As seen on the Huffington Post.

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.

I tell this story to make a point about AIG and other companies where managers have been awarded lavish retention bonuses. In my view, very few managers are irreplaceable, especially in this economy.

The AIG retention bonus imbroglio is emblematic of the same disease that afflicts many public companies across America. Managements are overcompensated in myriad ways, even when stockholders -- the owners -- take tremendous losses. How is this helping our national economy? Why do we tolerate it?

Retention bonuses are often little more than an employee racket in bankruptcy proceedings. Why should the very managements that got the company into trouble get enormous payouts? And yet this occurs all too frequently on the ill-advised reasoning that they might actually leave. In many cases, the companies are better off without them.

Another major problem is the so-called 'exclusivity rule,' where these same managements that got the company into trouble are given the exclusive right to come up with a restructuring plan for 180 days or more. Shouldn't creditors and other stakeholders also have the immediate right to devise a new plan?

House Financial Services Committee Chairman Barney Frank put it right when he said that a retention bonus is "a nice word, it turns out, for extortion."

"If it's people getting a small salary and some kind of an incentive bonus and it's a legitimate incentive bonus, that's not a problem," Frank told CNN, referring to Fannie Mae and Freddie Mac's plans to pay millions of dollars in retention bonuses to top execs. "But retention bonuses where people say, 'Bribe me and I'm going to quit the company and hurt you,' should not be allowed."

As the New York Times' Maureen Dowd puts it, Fannie Mae "brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco," referring to the Theater of the Absurd dramatist.

If only Obama had been as tough on AIG and others as he has been on General Motors, where CEO Rick Wagoner was forced out last month, a move soon to be followed by a majority of GM board members.

Wall Street Journal writer Paul Ingrassia said Obama's Automotive Task Force, headed by private equity luminary Steven Rattner, should be commended for replacing most of GM's board of directors, many of whom "put loyalty to Wagoner above duty to shareholders while the company imploded."

It is unfortunate that it took a force the size of the U.S. government to shake up the board and management at GM. In effect, the government has become the world's biggest activist investor, making the same kinds of demands that any activist or creditor should rightfully make in return for its investment.

Shaking up managements and boards is a no-brainer at underperforming companies for activist hedge funds and private equity firms, including Quadrangle Group, which Rattner co-founded. Why should investors tolerate poor performance? Why should taxpayers?

I have shaken up boards and managements at many companies in which I have invested, including Blockbuster, ImClone, Stratosphere, Philips Services, Federal-Mogul and many others. Generally, but not always, the net result has been very positive for the company and the shareholders. It is important to get new blood, new strategies and new ideas into underperforming companies.

As the saying goes, 'if you do the same thing all the time, you get the same result.' This applies to many managers. Too many are one-trick ponies. America is losing its economic hegemony because of it.

But most importantly, it is up to shareholders to step up to the plate and demand changes at their companies. For too long and for a variety of reasons, shareholders have been complicit in allowing management excesses and incompetence by not taking a stand.

"Shareholders have reelected these directors, have approved these pay plans and have been enablers for the addictive behavior of the corporate community," said Nell Minow, editor and co-founder of the Corporate Library in a recent BusinessWeek interview.

Let's hope the global economic meltdown causes shareholders to demand more changes on the part of their companies -- and not leave it to the government.

As seen in the New York Times

BARNEY FRANK, the Massachusetts Democrat who heads the House Financial Services Committee, recently said that the government should sue American International Group to recover the $165 million in bonuses it paid to executives in its financial products division. "We own this company, in effect," Mr. Frank said, referring to the government’s 80 percent stake."As the owners of the company, we do not think we should be paying bonuses or should have paid bonuses to people who made mistakes, who were incompetent."

Sadly, though, under American corporate law share ownership does not count for much. Mr. Frank might be surprised to learn that a lawsuit would have almost no chance of success in court, even for a majority shareholder like the government. A.I.G. would most likely argue that the oft-cited "business judgment" rule gives management wide latitude to set compensation without shareholder interference. What the government should have gotten was board representation in return for its large investment in A.I.G.

Now, barring political resolution (including a confiscatory tax or a voluntary surrender of bonus money), the government’s choices are limited to exercising the rights of a shareholder. Perhaps one silver lining to this debacle is that it will finally alert Washington to the lamentable state of corporate governance in America. Our legislators will find — as I have as a shareholder who has waged many battles to get on corporate boards — that the rights of the shareholders are quite circumscribed.

One problem is that state laws allow companies to create complex "advance notice" requirements that let companies derail efforts to elect shareholder-nominated board members.

Although a majority shareholder like the government may be able to get its nominees onto the A.I.G. board without a fight, typically even a large shareholder must conduct an expensive proxy contest to elect its nominees — that is, he needs to solicit enough votes from other shareholders. This is accomplished by mailing a statement describing the shareholder’s positions, and a card on which to vote. At a large public company, mailing, printing and other costs can run into the millions of dollars.

Those costs could be reduced, and the election process could be made more open, if the Securities and Exchange Commission would allow "proxy access."

Proxy access would permit shareholders to solicit votes for the election of their nominees by including the names and other relevant information about those nominees in their company’s annual proxy statement, and thus save the cost of sending additional documents. But so far the S.E.C. has said no to proxy access for the election of directors nominated by shareholders, though its new chairwoman, Mary Schapiro, said on Thursday that the commission will take up the issue in the coming months.

Alternatively, the government could propose a "say on pay" resolution to be voted on by shareholders. But under current law in various states — for example, in Delaware, where more than 50 percent of publicly traded American companies are incorporated — even if the company puts such a resolution to a shareholder vote the resolutions are merely advisory. This means that the board is legally entitled to ignore shareholder wishes regarding compensation of corporate executives.

With some exceptions, our public corporations are increasingly unable to compete globally, they pay excessive compensation to top brass and they are generally unaccountable to shareholders. The best hope to change this situation is to allow shareholders the power to move the state of incorporation of public companies from one state to another. For example, North Dakota passed a law in 2007 that, among other things, provides for proxy access and for the reimbursement of expenses to a shareholder who runs a successful proxy fight. A move to North Dakota would greatly advance shareholder rights for any company.

But under current state law shareholders can elect to move their company to another jurisdiction only if the existing board of directors approves such a move — and those incumbent boards will want to stay in the management-friendly states they already inhabit.

Federal legislation could correct this absurdity and permit shareholders to move the corporations they own to another state by a simple majority vote. Such legislation would override the restrictions of state laws that prevent such a change of jurisdiction unless approved by the board of directors. Most important, it would encourage the states, which profit from the tax revenues that flow from corporations, to compete with one another by reorienting their laws on corporate governance to benefit shareholders.

The legal landscape is filled with devices designed by state legislators and courts to prevent shareholders from influencing how companies are run and so allow management free rein. Legal mechanisms known as poison pills, permitted under the laws of most states, effectively prohibit shareholders from accumulating a large position in a company or working with other large shareholders to influence the company.

Furthermore, public corporations may legally adopt a staggered board, whereby board members are grouped into classes, with each one representing about a third of the total number of directors, so that only one class comes up for election in a year.

This means that seriously shaking up a board would require at least two very expensive proxy contests over two years. And current state laws permit incumbent board members access to the corporate treasury, allowing them to spend millions of dollars, to hire lawyers and public relations firms, run ads and mail materials to prevent shareholders from adding their designees to the board of directors.

The problem of disenfranchised shareholders can be found at the root of today’s financial crisis. A.I.G., for example, sowed the seeds of its own near-destruction by making a wholesale rush into risky derivative transactions without adequate collateral. Its board of directors was either unaware of it or did not stop it. If shareholders had enhanced legal rights to elect qualified and responsible board members, it would help our public corporations avoid the kinds of meltdowns we are now experiencing.

We can hope that the government’s experience with A.I.G. will demonstrate to Congress how little power shareholders actually have, and how important corporate governance reform is. It is time to remove the many devices that managements use to entrench their power, and give shareholders real power. The "ownership" rights that the government, as a shareholder, is now talking about are the same ones that activist shareholders have been demanding for years.

Edward E. Neiger is the founder of Neiger LLP, a creditor’s rights and bankruptcy law firm. Neiger LLP leads efforts on behalf of creditors and creditors’ committees to help them recover as much money as possible. Neiger LLP also publishes the Avoidance Action Report, which is a quarterly publication reporting the latest developments and case law in connection with bankruptcy avoidance actions. Prior to Neiger LLP, Edward was an attorney in the Business, Finance & Restructuring department of Weil, Gotshal & Manges LLP. For more information please visit www.neigerllp.com or contact the author directly at eneiger@neigerllp.com.

By Edward Neiger

Many American companies will likely file for bankruptcy protection in the next few years. It is, therefore, important that Congress act to protect the interests of creditors and shareholders of bankrupt corporations. Unfortunately, one systemic cause of corporate failure – overcompensation of bad management – is all too often allowed to recur after a company files for bankruptcy protection. Reforming certain aspects of the bankruptcy code will go a long way to revive America’s sick corporations by re-instilling public and creditor confidence in corporate America – an important step in reviving the economy. Particularly, Congress must ensure that there is a genuine correlation between a bankrupt company’s performance and its executive’s compensation.

Congress had good intentions when it enacted Bankruptcy Code section 503(c) as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Essentially, section 503(c) limits compensation to insiders (such as officers and directors) if the compensation is "for the purpose of inducing such person to remain with the debtor’s business." In addition, section 503(c) prohibits executive severance packages that are disproportionately larger than other non-management employees’ severance. While many bankruptcy courts have indeed limited executive compensation, debtors’ attorneys have become increasingly creative in getting courts to approve excessive compensation for executives of bankrupt companies; sometimes for the very executives that were at the helm when the company sank into insolvency.

In some cases lawyers used one of the oldest tricks in the lawyers' handbook: ask for the sun, settle for the moon. For example, in the Delphi bankruptcy case, the debtor originally asked the court to approve an $80 million executive compensation package. When all the dust settled, the court approved a still-handsome $16.5 million payout. In the New Century bankruptcy, the debtors proposed an "incentive plan" that would entitle high level employees and executives to bonuses equaling $6.3 million upon the successful sale of the company. The United States Trustee and other parties objected, stating that obtaining a floor bid for the sale of the company doesn’t constitute and achievement worth rewarding, especially for a company that is under criminal investigation. In the end, the court approved a scaled back bonus plan of $3.2 million to 116 top employees, many of whom were in charge of the company as it entered into its now-famed crisis.

Another possible end run around the bankruptcy code is to set aside money for bonuses and condition a sale of the bankrupt company on the retention of current management and the payment of bonuses to them. When Barclays bought certain of Lehman Brothers' assets in a bankruptcy court-approved sale, over $2.5 billion was set aside for employee bonuses, some of whom were executives at Lehman during its crashing and burning. Unfortunately, many of Lehman’s investors were not as protected.

In the Calpine bankruptcy, the bankruptcy court approved an "emergence incentive plan" which provided bonuses to top management upon Calpine’s successful emergence from bankruptcy, notwithstanding the company’s long-term success after emerging. According to Calpine’s 10-k for 2007, Calpine’s then CEO was to reap approximately $29.6 in combined benefits under the emergence incentive plan. This after receiving over $4 million in combined benefits in both 2006 and 2007. Calpine’s shareholders received warrants to purchase up to 10 percent of the reorganized company.

In the Airway Industries bankruptcy case, executives received handsome bonuses (some at least $500,000) upon the completion of the sale of the company. The court approved the bonuses over the objection of the unsecured creditors notwithstanding that the bonuses were paid by the secured creditors who were the primary beneficiaries of the sale.

In Nellson Nutraceutical, after executives failed to meet the goals set forth in the "executive incentive plan," the debtor proposed a revised plan that lowered the targets retroactively thus allowing the executives to achieve their "benchmarks" for bonuses. As justification for this move, the debtor argued that it had similarly tinkered with the bonus targets in the past when benchmarks were not met. The bankruptcy judge approved the plan over the objection of several interested parties. The creditors’ committee appealed this ruling but withdrew the appeal upon the confirmation of the debtor’s plan of liquidation.

