of saying you have to put my candidates on the company's proxy, access to the company's proxy, they say, OK, I'll run my own proxy; I'll pay for everything, but if I'm successful, you have to pay me back.
DHUE: John Castellani heads the Business Roundtable, an association of the nation's top CEOs. He says the idea of reimbursement for proxy costs may not be in the interest of all shareholders.
JOHN CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE: This is not just all about corporate governance; it could be about a hostile takeover. Under that scenario, would shareholders be required to pay for their own hostile takeover of their own company? You could construct it that way. It's an interesting concept.
DHUE: In some cases corporate boards have already made changes, including nominating more independent directors and adopting majority vote proposals, which require a board nominee to get an actual majority of votes to sit on the board. Castellani says these measures are enough to resolve concerns about board openness.
CASTELLANI: With shareholder access, you have to ask the question: given this record of reform, will opening the process up to special interests help shareholder value or will politicizing the process hurt shareholder value? We think it will hurt.
DHUE: But shareholder activists see a golden opportunity to push another hot-button issue: CEO pay. Congress recently hauled the CEOs of Countrywide and former CEOs of Citigroup and Merrill Lynch to explain their hefty pay packages in light of their firms' recent losses. Also called to testify were the chairmen of the companies' compensation committees. Damon Silvers oversees labor's interest in corporate governance issues for the AFL-CIO. He says pay and proxy issues underlie a broader question.
DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-CIO: The question of whether the totality of corporate governance is really promoting a long- term strategic point of view on the part of company management or whether essentially what we are getting is people running various kinds of ponzi schemes in alliance with various kind of short-term players in the market to the disadvantage of long-term investors.
DHUE: Last year, the House passed a bill that would give shareholders an annual non-binding advisory vote on executive pay packages. Senator Barack Oobama sponsored the companion bill, but the Senate has yet to act. Pat McGurn of RiskMetrics Group advises both shareholders and companies on corporate governance issues.
PAT MCGURN, SPECIAL COUNSEL, RISKMETRICS GROUP: Congress is the fear factor. If boards and shareholders and executives don't get their act together, a vacuum is created. And nature may abhor a vacuum, but Washington DC loves one and Congress will fill that vacuum every time.
DHUE: McGurn expects Congress to take up some sort of shareholder rights legislation after the election. How far lawmakers go may depend on how far companies go this proxy season to address shareholder demands. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Roundtable Review of Corporate Governance
SUSIE GHARIB: As we've just heard, the corporate board of directors is at the center of complaints about the system of corporate governance. Critics, such as Lucian Bebchuk of Harvard Law School, point to an alleged lack of concern that many boards have for stockholder interests. But others in the legal community take a different view, such as attorney William Savitt of the firm Wachtel Lipton. I spoke with both Bebchuk and Savitt and Savitt began the discussion by arguing that boards have to consider what's good for the company as a whole and not just shareholders.
WILLIAM SAVITT, PARTNER, WACHTELL, LIPTON, ROSEN AND KATZ: Stockholders are one of the many constituencies that form part of the corporate whole. Corporations ultimately aren't things that are owned; they are networks of people, groups, constituencies that are, when efficiently organized, strive together for the common corporate good. The role of the board of directors historically and today remains the appropriate coordination and mediation among the many corporate constituencies, including stockholders.
GHARIB: Professor Bebchuk, you have said that shareholders should be calling the shots, but you claim that isn't happening because they've been disenfranchised. Why do you say that?
LUCIAN BEBCHUK, DIR., CORP. GOV. PROGRAM, HARVARD LAW SCHOOL: Well, my research has documented that in the overwhelming majority of cases, incumbent directors run for reelection unopposed even when companies are significantly underperforming. Right now, the risk of replacement of the directors or even the risk of an electoral challenge is very low and this pattern is due to several factors. Outside shareholders are not permitted to place director candidates on the corporate ballot; only the incumbents can. Voting, you might be surprised to hear, is not confidential. In many companies, the shareholders cannot remove a majority of the directors in any annual meeting. And while the incumbent can charge all of their expenses to the company, all their company expenses, the challengers have to bear their own costs.
