Corporate Governance

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.