The current system allows executives to tie their compensation to short-term, myopic goals (sale of the company, liquidation of the company, or emergence from bankruptcy), thus allowing executives to circumvent bankruptcy code section 503(c)'s protections. This article does not advocate over regulation of executives of bankrupt corporations, nor does it promote caps on these executives' salaries; such restrictions would undoubtedly deter talented and creative executives from taking positions with bankrupt companies – companies where talent and ingenuity are needed most. Rather, Congress should tie any kind of compensation for executives of bankrupt corporations−whether as part of a retention plan or incentive plan, whether paid for by the debtor or by other parties−to the long term health of the company and/or creditor recovery. As such, an executive of a bankrupt corporation would have to make a strategic and personal commitment to the company to either propose a plan that would provide a significant recovery to creditors, or otherwise stay with the company for a period of time following its emergence from bankruptcy and receive compensation upon the achievement of post emergence milestones.

Another important bankruptcy reform that Congress should seriously consider is to shorten or eliminate the debtor's "exclusive period" to propose a plan of reorganization. Parties in interest, and even non-parties in interest, should have the right to propose competing plans of reorganization. The plan that provides the best overall outcome for the debtor, its estate and its creditors (to whom the debtor owes fiduciary duties) should be voted on and approved by the court. The benefit of this is threefold. First, managers will be keen to keep their companies healthy and solvent if they know that bankruptcy would likely mean the loss of their position and accompanying lavish compensation packages. Second, the healthy competition that would result from this would foster liquidity in the debt markets and bolster the balance sheets of companies with distressed debt on their books. Finally, a foundation of capitalism is that competition and consumer choice results in the best overall value; this is also true for plans of reorganization. The proposition of competing plans of reorganization will result in more choice which will ultimately lead to the best economic outcome for all parties in interest.

Sadly, bankruptcy is the next frontier for many American corporations. So long as the problems forcing companies into bankruptcy continue to percolate while in bankruptcy, the chambers of the bankruptcy courts will likely be these companies' final frontier.

Since 1995, James McRitchie has published CorpGov.Net, a popular corporate governance portal. According to the Council of Institutional Investors, a 2002 petition to the SEC co-filed by McRitchie and Les Greenberg, of the Committee of Concerned Shareholders, "re-energized" the debate over proxy access to nominate directors. McRitchie is frequently quoted in the press and has addressed audiences around the world, funded by associations, the Asian Development Bank and the U.S. State Department. Now he is working on systems to further empower retail shareowners. Contact: jm@corpgov.net

By James McRitchie

As more companies and shareowners opt to send and receive proxies electronically, voting in corporate elections plummets. Our electronic inboxes just don’t get the same attention as a physical pile of ballots. Only 6% of retail shareowners vote under "e-proxy rules," down from 19% when delivered by mail.

When we fail to vote within 10 days of a company’s annual meeting, our broker essentially votes our shares on issues that are deemed "routine" matters, such as for "noncontested" directors. Unfortunately, brokers almost always vote with management and what is defined "routine" will often make your eyes glaze over, like the proxy materials themselves. When we fail to vote, we are throwing away our only chance to be heard on important corporate issues.

Under the Obama administration, the Securities and Exchange Commission (SEC) may finally eliminate "broker-voting" but several initiatives pushed by management interests could erode elimination of this ballot stuffing mechanism. I’ll highlight those initiatives and tell you about two amazing projects that could make it much easier to vote intelligently, with very little effort, by relying on trusted "brands."

Initiatives to erode the voting power of investors if broker votes are eliminated:

• "Proportional" voting, in which brokers would vote uninstructed shares in the proportion that other shares have been voted.
• Client-directed voting. When investors sign their brokerage agreements they could instruct the broker how to vote if a proxy is not returned. Under floated proposals, our choices will be severely restricted.
• The management initiated Shareholder Communications Coalition aims to allow companies direct communications with retail investors. Of course, investors that get most of their election information from companies are more likely to vote with management on candidates and resolutions. Yet, it is hard to argue against companies having a right to directly communicate with investors.

Two ingenious grassroots initiatives could dramatically increase voting by making it easy for retail shareowners to vote or assign proxy rights based on the "brand" reputation of trusted fund activists and proxy aggregators.

ProxyDemocracy (http://proxydemocracy.org)

ProxyDemocracy compiles, displays and automatically e-mails messages to subscribers about proxy votes announced in advance by respected activist funds, such as the American Federation of State County and Municipal Employees Pension Plan, California Public Employees Retirement Fund, Calvert, Christian Brothers Investment Services, Domini, Florida State Board of Administration, and soon others. Each of these funds spends a lot of time and money analyzing proxy issues. By using ProxyDemocracy, we benefit by copying the voting behavior of these trusted "brands" and we strengthen shareowner democracy.

• ProxyDemocracy also rates a much broader groups of funds based on their voting behavior and allows users to create their own ratings, which can be held private or shared with other site users.
• ProxyDemocracy is working to allow shareowners to vote directly though its site and/or have ProxyDemocracy vote on their behalf, based on shareowner values and how they align with the votes of respected funds. Users will be able to override any vote made on their behalf.

The more people use ProxyDemocracy, the more funds will realize they can increase their voting clout and customer base by announcing votes in advance, and the more brands will be available for us to copy.

Investor Suffrage Movement (http://isuffrage.org)

The Investor Suffrage Movement is working to create a self-regulated organization that will oversee a "Global Proxy Exchange." Instead of directing management how to vote their proxies, shareowners will instruct the Exchange or will assign proxies to an intermediate aggregator, such as their pension fund, union, church, or an environmental group. While the funding necessary for a proxy exchange is still a few years away, activist investors/funds are invited to participate in interim initiatives:

• Last year the Investor Suffrage Movement successfully conducted proxy "transfer trials" to test the right of aggregators to vote at shareowner meetings.
• The Investor Suffrage Movement is currently setting up a network of volunteer "field agents" who contribute to the movement through activities such as:
• Making proxy rights available to compatible shareowner activists, allowing proponents to file, even if they don’t own shares themselves.
• Drafting, filing and defending resolutions in consultation with and on behalf of shareowners, allowing shareowners to be proponents with very little effort.
• Present proxy resolutions at annual meetings, saving proponents substantial time and travel expense.

Plundering of corporate assets through fraud, diversion, cronyism and just plain incompetence often results where self-perpetuating managers control governance mechanisms. The more field agents the Investor Suffrage Movement attracts, the more resolutions can be filed and the sooner the Investor Suffrage Movement can build an automated Global Proxy Exchange, fully integrated into the financial services industry. A Global Proxy Exchange will use the market to democratize capitalism, putting owners in charge. The result will be more efficient companies that reflect the sustainable values of investors and society.

• Bernanke Says Insurer AIG Operated Like a Hedge Fund – Bloomberg
• The Never Ending Bailout – New York Times
• US SEC official wants proxy access addressed in 2009 - Reuters
• 'Bad Bank' Funding Plan Starts to Get Fleshed Out - WSJ

As seen in the Washington Post.

The entirely preventable financial catastrophe we have watched unfold over the past 18 months has many culprits: reckless executives who gambled with their company's futures, feckless regulators and somnambulant boards of directors.

But while executives and regulators have justifiably taken heat for this multifaceted debacle, board members have largely been let off the hook. Why?

It is a board's responsibility to oversee management and to ensure a company's long-term survival. Its job, in short, is to represent the owners -- the shareholders.

With the tumbling and collapse of dozens of major financial and other institutions, can we draw any conclusion other than that those directors utterly failed in this regard?

Yet, increasingly, we are hearing apologists rise to the defense of boards, evidence that the process of obfuscation of the boards' guilt has begun. This is dangerous.

Evidence of this trend includes a recent Business Week article, "How Much Blame Do Boards Deserve?" by Jack Welch, the former chairman and CEO of General Electric, and his wife. Now, I have a great deal of respect for Jack Welch. But this defense of boards was wrong.

Non-executive directors at our battered and bankrupt financial institutions could not have been expected to understand the risks of complex, highly leveraged derivatives that brought about our financial crisis, the Welches wrote. That is nonsense. A board member should be able to understand when a company is leveraged up to 40 times the value of its assets, as some were. In my view, many were just not doing their jobs.

Jack Welch believes that some boards' members should have pressed managements more on their risk strategies. Chances are that some directors did take this approach. But did they demand any change of course? Or did they just accept the management line that certain risks are necessary to generate returns?

I think we have a right to expect more from directors. The system of checks and balances between boards and executive teams has, in too many cases, disintegrated. In this global meltdown we are seeing that many board members were demonstrably unqualified, abjectly remiss or simply too cozy with management.

Clearly, we must strengthen boards at public companies. Some measures must include splitting the role of chairman and chief executive; eliminating "staggered" boards, which allow for only a minority of members to be elected in any one year; and giving shareholders the right to propose board members and resolutions on company proxy statements.

Non-executive board members are fiduciaries to shareholders who choose and oversee managements, and the chairman is the main shareholder representative. How can the chairman oversee the CEO if the job is one and the same, as it is at a majority of Fortune 500 companies? Splitting these roles would eliminate this inherent conflict.

Similarly, how can shareholders exercise greater power if managements are allowed to thwart them from being nominated to company boards? In many states, provisions such as staggered boards, which are meant to prevent a full board takeover in any one year, and "poison pills," which effectively block takeovers by new managements, are perfectly legal.

The dictum of the new White House chief of staff Rahm Emanuel, "You never want a serious crisis to go to waste," applies to our financial and economic situation. Inept -- and often very well-paid -- managements and boards got us into this mess. Let's respond by making lasting changes to make them more accountable to stakeholders, which includes everyone in this country.

Corporate law is largely the province of states, which to varying degrees protect flawed governance models. What is needed is a superceding federal law that gives shareholders the right to vote by simple majority to move their company's legal incorporation to states that uphold greater shareholder rights.

North Dakota, for example, is recognized as having the most shareholder-friendly corporate laws in the nation, thanks to recent legislative action. By incorporating in the state and adopting its provisions, a public company would in one easy step improve rights for its shareholders and eliminate the often too-cozy relations between managements and boards.

I want to be clear: Jack Welch did a masterful job as the chairman and chief executive of GE for two decades, until 2001. But with GE Capital soaking up $139 billion in government loan guarantees, it's fair to ask whether the board demanded answers from its current CEO and chairman, Jeffrey Immelt, about the risks embedded in that critical division. Alarm bells should have gone off in the boardroom long before this blue-chip company sought taxpayer help.

Our disastrous market meltdown makes clear that it is high time for shareholders to demand and receive more accountability from the boards and managements of their companies. I have created the United Shareholders of America campaign to focus on just these issues. Only by concerted action can we make changes to how our companies are managed.

As seen in the Wall Street Journal

President Barack Obama's plan to limit executive pay to $500,000 a year—plus restricted stock—for institutions that get government funding is understandable. Still, salary caps are only a stopgap measure that fails to address the root of the problem.

The real problem is that many corporate managements operate with impunity—with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.

Despite the fact that managements, albeit with some exceptions, have done an extremely poor job, they are often lavishly rewarded regardless of their performance. We must change this dismal state of affairs if we are to rebuild our economy in a sustainable way that rebuilds confidence. If we don’t, these problems will keep recurring as investors pile into the next Wall Street innovation or asset bubble, enabled by the kinds of managements that nearly sank Wall Street.

The problem, as I have long maintained, 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.

What we need are fewer government rules at the state level that protect managements. We need to return capitalism—our great national wealth machine—to its roots, where owners call the shots to managements, not the other way around.

Currently, corporate law is largely the province of state governments, not federal. As a result, most corporations migrate to, and incorporate in, states that offer the most protection for managements.

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.

