Greenbackd

Carl Icahn contributed an article to the Wall Street Journal on President Obama’s plan to limit executive pay to $500,000 a year plus restricted stock for institutions that receive government funding. Icahn argues that while the response is “understandable,” the salary cap fails to address the root cause 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.

Icahn goes on to explain that the problem is that boards and managements are entrenched by state laws and court decisions that “insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.” He proposes a federal law that allows shareholders to vote by simple majority to migrate the company from its state of incorporation to more shareholder-friendly states. This power is currently vested in boards and management:

This move would not be a panacea for all our economic problems. But it would be a step forward, eliminating the stranglehold 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 loath 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.

It’s vintage Icahn to suggest such a simple yet effective, market-based solution.