GHARIB: Well, let's get some reaction from Mr. Savitt. Do you think that corporate elections are tilted against shareholders?
SAVITT: I do not. Let me make two points in this connection. One is that much of the argument that Professor Bebchuk and others have sponsored I think is based on a very inapt analogy between corporate elections and elections in democracies. The difference is that in a democracy, the electoral process is a fundamental accountability check; it's a key incident of the democratic process. Where the analysis of Professor Bebchuck goes wrong I think is that the election in the corporate process is an entirely different animal; it is an accountability check of the last resort. It always has been infrequently resorted to and that's good for stockholders in the long run.
And that brings me to my second point, which is directors who are constantly operating in a fishbowl, they need to listen to stockholders and they do; they listen to the marketplace. They exercise their best judgment in the context of those factors and many others. It's not so much a question of ignoring; it's a question of synthesizing. It's a job that requires directors to keep their eye on a much broader prospect, a much broader universe of constituencies. Stockholders are an important one, but they are not the only one.
GHARIB: A point that Mr. Savitt has made -- and I'm addressing this to you, Mr. Bebchuck -- is that, unlike shareholders, directors are liable for their actions and that makes them better able to determine the best interests of the company. How important is that?
BEBCHUK: Well, liability is again more of a theoretical rather than a practical aspect. Because empirical evidence indicates that putting aside the extremely unusual, exceptional cases of Enron and WorldCom, directors generally never have to pay out of pocket. So there isn't, practically speaking, director personal liability. That might be a good idea, but that makes it all the more necessary to have other mechanisms of accountability and giving shareholders the real power to replace directors is the answer.
GHARIB: Professor Bebchuck, given that this is the way the system currently works, what would you like to see happen? What changes would you like to see?
BEBCHUK: Bill agrees that we need to have some accountability mechanism and the problem is that right now it doesn't exist. The issue is not to have elections -- contested elections in most cases. The issue is for directors to face the possibility that there will be a contest if they under perform. So we need to make that easier and the way to do it would be, first of all, to give shareholders the ability to place candidates on the corporate ballot, not to reserve it only to the incumbents. We need to make voting by secret ballot, confidential. We need to give shareholders the power which often they will not use, but at least they should have the power to replace a majority of the board in any annual meeting. And we need, when challengers run a successful campaign, they should be reimbursed the way incumbents are.
GHARIB: Let's just to wrap up our conversation, let me ask each of you one question. Mr. Savitt, why do you think that it's important to have a system where directors and management manage a company instead of shareholders?
SAVITT: The social purpose of the corporation is not to empower stockholders. The purpose of the corporation, the reason that the legislatures of each of the states has provided for corporations is to provide an incubator for innovation, to provide an institution that can foster research and development and sustainable, long-term deployment of capital. The stockholder activist movement is a short-term movement. It is not concerned with the long-term perspective; it's only concerned with the short-term stock pot. And the only -- the only body within the corporate structure that has the long-term perspective, that facilitates the mediation of all of the corporate constituencies, is the board of directors. By turning authority over to the stockholder activists, one effectively shifts authority from the long-term perspective and the responsible perspective to the short-term perspective in a way that would be unhealthy for corporations and ultimately unhealthy for the country.
BEBCHUK: The issue, Susie, it's not about democracy; it's about accountability and efficiency. I agree with Bill that what we want is to have companies that produce long-term value. But in my view and in the view of most financial economists, to have people at the top that are unaccountable and don't have powerful incentives to focus on shareholder interests, that's not going to produce good results. So the only way to provide directors with incentives to focus on shareholder value is to make them accountable -- not necessarily all the time, but at least sometimes -- to shareholders. And the way to do it is to give shareholders the power to replace directors when directors under perform and to remove the defenses that have been erected from corporate takeovers.
GHARIB: I'm sure that this is a debate that is going to continue. We thank you very much for your time, Professor Bebchuck and Mr. Savitt.