However certain states, like North Dakota, offer many more rights and protections to shareholders. Because shareholders own companies, they should have the right to move a company to a state that gives shareholders more protections.

What is needed, therefore, is a federal law that allows shareholders to vote by simple majority to move their company's incorporation to another state. That power is currently vested with boards and management.

This move would not be a panacea for all our economic problems. But it would be a step forward, eliminating the stranglehood managements have on shareholder assets. Shouldn’t the owners of companies have these rights?

Now some might ask: If this policy proposal is right, why haven’t the big institutional shareholders that control the bulk of corporate stock and voting rights in this country risen up and demanded the changes already?

This is because many institutions have a vested interest in supporting their managements. It is the management that decides where to allocate their company’s pension plans and 401(k) funds. And while there are institutions that do care about shareholder rights, unfortunately there are others that are loathe to vote against the very managements that give them valuable mandates to manage billions of dollars.

This is an obvious and insidious conflict of interest that skews voting towards management. It is a problem that has existed for years and should be addressed with new legislation that benefits both stockholders and employees, the beneficiaries of retirement plans.

I am not arguing for a wholesale repudiation of corporate law in this country. But it is in our national interest to restore rights to equity holders who have seen their portfolios crushed at the hands of managements run amok. The suggestions above would do a great deal to change the dynamics of corporate governance in this country. Such a change will make us more productive as an economy, generating more wealth for everyone.

The Wall Street bailout and economic stimulus packages may be unfortunate and necessary steps to revive this flagging economy. But it is important to attack the real problem by demanding more management accountability.

I have initiated United Shareholders of America to empower shareholders to institute changes and I encourage you to join our cause. A majority of the U.S. population owns shares. Their voices need to be heard—now—on Capitol Hill and in the boardrooms of corporate America.

Cindy Fornelli is executive director of the Center for Audit Quality, a Washington-based public policy organization serving investors, public company auditors and the markets.

by Cindy Fornelli

Prodded by the economic crisis, contributed to by events and actions both here and abroad, the new Congress and the new administration are taking a hard look at our financial regulatory framework. They will dramatically increase the odds of getting it right if they can do three things:

Put investors first.

Promote transparency.

Protect independent standard-setting.

Of all parties with a stake in the regulatory framework, no one is more important than the person who puts his or her cash at risk by investing in the capital markets. Investors are the foundation of our financial system, and their confidence in the integrity of the markets is absolutely essential. That confidence has been shaken by recent events, with disastrous consequences for our economy.

At the Center for Audit Quality, we've spent a lot of time listening to investors. As part of a comprehensive effort to improve financial reporting, we solicited suggestions from investors and other market stakeholders during a national Public Dialogue Tour that included stops in 10 cities, from Boston to San Francisco. The overall themes were consistent at every stop.

The market participants we met in our coast-to-coast tour were clear that they don't want more information, they want more relevant information. They would like to see historical information presented with clarity and comparability; they called for forward-looking information; and they called for disclosures that could help inform projections on a company's future operations.

A number of dialogue tour participants proposed adding a "plain English" executive summary to annual reports. Others suggested that "click-down" online technology could let users control how deeply they delve into a particular company’s public reports. We also found considerable support for more complete and understandable disclosures on executive compensation.

In short, investors have made it clear that they want more transparency.

Corruption and malfeasance thrive in the shadows and wither in the sunlight. Bad things can happen when no one is watching, or when those watching — regulators, directors, shareholders and auditors — cannot get accurate and timely information.

We learned that lesson during the corporate scandals earlier in this decade. Now, the excesses and fraudulent activity that contributed to our current economic troubles have given us another reminder that good corporate governance starts with transparency.

Transparency gives investors, regulators and other interested parties the information they need to understand the finances and operations of a company or other business entity.

Some proposals for additional transparency would require significant changes to the current regulatory system — for example, requiring public disclosure from investment entities that now operate outside the regulatory system. Others, however, could easily be implemented within the existing regulatory framework.

Whatever Congress decides to do with the regulatory framework, lawmakers should seek to ensure that the standard-setting process is free from political interference.

We all know that there is no way to fully immunize standard setters from political pressure, just as there is no way to construct a regulatory system that can prevent all fraud. But the difficulty of achieving a goal doesn’t diminish the goal's importance.

The financial markets and financial instruments have become increasingly complex. Setting appropriate regulatory standards requires considerable expertise. Standards should be determined with care, applied with consistency and changed when facts — not political pressure — warrant adjustments.

No one is suggesting that standard-setters and regulators shouldn’t be accountable. They should have a clear mandate to serve investors and suffer consequences if they fall short. And they should not be subjected to political interference on behalf of special interests as they seek to fulfill their mandate.

We are in the midst of challenging times, but challenges are usually a powerful catalyst for change. We are much more likely to get positive change if the Obama administration and the 111th Congress prioritize what is best for investors, promote transparency and try to keep politics out of the standard-setting process.

As the president himself has stated, "I think we have to restore a sense of trust, transparency and openness in our financial system." I couldn’t agree more.

As seen in the Wall Street Journal.

In his inaugural address this week, President Barack Obama said "our economy is badly weakened, a consequence of greed and irresponsibility on the part of some," and due in part to "our collective failure to make hard choices."

He's offered few policy specifics other than saying we need to undertake massive new infrastructure and education programs. But he is right, there are a lot of hard choices we need to make. And one of them is the decision to fix the way public companies are managed.

Private enterprise forms the basis for our economy. It provides most of the jobs we enjoy and creates the wealth that raises living standards. New government spending can only do so much to repair the economy. Reshaping corporate management can do much more.

The problem with doing nothing is obvious. Faltering companies are now soaking up hundreds of billions of tax dollars and they are not substantially changing their management structures as a price for taking this money.

How does it serve the economy when we subsidize managements that got their companies into trouble? Where is the accountability? More importantly, where are the results?

The economy continues to sink, jobs are being lost, the markets continue on a downward course. Changes are needed and can come if Congress insists on reforms that make corporate boards and managers more accountable to stakeholders.

First, Congress needs to pass legislation giving shareholders enhanced rights to elect new boards, submit resolutions for stockholder votes, and have far more input on executive compensation and other issues. As companion to these reforms, Congress needs to pass legislation that prevents managers from making it more difficult for shareholders to exercise their ownership rights.

Managers often come up with creative ways to perpetuate their reigns of error. These include myriad takeover obstacles like poison pills, bylaw provisions and others devices that thwart shareholder efforts to hold managers accountable.

If Congress is reluctant to make wholesale changes at the federal level, it can enact one simple provision that would allow many of the needed changes to take place on the state level: It can give shareholders the right to vote to move a company’s legal jurisdiction to a more shareholder-friendly state such as North Dakota. Currently that decision is in the hands of company boards.

It is not reasonable to expect managers with failing track records to improve their performance on their own. They will only improve if they are placed under greater pressure by shareholders empowered to exert more influence on management decisions. Nothing will do more to improve our economy than corporate governance changes.

What we need are measures that let the capitalist system produce jobs and economic activity, with minimal but effective government oversight. Government spending is an important catalyst to economic gains, but we need to focus on improving the way private companies are managed so private capital can flow into them.

Our private sector is the greatest wealth creation machine ever devised, far outperforming any other economic model. Still, major improvements could do a lot to mitigate what Mr. Obama calls "the sapping of confidence across our land."

Lax and ineffective boards, self-serving managements and failed short-term strategies all contributed to the entirely preventable financial meltdown. It is time for battered shareholders to fight back.

Mr. Obama was right when he said that "it has been the risk-takers, the doers, the makers of things . . . who have carried us up the long, rugged path towards prosperity and freedom."

I hope that this means that the day of reckoning has come for those executives who simply feed at public and private troughs, putting little or no capital of their own at risk, and who produce little of value for the national economy.

It is time for change and the place to start is in the corporate boardrooms of America.

Jonathan Macey is Deputy Dean and Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale Law School. He is the author most recently of Corporate Governance: Promises Made, Promises Broken (Princeton University Press, 2008) available at http://www.amazon.com.

My second post is on the general problem with shareholder democracy caused by defects in the shareholder voting process.

Shareholder Voting

In "Corporate Governance: Promises Made: Promises Broken," I discuss the need for additional shareholder voting rights. With an improved process, corporate performance and accountability would have the capacity to advance even further. Some dissenters claim that shareholders probably vote too much, and others take the position that voting rules are efficient as they are.

In my view, as currently practiced, shareholder voting probably does not do shareholders much harm, but it doesn’t do them much good either. And the annual votes that shareholders make for boards of directors certainly do not legitimize all of the decisions of boards of directors to routinely support and highly compensate incumbent management.

Voting could serve shareholders well in takeover contests and in expressions of shareholder disapproval in high-profile instances of corporate governance breakdown, such as when poison pills have been proposed by management or outside lawyers. It is, however, irrational to think that expanding shareholder voting can improve the daily governance and operation of a large public corporation. Shareholders simply do not have the requisite information, or the inclination, to become sufficiently knowledgeable about what is going on within a public company to be useful to management in this way. Nearly all shareholders, even large institutions like pension funds, mutual funds, and insurance companies, hold highly diversified portfolios. It is not only illogical for such shareholders to immerse themselves in the business operations and strategies of the companies in which they invest, it is impossible. With modern funds holding shares in thousands of companies, the costs to their clients of emerging in corporate governance would make their funds noncompetitive.

Since mutual funds and pension funds own shares in such a vast number of companies, it makes sense for them only to become well informed about very major issues, such as takeovers or other fundamental corporate changes. In order for large, sophisticated investors to take the time to become sufficiently informed about their portfolio companies, they must reduce the number of companies in their portfolios. Most hedge funds and private equity funds pursue exactly this strategy. But even with hedge funds and private equity funds, formal voting is not useful. Instead, it is far more sensible and efficacious for such funds to immerse themselves in real-time decision-making. When the time comes to vote to ratify a major decision such as an acquisition or a divestiture, it's too late for investor input to add value. As the available evidence shows, when sophisticated outside investors do become involved in corporate governance, they do not express themselves by voting; rather, they inject themselves into the corporation's quotidian decision-making on an ongoing basis.

The argument here is that the basic infrastructure of the law of corporate voting is in need of repair. For example, the ability of management to control the timing of elections and the federal rules governing proxy solicitations do not serve the interests of shareholders and should be reformed.

Shareholders do not face the same conflict of interest problems that plague decision-making by management and their captured boards of directors. On issues where the choice is between the shareholder’s lack of information and management’s self-interest, corporate law should choose the shareholders by giving them the deciding voice in corporate governance. Takeovers are perhaps the paradigmatic example of a corporate governance issue that forces us to "decide who should decide" as between shareholders and management.

It is also important to distinguish between "generic" and "firm specific" corporate governance issues. The argument that diversified shareholders are unlikely to inform themselves sufficiently to assist in the corporate governance applies only to "firm specific" corporate governance issues. For example, issues such as whether a particular CFO or CEO should be retained, or whether a company should buy or sell a particular asset such as a subsidiary or a division, are specific to particular firms. As a general matter, voting by shareholders is not likely to be an effective corporate governance mechanism for making decisions about these sorts of issues.

In contrast, a generic corporate governance issue is an issue concerning broad policy that is likely to affect the value of all of the companies in a particular portfolio. One example is whether a particular anti-takeover device such as a poison pill should be adopted by a company. For such generic or market-wide corporate governance issues, it will likely be efficient for diversified shareholders to become well-informed because the resources spent in learning about the relative merits of various anti-takeover devices can be distributed across all of the public companies in an investor's portfolio.

Stephen Bainbridge of UCLA has succinctly summarized the law of shareholder voting as "so weak that they scarcely qualify as part of corporate governance." Consistent with this analysis, the list of items about which shareholders have voting rights is remarkably short. Shareholders vote annually on director elections, amendments to the corporate charter, and fundamental corporate changes, such as mergers, dissolution of the corporation, and the sale of all or substantially all of the assets of a corporation. Confusingly, shareholders and directors both hold the power to vote on changes to corporate bylaws. This, in turn, raises difficult legal questions about whether a shareholder vote on bylaws can trump a decision on bylaws made by the company’s board of directors.

