Shareholders – Stand Up And Be Counted

carl_icahn_ebay_-_Google_SearchBy David Nelson, CFA

Once again corporate raider and white knight Carl Icahn has launched an attack on the status quo. His latest battle, which pits him against board members and  the management of eBay, shines a spotlight on a part of corporate America few get to see from the inside.

Perhaps Gordon Gekko said it best when he told Bud Fox; “Wake up pal; if you’re not inside you’re outside.”

In his letter to shareholders Carl claims that board members Marc Andreessen and Scott Cook have breached their fiduciary duty. He also had very harsh words for CEO John Donahue calling him “completely asleep…” In his letter, he questions why eBay sold Skype for less than what they paid, especially considering Mr. Andreessen is on record saying “Skype is the archetypal phenomenon: a breakthrough technology.” He asks; Did Mr. Andreessen share this strong view with Mr. Donahoe?

Carl points out that an investor group including Mr. Andreessen, preempted a planned IPO buying 70% of Skype for less than what eBay had paid to acquire it. He gives quotes from Mr. Andreessen suggesting he knew Microsoft (MSFT) would be a willing buyer at a significant premium.

marc_andreessen_-_Google_SearchThe letter continues accusing Mr. Andreessen of making investments in and actively advising five direct competitors to eBay (four of which are competitors of PayPal). He claims this occurred while he was privy to nonpublic eBay Board information. Carl’s Open Letter to eBay Stockholders

I’ll leave it to Carl and shareholders to determine the validity of these claims but if true it is another example of shareholder rights being trampled.

With Carl involved, eBay whose stock has struggled over the last year has a bid trying to breakout to a 52 week high. Merrill Lynch analyst Justin Post believes that with Icahn demanding a separation of eBay and PayPal, their fast growing payment solution, investors will start to appreciate eBay’s sum-of-the-parts valuation.

Business As Usual

For too long, Gekko’s statement above has been the norm. Once voted in, directors often seem more focused on keeping their job than actually fighting for shareholder rights. How many times do we need to see this movie before we wake up and do something about it?

In December, I wrote a series of articles describing egregious failure at the board level dealing with CEO compensation. When I wrote Freeport’s CEO Adkerson Gets the Gold & Shareholders Get the Shaft I pointed out how the board gave CEO Adkerson an early Christmas gift of $36 Million in the form of an up-front severance package.

In You’re Fired I talked about Occidental Petroleum’s (OXY) Ex-CEO & Chairman Ray Irani coming with his hand out looking for a severance package and received $14 Million. According to Bloomberg from 2001 to 2009 Irani received an annual compensation of $80 Million.


Increasingly a small subset of shareholders is pushing for reform. These investors are looking to force public companies to declassify their boards. Votes for directors in a classified board occur on a staggered basis. The entire board is never up for re-election at the same time and therefore becomes difficult for activist shareholders to gain enough seats to cause change or reform.

According to 8 Fortune 250 companies held votes to declassify their boards in 2013 and thereby removing the staggered voting structure. All but one, PACCAR (PCAR) received a majority vote. Since 2006 there has been significant gains with more than 3/4 of companies in the S&P 500 now declassified.

Independent Chairman

An even more important governance issue seems to be gaining steam. Last year, again according to 39 Fortune 250 companies held votes demanding an Independent Board Chairman. Too many CEO’s fill both roles with an obvious inherent conflict of interest. Even though the CEO doesn’t participate in the compensation committee it’s hard not to imagine there is an incestuous relationship, especially with CEO’s that have had a long tenure.

Progress here is still a struggle. According to Price Waterhouse Coopers LLP at the end of 2012 only 43% of S&P 500 companies had an independent chairman.

Activists on the March

Activist investing is clearly gaining steam. Whether its Carl going after the boards at Apple (AAPL) and eBay (EBAY) or Dan Loeb of Third Point pushing for changes at Sony (SNE), investors seem to be tagging along for the ride. According to an IRRC study in 2009 of 120 companies found shareholder returns were 19.1% to 16.6% higher than peers following a proxy contest.

Even this morning we see another headline in the Wall Street Journal discussing the battle shaping up at CommonWealth REIT (CWH), traditionally a sector where activists have had little success because of corporate charters that prevent any one investor from owning more than 10% of a company’s shares.


Just like your local elections, change happens when people show up. Having the right to vote is useless if you don’t exercise it. How many Americans lash out at their representatives both locally and nationally but fail to go to the polls to cast their ballots.

If investors don’t vote their shares then the burden falls completely on the institutional community. Even institutions drop the ball including yours truly. I intend to focus more closely on the mountains of proxies that come to our firm.

Remember, if you want change, you have to show up. Stand Up and Be Counted.