Icahn Channels Churchill in Critique of Boardroom Politics


“I’m no political scientist, but it doesn’t take a genius to understand that voting is crucial to democracy. When things aren’t going well, citizens can vote the leaders out. A lot of blood has been shed for these rights, and while democracy isn’t perfect, to paraphrase Winston Churchill, it’s far better than any other system of government,” wrote activist investor Carl Icahn in a September 18 Wall Street Journal editorial.

This reflection follows closely behind Icahn’s announcement that he and fellow Dell (NASDAQ:DELL) shareholder Southeastern Asset Management would no longer pursue their efforts to defeat the privatization bid made by the personal computer maker’s founder and Chief Executive Officer Michael Dell. Icahn, a man known for taking large stakes in companies he judges to be ill-managed or undervalued and pushing for change, began amassing his 8.9 percent stake in the struggling personal computer manufacturer Dell earlier this year.

At the beginning of March, his investing turned into a bid rivaling the $24.9 billion offer made by Mr. Dell. With Icahn in the lead, many other large shareholders began to oppose the privatization proposal, causing Mr. Dell to postpone the shareholder vote over his bid multiple times. The battle between Icahn and Mr. Dell was characterized by a string of strategic maneuvers — from the CEO’s push to changing voting rules so that any shareholders who did not cast a vote were not counted as against the deal, to the lawsuit Icahn filed in response to the board’s decision to amend the voting rule in return for a higher buyout offer.

It was Mr. Dell’s successive delays of the shareholder vote, for what he called lack of shareholder support, plus the change in the voting rules, that caused Icahn to author an open letter to shareholders in which he explained that he and partner Southeastern Asset Management had “determined that it would be almost impossible to win the battle on September 12,” the date of the final shareholder vote.

“Even in a dictatorship when the ruling party loses an election, and then ignores its outcome, it attempts to provide a plausible reason to justify their actions,” wrote Icahn. “Andrew Bary at Barron’s wisely observed, ‘In an action worthy of Vladimir Putin, Dell postponed a [July] vote on Michael Dell’s proposed buyout of the company when it became apparent that there was insufficient shareholder support for the deal,’” he continued.

Yet, Dell offered no justification for the Dell, according to Icahn. Instead, the company relied on the usual “business judgement” catchall, he wrote. “We jokingly ask, ‘What’s the difference between Dell and a dictatorship?’ The answer: Most functioning dictatorships only need to postpone the vote once to win.”

In that same letter he argued that current state laws often favor incumbent corporate boards and management. While he noted that, “We must abide by these” rules, he believes that they can and must be changed because boards should not be allowed to treat election results as totalitarian dictatorships do, by ignoring the results. “The Dell board, like so many boards in this country, reminds me of Clark Gable’s last words in Gone with the Wind, they simply ‘don’t give a damn,’” he wrote.

The fairness of voting, or lack thereof, in corporate boardrooms was the subject of Icahn’s Wednesday editorial. In his opinion, it is “baffling” that voting rights do not “really apply” to public corporations. Shareholders can vote, but boards can easily ignore the outcome thanks to the “business judgement rule” backed by state laws and the court system. Once more employing history, Icahn described how the feudal lords of the middle ages used the concept of the “divine right” of royalty to “justify their lordly positions while plundering the peasants,” just as boards now “act like they are vested with similar powers: the divine right of boards!”

According to Icahn, the board-centric governance system is the result of years of lobbying by pro-management groups in state legislatures, which created a “thicket of laws” that protect “the impregnability of boards and CEOs.” In comparison, he wrote, shareholders have been “relegated to a ‘take it or leave it’ status,” meaning the can agree or dump their stakes.

“How can it be, for instance, when a shareholder purchases 10 percent or 15 percent of a company’s stock, management can legally issue a flood of new stock to dilute those holdings and thwart a takeover because it may cost them their jobs?” he asked.

“How is it fair that boards can simply ignore shareholder votes and leave incompetent crony directors and CEOs in place? Or legally ignore shareholder board nominations despite overwhelming evidence that new ideas and strategies are essential to salvage a failing business?” His last question clearly references his recent experience with Dell.

To him, Dell “is just one recent example of a ridiculously dysfunctional system. Lacking strategic foresight, the Dell board for years presided over the loss of tens of billions of dollars in market value at the hands of CEO Michael Dell. Instead of deposing him, the Dell board froze out shareholders and last week voted to allow the CEO to buy the company at a bargain price using shareholders’ own cash.”

Ichan argued that is “practically self-evident” that if a reform of the system of corporate governance in American business was improved, shareholders would reap the benefits. “At the risk of being immodest, I believe our record at Icahn Enterprises (NASDAQ:IEP) proves this almost to a certainty,” he wrote. Over the years, we have attained great success by religiously following the activist model.

The reform he is looking for is simple. Laws “must be changed” so that shareholder votes count and activism “can be effectuated by more than just a few stalwart activists with the staying power to take on intransigent corporate management.” He believes it is time for shareholders to stand up for their  rights. “What I said 25 years ago at the Texaco annual meeting still stands: ‘A lot of people die fighting tyranny. The least I can do is vote against it,’” he concluded.

Follow Meghan on Twitter @MFoley_WSCS

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