While shareholder voting is limited to just a few issues, this is not the only or perhaps even the most significant restriction on the impact of shareholder voting. An important additional constraint on shareholder voting is the problem of screening by boards of directors. Before an issue even gets to the shareholders for their approval, it must almost always first pass through the board of directors for its approval. The only exceptions to this rule are the provisions for electing directors and for amending the bylaws, which do not require board approval prior to action by the shareholders. Some avaricious managers have even tried to impose greater constraints on the election process by attempting to screen nominees of outside groups. While this practice is probably illegal, it is accomplished by requiring that all candidates proposed as nominees for directorships must first be approved by the nominating committee of the incumbent board. Given their questionable legality, these provisions illustrate the extent to which some companies are willing to go to deter outside efforts to gain control.

The current law and regulation of the shareholder voting is too restrictive. Shareholders are only be permitted to vote on issues of large magnitude because it is thought that these are the only instances in which shareholders will be able to overcome the rational ignorance and voter apathy problems that plague the decision-making process and make voting uninformed and irrational. Shareholders also should be allowed to vote on generic issues, that is, on issues that come up again and again in the course of share ownership (or, in the political context, in the case of citizenship.). The costs of becoming informed on such generic issues can be amortized over every investment in the investor’s portfolio in which these issues arise.

Jonathan Macey is Deputy Dean and Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale Law School. He is the author most recently of Corporate Governance: Promises Made, Promises Broken (Princeton University Press, 2008) available at http://www.amazon.com.

The Icahn Report has exposed: (1) abuses in the use of golden parachute agreements; (2) many of the false premises behind the faulty assumption that corporate elections are "democratic" event that legitimize corporate boards; (3) the entrenchment effects of staggered boards of directors and, most importantly perhaps; (4) the sheer corruption of law and morality that is represented by the continued legality and adoption of poison pill defensive devices.

In my next two blog postings I would like to bring my own, admittedly academic perspective to two topics that are, I believe, highly relevant to the agenda of this blog. The first topic is the problem of "board capture" among boards of directors of public companies. The second is the general problem with shareholder democracy caused by defects in the shareholder voting process.

Director Capture

In the academic world, particularly among political scientists and economists, "capture" occurs when decision-makers such as corporate directors favor certain vested interests such as incumbent management, despite the fact that they purport to be acting in the best interests of some other group, i.e. the shareholders. The problem of capture and the theories associated with the idea of capture are most closely associated with George Stigler, and the free-market Chicago School of Economic thought. Among the more interesting and important theories of Stigler and other proponents of capture theory is the idea that capture is not only possible, in many contexts it is inevitable.

In my recent Princeton University Press book "Corporate Governance: Promises Made: Promises Broken" I apply capture theory, which is usually used to describe and model the behavior of bureaucrats in the public sector, to the directors of publicly traded companies who come to their positions through the board nominating committee.

In my view, such directors are highly susceptible to capture… even more susceptible than bureaucrats and politicians. Capture is inevitable because management controls the machinery of the corporate election process. Management's narrow interest in having passive and supportive boards manifests itself in the appointment of docile directors who are likely to support management's initiatives and unlikely to challenge management or to demand that managers earn their compensation by maximizing value for shareholders.

The extension of capture theory to corporate boards of directors is supported not only by foundational work in political science and economics but also by important work in social psychology. Directors participate in corporate decision-making. In doing so, these directors, as a psychological matter, come to view themselves in a very real way as the owners of the strategies and plans that the corporation pursues. And of course, these plans and strategies inevitably are proposed by incumbent management. Thus, directors inevitably risk simply becoming part of the management "team" instead of the vigorous outside monitors and evaluators that they are supposed to be. Management’s persistent support of and acquiescence in the proposals of management consistently renders directors incapable of objectively evaluating these strategies and plans later on. Of course this is not the case when the directors represent hedge funds or other large investors who have a large financial stake in making sure that the company prospers.

Another factor leading to board capture is the fact that boards of directors have conflicting jobs. They are supposed not only to monitor management, but also to select and evaluate the performance of top management. After top managers have been selected, the boards of directors making the selection decisions are highly likely to become committed to these managers. For this reason, as board tenure lengthens, it becomes increasingly less likely that boards will remain independent.

The theory of "escalating commitments" predicts that decision-makers such as corporate directors will come to identify strongly with management once they have endorsed the strategies and decisions made by management. Earlier board decisions supporting management, once made and defended, will affect future board decisions such that later decisions comport with earlier decisions. As the well-respected Cornell psychologist Thomas Gilovich has shown, "beliefs are like possessions" and "[w]hen someone challenges our beliefs, (for example the belief of directors that management is highly competent) it is as if someone [has] criticized our possessions."

The cognitive bias that threatens boards of directors and other proximate monitors is a manifestation of what Daniel Kahneman and Dan Lovallo have described as the "inside view." Like parents unable to view their children objectively or in a detached manner, directors tend to reject statistical reality (such as earnings performance or stock prices) and view their firms as above average even when they are not. The first step in dealing with the problem of board capture is to recognize that the problem exists.

Boards should be free to choose whether they wish to be trusted advisors of management or whether they want to be credible monitors of management. They can’t be both. We should stop pretending that they can.

One policy proposal would be for companies to have two boards of directors (as they do in Germany and the Netherlands), one for monitoring and one for assisting in the management of the company. Firms that decide to retain the single board format should be required to choose whether their board should devote itself to "monitoring" (or supervising) management or to advising (or managing along with) the company’s CEO and the rest of the management team. The farce that board can do both should end.

Boards that purport to monitor or supervise management should be held to an extremely high standard of independence. Management should not be involved in any way in the recruitment or retention of these board members. Socializing and gift-giving should be prohibited. And, of course, managers themselves should not be allowed to sit on monitoring boards. Managers should not be allowed to serve as the chairmen of monitoring boards.

Independence standards should be relaxed for the boards of companies that elect to participate in management. Decisions that involve a conflict between the interests of shareholders and the interests of management should be subjected to close scrutiny. Such decisions include decisions about executive compensation of all kinds, particularly bonus and severance payments, as well as decisions about such things as the adoption of staggered terms for the board or the adoption of a poison pill rights plan.

Shareholders of companies with management boards should have substantially more rights than shareholders of companies with independent boards. Shareholders of companies with management boards should be strictly prohibited from engaging in defensive tactics such as adopting poison pill anti-takeover devices. In addition, shareholders of management board-run companies should have enhanced voting rights. A majority vote of the shareholders should be required to approve executive compensation agreements in companies with non-independent, managerial boards, and directors of companies with managerial boards should be subject to ouster every year in the form of an annual no-confidence vote by the shareholders.

Finally, shareholders of companies that are run by managerial boards should be able to vote annually to require their companies to switch to an independent board. Well-run companies that prefer to operate with an insular managerial board can stay that way, but shareholders are entitled to a truly independent board if they want one.

As seen in the Wall Street Journal

The epic financial crisis afflicting the banking industry in the last 18 months is largely the result of cratering values of loans and other assets stuck on bank balance sheets. When the market for such loans stalled, banks couldn’t sell them and were forced to take billions of dollars in writedowns.

Fearing the worst, the government pumped hundreds of billions of taxpayer dollars into these institutions, with questionable long-term results. Though it is early days in the rescue, the economy has shown few signs of improvement, which was one intended result. And the bank losses continue.

Why should taxpayers foot the bill when there are trillions of dollars in private money on the sidelines in the world financial markets? Private investment is a far more appropriate agent to revive these institutions, yet little is coming in.

One reason for this is that the distressed assets on bank balance sheets are being priced at artificially low levels as a direct result of federal bankruptcy laws. With a few changes, the banking system could face a financial revival backed by private investment, not public funds.

Convoluted bankruptcy laws keep loan prices artificially depressed because in this bear market, the prospect of a bankruptcy puts a huge damper on investor appetite for debt securities in overleveraged companies. This includes hundreds of billions of dollars in bank and bond debt issued for scores of leveraged buyouts in recent years.

This sorry state of affairs could be improved by the elimination of one key bankruptcy rule: the “exclusivity” period. This rule unfairly gives managements, with court approval, a monopoly to formulate a reorganization plan for a minimum of 18 months and sometimes more. Such a plan generally includes proposals to restructure debt, sell assets and void onerous contracts.

But during this period non-trade creditors like bank debt and bond holders languish in significant uncertainty as to what will happen to their investment.

The exclusivity rule mainly benefits equity holders and managements, not creditors. But why should the same managements that got the company into trouble be given the right to lock-up its assets for an extended period of time?

Without an exclusivity period, different classes of creditors and equity holders could immediately propose different restructuring solutions, including the sale of assets overseen by a bankruptcy court.

The biggest impact of such a rule change is that the assets in a company operating in Chapter 11 would be priced as though they could be sold, in effect giving them a ‘mergers & acquisitions premium’ unshackled by what amounts to federal intervention into company affairs.

This small change would cause distressed loan prices to rise in many cases – having the effect of bolstering balance sheets of banks and other companies that hold them – without public money.

Furthermore, it would slash the need for expensive bankruptcy lawyers, restructuring firms, consultants and others advisors, which can reap tens of millions of dollars in fees – often at the expense of creditors and company treasuries. These operatives would likely be the biggest opponents to such a change, besides entrenched company managements who benefit from the exclusivity monopoly.

It is one thing to apply the exclusivity rule to small businesses in the hopes that an individual who has spent his life building a business has a chance to keep it. But it makes no sense that huge private equity players can use these same rules to crush billions of dollars of debt that banks lent to finance once-healthy companies.

If equity holders bet and lost, then debtholders should be able to come in quickly and salvage the company and their investment. In the long run, this would be good for the company, the credit markets, employees and the communities in which companies are located.

Few are helped by the exclusivity rule, other than the desperate equity holders and top managers clinging to the helm of the companies that faltered under their watch. And eliminating exclusivity would not necessarily lead to more company liquidations, but would take away the monopoly management has on formulating restructuring proposals. It would also force managements to redouble their efforts to find ways to stay out of Chapter 11 – which can only be a good thing. Chapter 11 is often a crutch to lackluster and unimaginative managements. Changing the rules would put them under more pressure to keep their companies healthy to avoid it.

I have long argued for increased shareholder rights and last year initiated United Shareholders of America to advocate strengthening those rights. In this case I argue for increased creditor rights.

But the economic philosophy behind both initiatives is identical. In both cases it allows market forces to work better, both in pricing securities and also eliminating management monopolies in the affairs of companies.

We must allow market forces to do their job, which includes promoting the ability of the rightful owners of assets – not just managements - to control their fate to the maximum extent practical. The idea is to efficiently maximize the value of the assets through operational changes, restructuring or sale to third parties.

Today, troubled assets are often frozen in a quagmire and will be for years to come unless bankruptcy laws are changed.

The capitalist system is the most efficient wealth-producing machine in existence. We must strive to remove barriers that thwart this efficiency.

As seen on Huffington Post

The magazine Corporate Board Member is scheduled to come out with an article in their January issue entitled "How to Icahn-proof your board," according to marketing materials the publication sent out.

Naturally I await this article with keen interest, particularly since I serve on a number of boards that apparently failed in this regard.

With the 2009 proxy season looming large and hedge funds gearing up for some serious board challenges, some board members may not want to wait to glean the nuggets of advice from the magazine's staff of august commentators.

So in the spirit of the holiday season, I offer my own unsolicited advice on how to Icahn-proof your board. I'll start with this nugget: don't give me reasons to come after your company to begin with. The right way to achieve this, of course, is for shareholders to elect strong and independent-minded boards that have the knowledge and courage to demand answers from management they are charged with overseeing.

Such a board should be capable of exercising its oversight responsibility in appointing and oversee managers whose primary objective is to relentlessly develop and implement successful strategies, grow shareholder value and cut waste.

