Shareholders are NOT The Answer!

Recently, Carl C. Icahn (chairman of a publicly traded diversified holding company) wrote an opinion piece for the Wall Street Journal suggesting some changes that he feels are necessary to help revive the private sector of the economy. While it is clear that regulation change is coming, it is unclear to what extent and where exactly the change will be felt – it may be changes to credit rating agency regulation, securities regulation, etc. Icahn calls for a change to corporate governance rules, allowing the shareholders more rights to make decisions within the corporation. His initial proposal calls for enhanced rights for shareholders to elect new boards, submit proposals, and provide input for issues such as executive compensation. Further, he calls for Congress to limit management’s ability to remove these rights from shareholders. Mr. Icahn is clearly pointing blame to directors and officers of corporation for excessive risk taking and poor judgment in running businesses into the ground. His proposal would tighten up oversight of the board’s performance and would, in theory, produce more effective boards.

However, Icahn fails to address some problems that his proposal would create. For instance, allowing shareholders enhanced rights to make business decisions removes the expertise from the decision making – shareholders do not run the day-to-day operations of a business because they likely do not have the expertise that the elected board and hired officers do have. While each shareholder may feel a greater sense of freedom and ability to affect the corporation which he or she owns, the aggregate of attempted action by many shareholders may add up to be a major waste of corporate resources. Shifting the power to the passive investor shareholder does not seem to be the proper solution to the problems faced by the private sector.

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