In addition, the board should regularly and constructively communicate with shareholders and view them as partners, not impediments.

Lastly, managers and board members should focus on their primary job of maximizing asset values and not feathering their own nests, and soaking up huge bonuses and perks in spite of lackluster and value-depleting performances.

If boards execute these strategies successfully, they will be Icahn-proof. There are many respected companies which practice these simple precepts. Not surprisingly, they rarely face challenges from activist investors like myself and dozens of others out there.

Sadly, I fear the magazine will offer another kind of advice: the wrong way to Icahn-proof your board. In recent years, a whole cottage industry of corporate sycophants and panderers has grown up to advise boards on how to obstruct shareholders and fend off legitimate challenges from the true owners of companies – the shareholders.

As more weak boards adopt these misguided tactics and policies, corporate America’s competitiveness and entrepreneurial drive is eroded. This should be of major concern to anyone whose livelihood depends on a strong economy – which includes virtually everyone.

This misguided advice is generally aimed at entrenching existing managements, no matter how poorly they perform. It is produced by law firms, public relations firms and corporate consultants, all of which look to curry favor with boards and win lucrative advisory contracts.

For example, the law firm Blank Rome recently offered advice on how to "lessen your company’s vulnerability to a shareholder activist and prevent it from being a sitting duck this proxy season," according to a memo to its clients.

Blank Rome advised that boards should enact myriad technical amendments to a company's bylaws and certificates of incorporations "intended to shield the company from activist shareholders," according to the December memo.

Such advice is premised on the assumption that activist shareholders are forces that must be thwarted and obstructed, implying that passive shareholders that dutifully vote the management line are the "good" shareholders.

Nothing could be farther from the truth, of course.

In my view, it was passive and hands-off mutual fund shareholders and weak boards that allowed the outrageous messes that occurred in the last two years. During that period, we saw major stumbles or collapses at dozens of top-rated companies, including corporate pillars like AIG, Lehman Brothers, Bear Stearns, Citigroup, General Motors, IndyMac, Countrywide, dozens of regional banks and others.

Where were the boards at these companies? Were they asking the right questions and demanding answers? Or were they seduced by the siren songs of legions of consultants and lawyers jetting off to lavish retreats, while the companies they were charged with overseeing got haplessly crushed on desolate and rocky shorelines?

I have formed United Shareholders of America to rout out lax and incompetent corporate governance. After trillions of dollars in market value was obliterated needlessly by sheer corporate incompetence and mismanagement, it is urgently time for shareholders to demand accountability from managements.

The way to successfully Icahn-proof a board is to have it perform the way it is designed or get it out of the way and let others do the job. Our job as shareholders is to demand nothing less.

Join United Shareholders by signing up on my blog, the Icahn Report. It costs you nothing and our national weal depends on demanding action.

North Dakota may be cold this time of year, but shareholder activists are looking to make it a hot destination for public companies.

©iStockphoto.com/csreed

Last year, partly as a result of a campaign I backed, North Dakota changed its laws to strengthen shareholder rights at public companies incorporated there.

Now some shareholders have proposed resolutions to be placed on corporate ballots in 2009 to relocate their companies to the state. More are expected to follow.

Long-time shareholder activist John Chevedden, for instance, said he has filed relocation proposals to be included on proxy statements at 15 public companies.

For Chevedden, the move is a no-brainer. Historically, states like Delaware, where a majority of U.S. public companies are incorporated, give shareholders little power to influence company affairs and strategy. But last year, North Dakota became the most shareholder-friendly state in the nation.

"If a company moved to North Dakota, it could cure five items of corporate governance at once," Chevedden told the Icahn Report.

The move is likely to meet opposition from company managements, since it erodes their control over companies that shareholders own. And when shareholders make proposals managements don’t like, they typically ask the SEC for a ruling to exclude these proposals from the company’s annual meeting proxy statement, in an effort to keep shareholders from supporting the measure.

The SEC, however, hasn’t previously shown much willingness to challenge shareholder resolutions to reincorporate in other jurisdictions, according to Race to the Bottom, a legal blog.

Chevedden said the SEC has already rejected one company request to discard a shareholder proposal from its proxy materials relating to jurisdictional relocation.

Still, under current law, to be binding, a corporate relocation resolution must be approved by the board. Therefore, the proposed shareholders resolutions being pressed by Chevedden are merely "precatory," or advisory, meaning that managements don’t have to adopt any shareholder proposal they don’t like. But Chevedden said if such proposals win widespread shareholder support, managements ignore them at their peril.

What’s different about North Dakota corporate law? Lots. And the state is looking to use the provisions to attract lucrative business from corporations that incorporate there, just as Delaware gains a substantial portion of its state revenue from companies incorporated in that state.

If companies choose to sign up in North Dakota under the provisions of the new law, they are limited from instituting anti-takeover provisions like poison pills and staggered boards. Such provisions thwart a company from being taken over and have its assets better redeployed under different managements.

In addition, it requires that the board chairman and CEO jobs be separated, and requires advisory shareholder votes on executive compensation.

It also allows shareholders owning five percent of the outstanding shares for two years or more to nominate directors and they must be put on a company’s proxy statement.

These rules and a number of others in the North Dakota statute vary significantly from Delaware’s and would go a long way to give shareholders more rights to bring accountability to managements.

There are numerous long-standing reasons why these changes are essential. But most importantly, they come at a time when shareholders need to exercise more influence at companies which have suffered massively this year as a result of the market meltdown.

Clearly, much of the meltdown occurred as a result of the failure of boards to properly clamp down on managements who took excessive risks that brought down their companies, particularly those in financial services.

This is unacceptable and must be changed. This is why I have founded United Shareholders of America – to give shareholders more power over the companies they own. It is only when large numbers of stockholders unite that we can push back against the entrenched and unresponsive boards and managements in this country.

Sign up for USA on my blog, The Icahn Report. www.icahnreport.com.

In 1992, after 25 years as a civil engineer for the City of New York, Phillip Goldstein and partner Steve Samuels co-founded what is now Bulldog Investors, a value oriented investment firm that focuses primarily in closed-end funds, small-cap operating companies and SPACs. Goldstein is a veteran of numerous proxy battles and has served as a director of a number of closed-end funds. He is currently a director of the Mexico Equity & Income Fund, ASA Ltd. and Brantley Capital Corp. Goldstein is widely-quoted on topics involving closed-end funds, hedge funds, value investing, investor activism, corporate governance and securities regulation.

By Phil Goldstein

What is fundamentally wrong with corporate governance in America? In a nutshell, it is difficult for stockholders to hold management accountable for its misdeeds.

This is not a new insight. In 1776, Adam Smith wrote in The Wealth of Nations: "The directors of such companies, being the managers rather of other people’s money than of their own, will not watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Negligence and profusion therefore must always prevail in such a company."

Let's fast forward to 1934. Here is what Congressman Lea of California said in the Congressional record of May 1, 1934:

"In the main, the men controlling these great corporations are not large owners of the stocks of the corporations they control. Too often they have yielded to the temptation to control these great business institutions to their own interests, and with a zeal out of proportion to the loyalty they have shown their stockholders. Thus in recent years we have seen the directors of corporations, without the knowledge of their shareholders, voting themselves vast bonuses out of all proportion to what legitimate management would justify. We have had revelations of salaries paid to directors and officers of great corporations which showed shameful mismanagement; which showed that the men in charge of some of these corporations were more concerned in managing its affairs for their own benefit than for the benefit of the stockholders."

It is now 2008 and it is fair to say that the lot of shareholders has hardly improved, considering the trillions of dollars in lost shareholder value over the last year, along with the egregious bonuses and salaries paid for this dismal performance.

Next year, the Securities and Exchange Commission, for the umpteenth time, is likely to reexamine the rules governing proxy access, which have historically been weighted heavily in favor of incumbent management. Better proxy access would make it easier for shareholders to place director candidates and resolutions on the ballot for vote at annual meetings.

Once again the SEC will be inundated with comments from management advocates insisting that nothing is broken. It will also face a barrage of comments from those that see corporate elections as a way to advance causes unrelated to enhancing shareholder value.

Here is my two cents.

It is irrefutable that the proxy rules have failed to achieve their goal, i.e., "to give true vitality to the concept of corporate democracy." A corporate election today remains largely an empty exercise.

The problem is not that shareholders cannot nominate candidates for director. It is that those nominations must be presented at a stockholder meeting and that most shareholders find it inconvenient to attend these meetings. Hence, the vote at meetings of public corporations is predominantly via proxy.

Since the corporation's proxy card does not include all bona fide nominees, shareholders that do not attend the meeting have no practical means to cast their votes for nominees other than management's.

The solution is to ban "one party" proxy cards. Such a proxy card frustrates the free exercise of voting rights, since it results in the "election" of directors who might not otherwise have been elected if shareholders received a proxy card that listed all bona fide nominees.

What is a fair corporate election? The standard for such an election was set forth in the 1987 Delaware Chancery Court decision in Aprahamian v. HBO & Co., 531 A.2d 1204, 1206-07:

"The corporate election process, if it is to have any validity, must be conducted with scrupulous fairness and without any advantage being conferred or denied to any candidate or slate of candidates. In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards in providing for and conducting corporate elections."

Tinkering with the current fundamentally unfair corporate election process is futile. Instead, the Commission should look to Section 481 of the Labor-Management Reporting and Disclosure Act of 1959, which is the federal standard for electing officers of labor unions. Section 481 states:

"Every member in good standing shall be eligible to be a candidate and to hold office (subject to . . . reasonable qualifications uniformly imposed) and shall have the right to vote for or otherwise support the candidate or candidates of his choice, without being subject to penalty, discipline, or improper interference or reprisal of any kind by such [labor] organization or any member thereof."

By substituting "shareholder" for "member" and "corporate" for "labor," the SEC can craft, interpret and enforce proxy rules that will afford shareholders of publicly traded corporations the same level of voting rights as union members.

Specifically, the Commission should immediately take the common sense position that a proxy card that excludes the name of any bona fide nominee known to the soliciting party is materially misleading.

Even the pro-management Committee on Federal Regulation of Securities of the American Bar Association's Section of Business Law Disclosure has advocated the use of a fair proxy card. In its January 7, 2004 comment letter to the SEC, it said:

"Disclosure on the proxy card should be clear and uncomplicated so that the voting decisions by shareholders will in all cases represent an informed judgment. Furthermore, the structure of the proxy card should be neutral in terms of the ability of a shareholder to vote on an informed basis."

Interpreting rule 14a-9(a), the anti-fraud proxy rule, to require every proxy card to include the name of every known bona fide nominee for director will go a long way toward achieving the goal of vitalizing "the concept of corporate democracy."

Over the years, the Commission has spent far too much of its resources on baby steps that have failed "to give true vitality to the concept of corporate democracy."

Shareholders already have the right under state law to propose nominees for director. But they need a mechanism to effectively utilize that right. In short, they need to be provided with a proxy card that includes all bona fide nominees.

Shareholders have waited seventy-four years for the Commission to fulfill the will of Congress by adopting rules to "[prevent] the recurrence of abuses which . . . [had] frustrated the free exercise of the voting rights of stockholders." Isn’t that long enough?

Interpreting rule 14a-9(a) in accordance with the principles set forth in Section 481 of The Labor-Management Reporting and Disclosure Act of 1959 would go a long way toward making "the free exercise of the voting rights of stockholders" a reality and almost certainly would be upheld by a court as a valid exercise of the Commission's rulemaking authority.

Implementing this reform will not cure the sorry state of management accountability to shareholders because millions of dispersed investors are still no match for a well organized and highly motivated corporate lobby. But it is a start.

This post was also published on Harvard Law School Corporate Governance Blog

Eliot Spitzer offered up some insightful commentary (Nov. 16, Washington Post) on the public corporation's fall from favor and rightly pointed to basic issues in corporate governance that need reform. He states, "…our corporate governance system has failed. …Boards of directors, compensation and audit committees, the trio of facilitators (lawyers, investment bankers and auditors) whose job it is to create the impression of legal compliance, and shareholders themselves – all abdicated their responsibilities."

If by shareholders, Spitzer means mutual funds and pensions have not actively held boardrooms accountable, I agree with him. Put simply, boards have failed. Why should shareholders stand by on the sidelines? There is no axiom stating that public shareholders have to stand by and witness the demise of the most powerful financial engine in history.

Why should public shareholders be forced to leave so much value on the table because of risks taken by unaccountable management teams and boards? Spitzer says that when his office and the DOJ warned that, "some of AIG’s reinsurance transactions were little more than efforts to create the false impression of extra capital on the company's balance sheet," they were "jeered at for attacking one of the nation's great insurance companies, which surely knew how to balance risk and reward." Clearly, many boards such as AIG did not know how to balance risk. And they certainly did not know how to balance reward.

As owners, why would we allow this? The theory of the public corporation is not bankrupt, the practice is. We need critical changes in corporate governance that would go to the heart of the blameworthy lack of accountability between managers and shareholders.

Board members are often hand-picked by managers. The current proxy system is so biased in favor of management that any challenge is prohibitively expensive and generally guaranteed to fail. In theory of the corporation, the shareholders pick the board, and it in turn picks the management. In practice however, the system is turned upside down. Incumbent management picks the issues and board nominees for the proxy statements and distributes the ballots. The shareholders vote and sign their names to the ballots and then send them back to the incumbents, who count them and announce the outcome. And so, there is no true election. There is only one list of nominees! The system is similar to a dictatorship; the difference being that the goon squads protect the dictator, but lawyers protect the board.

And what is the result? Most recently, a financial crisis. Listen to Spitzer. "Boards of directors were also missing in action over the past decade; not only did they not provide answers, they all too often failed even to ask the appropriate questions."

This failure of corporate democracy has left shareholders virtually powerless. The system must be fundamentally reformed to give shareholders more rights – to nominate board members, to eliminate excessive takeover defenses and to have the ability to vote to incorporate their company in another state.

Simple legislation (see my post Shareholders Should Decide Where Companies Incorporate) would make tremendous progress toward resolving the power mismatch that managements and their boards have over shareholders. With true competition for board seats, accountability can be restored and managers would be compelled to work for value maximization on behalf of shareholders and not work simply to enhance their pay and perks and entrench themselves in highly paid positions.

Truly independent board members could also insist on performance based compensation plans and other programs to align management’s interests with shareholders. Then public shareholders could realize the full potential of their companies. But currently, the best opportunity for shareholders is to sell their shares and stand by while, in many cases, the same management team that ran their companies into the ground reap additional millions for a job poorly done.

These reforms are not just grist for academic debate. Reforms of our current system like 'Say on Pay' and golden parachute modification have received increasing support and several prominent corporations (including Aflac, Vodafone and GlaxoSmith Kline) have voluntarily adopted policies like Say on Pay.

At the very least, these reforms are essential to enhance management accountability for our corporations. Equally important, they would restore a basic democratic right to the owners of corporate America.

While the financial crisis continues, shareholders should have the option to protect their rights and make America's boardrooms accountable. Make a difference and join United Shareholders of America. This is where we start. It is where we grow stronger. It is where change begins.

(From time to time, starting today, the Icahn Report will be publishing news of interest written by staff.)

The CEOs of mortgage giants Fannie Mae and Freddie Mac were warned repeatedly by their risk officers about the dangers of investing in subprime mortgages, but pushed ahead anyway into the strategy that ultimately caused their collapse, Rep. Henry Waxman charged at a House Committee on Oversight hearing on Tuesday. The two government-sponsored entities, which buy mortgages from banks and lenders, were seized by the government in September and given access to $200 billion in capital.

Rep. Henry Waxman, the outgoing head of the House Oversight Committee, said risk managers "raised warning after warning about dangers of investing heavily in subprime and the alternative mortgage market. But these warnings were ignored."; Waxman, whose committee obtained nearly 400,000 documents from both companies, also said Freddie fired its chief risk officer after he warned of the dangers of targeting borrowers who would have trouble qualifying for mortgages.

"The CEOs of Fannie and Freddie made reckless bets that led to the downfall of these companies," said Waxman. The strategy, he said, was "tremendously lucrative" for the CEOs, who took home over $30 million between 2003 and 2007. "Their irresponsible decisions are now costing the taxpayers billions of dollars," Waxman said. –D.H.

• MD Rep. Cummings questions AIG retention payments – AP News
• Finally, Some Semblance of Rationality to Wall St.'s Compensation Structure – Seeking Alpha
• IPOs and Executive Compensation – Race to the Bottom
• SEC poised to finalize rule on interactive data format – Accountancy Age
• Former NY Fed Chief Tells Congress Credit Default Swap Debacle Was Risk Management Failure – Jim Hamilton’s World of Securities Regulation

Let’s say you're the CEO of a big company and your friends on the board have awarded you a big "golden parachute" severance package so you’ll be set for life if the company gets taken over. Nice deal for you.

©iStockphoto.com/PeskyMonkey

Then, your company then gets a takeover offer that your board accepts. Bingo! You win the grand prize – about two-thirds of the Fortune 500 companies paid out an average of $61 million in golden parachutes, according to a recent RiskMetrics study.

Then you see the tax bill. It's a whopper. Thankfully, your company doesn’t want you to suffer, so they pay your taxes for you, using shareholder money.

Sound incredible? Not in today’s corporate America.

According to RiskMetrics, the parent of Institutional Shareholder Services, about two-thirds of the Fortune 500 companies will pay the taxes on your golden parachute. They even have a name for these payouts: gross ups. So you can take home that $61 million scot-free.

Just when you thought the outrageous greed at the top of the corporate ladder couldn’t get any worse, we find more eye-popping examples.

For example, Capital One Financial Corp. – the credit card company that’s getting $3.6 billion in federal bailout funds – paid $107.6 million in taxes for John Kanas, the former CEO of North Fork Bancorp, which Capital One bought in 2007, according to the Wall Street Journal.

But instead of wringing our hands, it is up to shareholders to challenge these outrageous practices. To quote Shakespeare in Julius Caesar, "The fault, dear Brutus, is not in our stars, but in ourselves." We as shareholders let the boards get away with their mediocre jobs and now we are all feeling the pain – in lost jobs, lost money, lost economic power.

Can there be any better reason for shareholders to rise up and challenge the status quo? If a company is going to pay taxes for its top executives, why shouldn’t they pay taxes for shareholders? Are owners of the company any less deserving than the managers, who are after all simply employees in the end? These senior executives are not sovereign rulers, although many act as though they are.

Gross ups ought to be eliminated, except in certain rare cases for executives who have consistently outperformed and shareholders have also made substantial and sustainable gains. For the most part, public companies should not be in the business of paying personal income taxes for executives using shareholder money.

One reason we have excessively compensated executives is that law firms, consultants and others paid by companies give them legal cover to do this. A recent Wachtell Lipton memo to clients is a prime example.

For instance, suppose a manager fails to achieve performance goals that qualify him for a bonus? Instead of using the incentive to make him work harder to achieve targets, Wachtell Lipton says companies can "use its business judgment to override the applicable performance goal and make discretionary bonus payments," according to the Dec. 3 memo.

Simply put, the law firm says companies can ignore the purpose of an incentive – a bonus based on performance – and simply pay them anyway. I would like to know how it serves shareholder interests when employees are paid bonuses whether they perform well or not.

Similarly, suppose stock options for executive have a "strike price," or redemption value that is far above a company’s share price? With the stock market swoon, many executives no doubt find themselves in this situation.

Previously, some companies simply lowered the option grant price, until these "backdating" practices were uncovered and prosecuted. But Wachtell, in the same memo, provides a different solution: companies can simply issue more options at a lower price.

"Compensation committees may determine that (existing) options have lost meaningful incentive and retentive value," says Wachtell Lipton in the memo. "Under these circumstances, a compensation committee may wish to consider making a one-time special option grant or accelerating the 2009 option grant, in order to take advantage of depressed share prices and restore the incentive and retentive impact of company options."

In other words, reward your employees whether the company achieves higher stockholder value or not, since they may resign.

In many cases, concerns that an executive may leave is not a real reason that companies pay 'retention bonuses.' The real reason is often just to award their friends and buddies in the company, regardless of their performance.

I say let them leave rather than pay them for failure. It's a buyers market for executive talent these days. Why should corporate America be rewarding executive failure? Why should we pay retainer bonuses if they are not worth being retained?

This is why I have started United Shareholders of America – to rid ourselves of the most flagrant management abuses that have gotten many companies into trouble in recent months and years. But it is only when large numbers of people join in our cause will we be effective. Join USA by signing up on my blog, the Icahn Report. www.icahnreport.com.

• Morgan Stanley adopts Clawback provision – Dealbook via Dealbreaker
• Tribune Bankruptcy Reveals Golden Parachute payouts – NowPublic.com
• Dillard’s Row Worsens – New York Post
• Corporate Responsibility and the Financial Crisis – CRO
• Shareholders Ponder North Dakota Law - WSJ
• Holding CEOs Accountable - WSJ

Charles M. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is also "Of Counsel" to the law firm of Holland & Knight. His fields of expertise include corporations, securities regulation and corporate governance.

by Charles Elson

Central to the philosophy of the modern Delaware corporate law has been the concept of judicial restraint in the review of director decision-making. Wide discretion is granted to boards through the operation of the Business Judgment Rule.

The theory is that shareholders, through exercise of the electoral franchise, provide the best mechanism for ensuring appropriate director discretion than the review by a third-party judicial body. Of course the lynchpin to this approach is the availability of an open and fair election to provide the necessary outlet for shareholder will.

Unfortunately, for a variety of reasons, in most public companies the shareholder election process functions as a mere formality to ratify the actions of a generally self-perpetuating board and management. For the election to serve as the appropriate accountability vehicle intended by the Delaware scheme, it is important that from time to time there is the real potential that it function as a true contest over corporate policy and direction.

To accomplish this, we need to level the playing field a bit between the incumbent board and the shareholders in the electoral process.

Traditionally in a proxy contest, the expenses of the challenging party are solely borne by that party, while the board uses the corporate treasury to finance the presentation of its position.

This has been an obvious impediment to fostering vibrant elections as all shareholders effectively subsidize the board's candidacy while the challenger is forced to personally bear the cost of a campaign. If the challenge involves a legitimate debate on corporate direction and policy, there is no good reason why the shareholders of the corporation should fund the cost of the promoting one viewpoint and not the other. This asymmetry is certainly problematic in that it acts to stifle thoughtful discussion and re-examination of corporate policy which ultimately leads to lessened accountability by the incumbent board and management to shareholders. That is why reform is necessary.

The simplest solution to this problem is to provide some sort of reimbursement of reasonable expenses to challengers in non-control directorial election challenges. If one is successful in proposing and electing a director, then that one's expenses should be reimbursed by the corporation.

If an individual is unsuccessful, but loses only by a small percentage, then it is clear that the effort was over a legitimate issue. Therefore, some portion of that individual's expenses should be reimbursed. Should the challenging candidate or candidates lose by a significant vote, then no corporate funds should be expended for the support of the effort.

Such a scheme would be initiated with shareholder consent and the Delaware code should be amended to explicitly provide for the mandatory establishment of such a regime upon an appropriate shareholder vote. By removing an important financial impediment to more vibrant corporate elections, the election process would no longer be a simple formality but a real forum for informed debate and ultimate expression of shareholder will.

This would accomplish two important goals.

First, it would assure the necessary vibrancy of the electoral process vital to the appropriate functioning of the corporate regime as contemplated under the traditional Delaware corporate law.

Second, the election itself, or merely the threat of a contested election, would encourage better directorial and management accountability to shareholders and ultimately more effective corporate performance.

The Delaware corporate law has proven to be an incredibly effective vehicle for the regulation of public corporations. This proposed measured change is necessary to ensure its continued utility and effectiveness.

A version of this article appeared in the Delaware Lawyer. The article reflects the views of the author and not the views of Delaware Lawyer or the Delaware Bar Foundation.

• Gaylord Entertainment uses the poison pill to reject TRT’s bid to increase its stake – AP News via MSN money
• Raleigh News and Observer reports that Icagen would hinder any takeover try
• Bank Layoffs: Credit Suisse, State Street, Carlyle and more.. – The Deal
• Rodgin Cohen on the future of M&A – Harvard Corporate Governance blog

• General Motors and Ford CEOs putting their salary on the line – Los Angeles Times
• Boston Business Journal says it’s time for corporate boards to step up to the plate
• Lifting the Lid-US firms struggle to globalize the boardroom - Reuters
• Real Business points out 10 principles of corporate governance
• Auditors Urge Treasury to Add Bailout Controls – New York Times via Dealbook

Treasury Secretary Hank Paulson, in a speech this month, gave some prescriptions for fixing components of the financial system which are worthy of consideration, including changing flawed executive compensation plans and rectifying failed regulatory systems.

©iStockphoto.com/Alex Slobodkin

As we have seen, the root of the crisis is the widely held assumption that housing prices would continue to rise year after year, even though it was obvious to some that we were in an unsustainable bubble.

The blind belief in a continually rising housing market was behind the sales pitches for all kinds of securities, from mortgage-backed securities, credit default swaps and retail mortgages to unqualified borrowers.

Now Wall Street has sustained a body blow of unparalleled and unreal proportions that erased trillions of dollars in stock and bond values, inflated national deficits by trillions of dollars, causing dozens of banks and financial firms to implode and erased hundreds of thousands of jobs.

So why did financial executives nearly destroy the system that pays their lavish salaries and bonuses? For just that reason – the pursuit of lavish salaries and bonuses in a get-while-the-gettins-good mentality, risks be damned.

These bank executives and traders were like Yertle the Turtle, the Dr. Suess character who built an ever-rising tower to the sky for sheer ego gratification (on the backs of other turtles) only to have it collapse miserably.

“All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted,” the New York Times reported on Nov. 23 in an excellent front-page story about the Citigroup collapse.

I don’t want to point fingers, because there are many who are responsible for the blind and heedless rush to profit. But Paulson is right that Wall Street compensation practices that drove this recklessness needs an overhaul.

“Given their role in supporting and sustaining U.S. economic activity, financial institutions’ compensation practices should not encourage unsafe and unsound risk-taking or reward failure,” said Paulson.

Of course, it is always a tough call to balance reward against risk in any market. But the huge bonuses paid to executives at institutions such as AIG, Citigroup and many others apparently made those risks far too easy to ignore.

Top executives at many institutions made tens of millions of dollars each while their institutions were piling up unsustainable risks – again, on the assumption that housing prices would continue rising.

Where were the boards of directors in these institutions? Weren’t they supposed to be asking questions and demanding answers about how much risk management was taking on? Did they even understand these risks? Or did they simply ignore their fiduciary duties, leading to colossal losses?

Now the government is being forced into an unprecedented bailout to the tune of trillions of dollars. Unfortunately, we have no choice but to keep the financial system afloat.

Where were boards of directors when the unregulated credit default swaps market ballooned to an estimated $55 trillion? Why weren’t they questioning the managements about the risks their companies were taking on?

I agree with Paulson who said we must never again be deluded into thinking that the market can self-regulate, particularly in risky over-the-counter securities like swaps and other derivatives.

“Any financial product whose market size represents a systemic issue should be subject to regulatory oversight,” said Paulson. Better late than never, I suppose. But this financial meltdown should have never happened in the first place.

And it would not have happened if proper corporate boards were in place, doing the job of evaluating risk and keeping management accountable.

In my opinion the best protection for the corporations and our economy is for shareholders, the owners of public companies, to resume their proper role in corporate governance - a role that has been taken from them by managements who, driven by their own avarice and with the assistance of compliant state governments and armies of lawyers, have put into place a self perpetuating system for their own benefit, the results of which we now see before us.

This is why I initiated United Shareholders of America – to better empower shareholders – the true owners of companies – to be able to exercise their power. But it is only when we get large numbers of people involved will we take back the power. Join USA by signing up on my blog, Icahn Report. www.IcahnReport.com. It will cost you nothing but our financial futures may depend on it.

• CEO pay lucrative in Carolinas – Raleigh News and Observer
• GM, The Bailout and the Role of the Board – Race to the Bottom
• Putting A Value on a C.E.O. – New York Times via Dealbook
• Corporate Boards are Broken- Motley Fool
• Box- Ticking is not the key to managing in the boardroom – The Times of London

- Three former UBS officials to forgo $27 mn in compensation - Dealbook

- Banks ask for clarity on Fair Value Accounting - Reuters

- AIG exec Cassano's statements probed by prosecutors - Bloomberg

- AIG says no 2008 bonus for top execs - Reuters

- Banks may write down $44 bln in fourth quarter - Bloomberg

- 'Bailout' is word of the year - Boston Herald

• Wachovia execs could get $98.1 mn in severance – Reuters via Seeking Alpha
• What are the governance implications of the federal bailout? - Riskmetrics

One big reason our economy is in crisis is because self-serving corporate managements and boards failed to provide sufficient risk controls over their finances. The credit crisis was largely preventable and it just shows the extent of mismanagement in corporate America today.

One of the big reasons why this greed and recklessness is allowed to flourish is that many states enable corporate managers and boards to perpetuate themselves in office, no matter how incompetent they are. Most shareholders can’t fight back effectively.

One of these states is Delaware, which generates about 20 percent of state government revenues, or about $550 million annually, from companies that make the state their legal home. A majority of U.S. public companies incorporate in Delaware and many major business decisions are made in its courts.

Delaware courts, which are justifiably respected and adept at making speedy decisions, are often hamstrung by a pro-management bias that emanates from the Delaware legislature, which regularly passes laws that favor managements over stockholders in an effort to attract more businesses to incorporate in the state.

However, other states, such as North Dakota, offer many more rights to shareholders. It is ludicrous that shareholders, who are the true owners of corporations, do not currently have the legal right to move their company to such a jurisdiction if they so choose.

The Delaware courts have allowed almost all of the most egregious anti-takeover devices in existence. Topping this list is the poison pill, a device which allows boards to effectively block hostile takeovers no matter how much they are needed to root out bad managements.

Delaware law has also given a green light to staggered board elections, meaning only a minority of new board members can be elected in any one year. This protects the status quo on a board, no matter how inept the board and management is.

Obviously, the law should be clear that any legitimate offer for a company should be put to stockholder for a vote, whether the board likes the offer or not. But in Delaware it isn’t.

And there’s more. In Delaware, unless the purchase is approved by the incumbent board, a shareholder cannot buy more than 15 percent of a company’s shares without facing a barrage of restrictions on future transactions involving the company.

For instance, if you propose a transaction with the company, the board and two-thirds of shareholders must approve it, and your 15 percent-plus stake doesn’t count towards that vote. That’s about as anti-democratic as it gets.

Or how about this one? Delaware law allows for many “change of control” provisions that actually can hurt the company and only serve to protect entrenched managements. These provisions can impede an offer no matter how beneficial it is for shareholders. They simply serve to cast a chill over the M&A environment. In fact, Delaware allows just about every pro-management, anti-shareholder provision in existence today.

Thus it is no surprise that many managements, which currently have the sole right to determine where their company incorporates, choose Delaware - it is in their self-interest.

For our economy to recover from this downturn, we need corporations to be more accountable to shareholders, who own them. Through my new advocacy initiative, United Shareholders of America, I intend to push for new federal legislation that will give shareholders the right to move their company’s state of incorporation. I believe it is long overdue. But we need more people to join this cause by signing up on my website, Icahn Report. www.IcahnReport.com.

The right to redomicile a company may seem like an arcane corner of corporate law with little relevance to anyone outside of legal circles. But it has everything to do with how well companies are managed these days. And better management of companies would improve our entire economy and national well-being, particularly after the latest fiasco on Wall Street.

The capitalist system on which we all depend is best when it runs efficiently. And efficiency depends on companies having their assets managed to maximize their potential and profit, so profits can be redeployed to grow businesses. This is fundamental.

The net effect of these Delaware provisions is that they inhibit the natural processes of Darwinian corporate evolution, which culls out weak companies and favors managements that can make companies run more efficiently and profitably. Corporate takeovers, whether hostile or friendly, are often highly beneficial to shareholders and our common economic good.

An estimated 100 million citizens hold shares, either directly or indirectly. Shouldn’t they have more rights than corporate managements, which often own very few shares? Shouldn’t shareholders, the true owners of companies rather than the entrenched board, make the final decision to accept or reject a bona fide offer? It is not only unfair, but unconscionable.

Join United Shareholders of America. Our national well-being depends on making changes. We must show the government how we feel. Only with many people can we do this. It is only when we unite against corporate incompetence can we thrive as an economic nation.

• Before the Bust, These CEOs Took Money Off the Table – WSJ (subscription required)
• Financial Week reports that several directors sit on the boards of the two industries hit hardest by the economic downturn and seeking the most government aid.
• A U.S. Senate subcommittee is focusing in part on whether bond-ratings firms, driven by conflicts of interest, boosted mortgage investments which have since collapsed – WSJ via Dealbook
• Financials may need $1 trillion says Analyst – Reuters via New York Times
• Deutsche Bank may cut 900 jobs in London, New York – Bloomberg News
• Mitt Romney writes an editorial on the Big 3 - New York Times

• Big 3 CEOs flew private jets to ask for public funds. – ABC News
• US Chief Executives call for 3 billion dollar stimulus reports Dealbook
• Finlay on Governance questions 'What if Citigroup had a real board?'
• Social Devlopments points out that the National Association of Shareholder and Consumer Attorneys (NASCAT) urges Congress to allow for greater empowerment of shareholders to help police financial markets and corporate governance
• Dear John Thain on Seeking Alpha shows that the growth rate of the largest companies has outpaced our economy by 6% annually. Does this mean leaders were taking on too much risk?

• UBS reins in compensation for top executives reports Reuters
• The Charlotte Observer cites Goldman in recognizing pressure is growing for all bank executives to give up their bonuses
• Andrew Cuomo thinks execs at Citigroup should follow Goldman’s lead – New York Post
• How to Sharpen Banks’ Corporate Governance – The Financial Times
• The WSJ discusses United Shareholders of America over the weekend

Dylan Ratigan has established himself as a top financial anchor and reporter through his work on CNBC shows such as "On the Money" and "Closing Bell" as well as during his tenure at Bloomberg News, where he served as a Global Managing Editor and host of its "Morning Call" program. He is the anchor and co-creator of CNBC's "Fast Money"and the co-anchor of "The Call" and the 3 p.m. hour of the "Closing Bell."

By Dylan Ratigan

Warren Buffett recently urged us all to follow his lead in buying American stocks during this fear-driven down market, invoking his common sense wisdom of being greedy when others are fearful and being fearful when others are greedy.

While I appreciate and agree with Buffett that it may be a good time to invest in this great country's long-term future, I also think there is a lot the Warren Buffetts of the world can do right now to help ensure a prosperous future.

First, we need to take a realistic view of how we got into the current financial calamity.

Instead of creating a society that harnesses the powerful force of capitalism to benefit us all, which resulted in the development of light bulbs, automobiles and computers, we have created a system in which the spirit of innovation has been hijacked to find better ways to cheat society for personal gain.

We have to face the reality that regulators alone can never keep ahead of the cheaters. An unfortunate aspect of human nature is that some people will always try (and succeed) at "gaming" the system, no matter how prescient and attentive our regulators.

I believe the solution to the current and historical problems with capitalism is to enact two pieces of regulation.

First, we must never again allow any company to become "too big to fail." Companies, by their very nature, take risk. Because of the competitive nature of capitalism, there is no amount of regulation, transparency or prudence that can successfully prevent companies from occasionally failing. This is especially true of banks, which will always be tempted to increase profits by pushing the risk envelope and will always find ways to do so.

Just as traditional commercial bank regulators have the authority to curb an excessively risky bank, we need to enforce a limit on the size of non-bank financial entities. This measure could help stop the inevitable failures that cause the systemic failures for which we are all now paying.

Second, and the most pertinent to Mr. Buffett, is that we need to promote, not stamp out, short-selling. It is only through the use of the skeptical force of short selling that those who would seek to inflate their company’s value by hiding or manipulating information will be forced to provide transparency that regulations could never mandate.

The wonderful thing about a stronger system of upward and downward pressure is that it forces companies to be more accountable. And if there is anything lacking these days, it is accountability among managements.

So instead of an activist like Carl Icahn trying to take over the board of a company, he could simply raise a "short" fund to target companies that have loaded their boards with cronies and yes-men.

Or the next time Warren Buffett labels something like derivatives as "financial weapons of mass destruction," he could instead tell us which companies to bet against. This will force these companies to change their behavior more than any government regulation ever can.

There is a reason why CEOs who helped get us into this mess regularly blame short sellers for their failures.

It is because short selling forces CEOs to either disclose what they are doing or suffer consequences for their secrecy. But rather than admit to 40-1 leverage, they loudly stigmatize those who would dare to bet against their companies.

Unfortunately, merely choosing "not to buy a stock" is not enough to force this kind of necessary transparency, for there is always a "greater fool" down the road to buy it. We need to actively punish these companies and managers in our role as profit-minded investors.

In simplest terms, choosing not to buy a stock because you don't like the company is like refusing to be friends with a drunk. But shorting a stock is like sending a drunk into rehab. Many of these companies, drunk with money and neglectful of risk, should have been sent to rehab a long time ago.

Obviously, we can never again allow the system to become so vulnerable to inevitable future corporate failures. But just as obviously, we can also no longer trust government alone to catch the cheaters and liars that have bastardized American capitalism.

Let's apply the human nature that creates these problems to expose and punish them financially. We must no longer pay heed to disgraced CEOs who falsely claim that their downfall was caused by "those evil short sellers."

Let’s face it - sober people do not mistakenly end up in rehab because it is so easy to prove that they are sober. But when we discover they are regularly drunk at lunch, that's where we can send them.

I can think of no one better than Warren Buffett to be that kind of friend to both our country's companies and its citizens.

Nell Minow is the editor of The Corporate Library, an independent research firm specializing in corporate governance.

By Nell Minow

President Obama will come into office with very little time to head off a long-term economic downturn. The recent volatility we have seen shows that the need for better corporate governance has never been clearer or more pressing.

The 21st century’s version of "mutually assured destruction" does not require weapons; it is the global economy, one in which we all are now are inextricably intertwined.

Previous scandals – insider trading, the savings and loan abuses, accounting fraud, market-timing, backdated options, and more – could be compartmentalized, attributed to a few bad guys abusing the system.

But this latest mess is so pervasive and so – apparently – legal that it has called into question the most fundamental notions of trust in Wall Street and in the American economy. The impact of America’s sub-prime loan disaster is felt around the world just as economic crises in other markets affected us.

The new President will have to do a lot more than tweaking some rules and issuing some new lists of best practices and disclosure requirements.

And even a new administration will be limited in how far it can go in reminding corporate boards that good governance is more than simply compliance and check-lists. It is about transparency and accountability, but most of all it is about making sure we have board members who are committed to asking good questions and insisting on good answers.

If the transition team asked me for my to-do list for improving corporate governance, I would provide a combination of quick steps and long-term, more ambitious and far-reaching proposals including:

1. "Say on pay" - When an overwhelming majority in the House approved legislation to give shareholders the right to cast a non-binding vote on executive compensation, it was Senator Barack Obama who introduced it in the Senate. So we can expect administration support for getting it enacted promptly.

2. Race to the top: Shareholders should determine the state of incorporation, a more market-based approach that will encourage the states to protect shareholders, not management.

3. "Majority vote" – The law now permits a director to continue to serve without getting majority vote from shareholders if there is no dissident candidate. Nearly 30 directors currently serving on U.S. corporate boards did not get majority support from shareholders. One way to remind directors that they represent shareholders is to make it possible for shareholders to remove those who overpay executives and fail to manage risk.

4. Appointments – The Bush administration recently added new SEC commissioners, limiting the new President’s ability to change its direction. But it is the President who decides who will be SEC Chairman, and the Chairman has the greatest power in setting the agenda and making division-level appointments. There are also positions at Treasury that will be very influential. And it is important to remember that the Assistant Secretary of Labor - with responsibility for ERISA, which governs the largest group of equity investors - should be an expert in capital markets, not just benefits. The failure of ERISA funds to exercise share ownership rights as fiduciaries should be on the agenda for investigation and enhanced oversight.

5. Reorganization – Combine the SEC and CFTC and eliminate the "self-regulatory organizations" that continue to give the securities industry too much authority in regulation and enforcement. This antiquated structure has been out of date for decades and there is no remaining justification to continue it.

6. Corporate governance has to be reviewed from the "demand side" as well as the "supply side." It is not enough to focus on what boards and executives must do. We must also focus on what investors, especially institutional investors, must do. The US needs something along the lines of the UK’s Myners Report, putting the burden on institutional investors to explain why they are not doing more to demand action on issues like poorly performing boards.

The SEC must also stop blocking the "broker vote" rule to end automatic "for" votes on governance-related issues. ERISA funds and other private institutional investors should be required to disclose all of their proxy votes, their proxy policies, and report annually on their exercise of other ownership rights, including the filing of shareholder proposals, meeting with management, proposing director candidates, and litigation.

7. Regulatory policy – SEC rules almost always encourage a compliance-oriented approach and discourage innovation. We need a shift to a more flexible "comply or explain" approach that makes the rules the floor instead of the ceiling and encourages innovation. A fundamental, zero-based, 21st Century approach to all of securities regulation is long overdue. The SEC should also step up Chairman Cox’s efforts to use technology to make federal filings more user-friendly. There is enormous opportunity to use online technologies for bail-out related tasks, especially valuation.

8. Global coordination – As capital markets become seamless we need to work more closely with other developed and emerging markets to assure transparency and consistency.

These steps would do more than make important changes in removing obstacles to the shareholder oversight that is an essential element of our markets' efficiency and resilience. They would send a powerful message that corporate managers will no longer be able to game the system for their own benefit.

• Citigroup directors looking to replace their chairman – Reuters
• The Daily Telegraph reports Morgan Stanley will cut 10% of its investment bank staff
• The US Government is on the hook for $5 trillion due to the financial crisis writes Forbes
• Canadian Banks are faring quite well according to Time. Says Minister of Finance Jim Flaherty, "The credit crisis we're facing is the result of unbridled greed. We need to bridle greed."

• The Philadelphia Inquirer questions whether WHYY’s board is paying CEO Wiliam J. Marazzo too much
• South Carolina Gov. Mark Sanford asked federal authorities to investigate a more than $12 million payday for a bank CEO ahead of the bank’s application for bailout assistance – www.thestreet.com
• Syneron Medical issues a poison pill – AP News
• Dear John Thain lays out the reasons for the crisis – among them are flawed compensation models and management pressure.
• Activist Investors are Gaining Support – TheDeal.com

• Truck Trend Blog discusses executive compensation of the Detroit 3
• Treasury says AIG must comply with executive pay curbs reports Reuters
• US taxpayers say Wall Street bonuses should be zero according to Blogging Stocks
• Shareholders’ proposals should not be advisory writes Race to the Bottom

The U.S. Treasury is spending some $700 billion or more in taxpayer funds to bail out scores of financial institutions that helped get us into this credit mess.

Now it turns out that a large chunk of this money may be going for executive bonuses. Where is the justice?

Elected officials including New York State Attorney General Andrew Cuomo and Rep. Henry Waxman are right to demand answers from these institutions about their plans to spend taxpayer money for bonuses, particularly since the government has taken big equity stakes in many of them.

"Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them," said Cuomo in a press release.

I totally agree. These banks should not be allowed to soak up federal funds and use the money to pay out large bonuses to those executives who got their banks into trouble to begin with through risky and ill-advised strategies.

While bonuses are often viewed as part of Wall Street compensation packages, executives should not be entitled to them if it can be proved that strategies they promoted failed, particularly at a time when shareholders and employees suffered as a result. It is time for the boards of directors of these banks to take a harder line on these payments.

Boards have a responsibility to shareholders – not just to senior managers. Rather than allowing managements be paid huge bonuses, they should make senior managements accountable for their performances.

Targeting egregious executive compensation on Wall Street and elsewhere, such as at Fannie Mae, Freddie Mac and AIG, is long overdue. I hope that these measures lead to lasting changes in how compensation packages are designed. It is extremely detrimental to our economy when executives bail out of their companies with millions of dollars in payouts for failed leadership.

There is some evidence that the tide is turning against executives who soak up egregious sums of compensation from institutions that stumble.

From 2006 to 2008, the number of Fortune 100 companies that have disclosed clawback policies has increased, according to executive compensation firm Equilar. But still more needs to be done. Clawback policies generally allow companies to seize compensation in the event of a financial restatement or ethical misconduct, according to Equilar, an executive compensation firm.

These days, we have seen much evidence that the seeds for many financial firms' recent stumbles were sown years before. And in many cases, it could have been avoided with prudent risk management policies. For instance, the AIG Financial Products division for years had been writing insurance policies on mortgage backed securities, known as credit default swaps. But it was only recently that these bonds began defaulting, leading to colossal losses for AIG which required a government takeover of the firm, backed with $120 billion in taxpayer dollars.

Faced with a legal challenge from the New York State Attorney General, AIG agreed last month to freeze any payments to former CEO Martin Sullivan’s $19 million employment contract. The AG also froze any payments out of a $600 million deferred compensation and bonus pool to AIG's Financial Products unit, including payments to Joseph Cassano who headed the unit and whose share was about $69 million, Cuomo said in a press release.

Regulators also said they are blocking multi-million dollar payouts to the CEOs of both Fannie Mae and Freddie Mac.

But there is clearly more to be done. National City Corp., the giant Midwest bank that stumbled badly from investments in subprime mortgages over the last year, paid its former CEO David Daberko a total of $64.8 million from 1991 to 2007 in salary, benefits and stock option payouts, according to Equilar.

It was Daberko who presided over the bank's aggressive push into subprime mortgages over the last half-dozen years which ultimately caused millions of dollars in losses, virtually forcing its sale to PNC Financial for a fire sale price this month, according to news reports.

And according to a recent shareholder lawsuit, Kerry Killinger, the CEO of the failed banking giant Washington Mutual, received over $33 million in total compensation, including at least $7 million in bonuses from 2005 to 2007 at a time when the bank was pushing forward into subprime lending that ultimately caused its demise.

Killinger, who was ousted by WaMu just weeks before the bank was seized by regulators in September, was entitled to a cash severance bonus of $16.5 million as part of his contract, SEC filings show. Should he receive this bonus for leading a bank that lost tens of billions of dollars in shareholder value along with the loss of thousands of jobs?

It is obvious that clawback provisions should be mandatory for all executive contracts these days in light of these debacles. Why should shareholders pay bonuses to executives who drove their institutions off cliffs?

Through my new advocacy initiative, United Shareholders of America, I am working to change laws to make executives more accountable for their performance or lack thereof. But it is only when large numbers join this cause that we will be empowered to change laws in Washington and state capitals that favor managements over shareholders, who are the true owners of corporations.

I am asking that you sign up for the campaign on my blog, the Icahn Report, www.IcahnReport.com. Put your name in the top right corner and join United Shareholders of America. It costs you nothing and may produce the changes we so desperately need.