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Carl Icahn, the Rabble-Rouser

By Brian Egger of

NEW YORK ( TheStreet) -- Last week, activist investor Carl Icahn brought his case against unresponsive corporate boards to the readership of The Wall Street Journal. In his op-ed, entitled, "Challenging the Imperial Boardroom", Icahn decries boards that ignore the results of shareholder votes, effect "poison pill" measures, or take other actions that ignore the wishes of stock owners.

He also cites a recent study by a Harvard professor, who concluded that activist shareholder interventions improve company operating performance. The author of that academic study analyzed 2,000 cases of activist intervention. Icahn, for his part, calls for legislative changes that would increase the accountability and responsiveness of chief executives and boards of directors.

Icahn wrote his piece in the wake of his abandonment of a campaign to block Michael Dell's buyout of Dell Inc. (DELL).

Icahn isn't the only activist investor who recently threw in the towel after a protracted boardroom battle. In late August, William Ackman, the head of Pershing Square Capital, sold his 18% stake in retailer J.C. Penney (JCP). Ackman had spent three years trying to effect change at Penney.

While Icahn's op-ed focuses on activist investing, the issues he raises have a storied history. Today's activists are, in many ways, kindred spirits of the corporate raiders and leveraged buyout artists of the 1980s. As large-stake investors, they grapple with what economists call "agency problems."

Agency problems persist because managers don't always act in the interests of shareholders. Organizations address these problems by empowering boards to act as shareholders' agents, ratifying and monitoring decisions made by corporate officers. In their seminal paper from 30 years ago, "Separation of Ownership and Control", economists Eugene Fama and Michael Jensen referred to corporate boards as "the top-level court of appeals of the internal agent market."

The LBO luminaries of the 1980s and activist investors of today have raised the common concern that corporate boards aren't always responsive to the wishes of shareholders -- or, more specifically, the interests of large institutional stockholders, who see themselves as acting in the best interests of all shareholders.

Struggles between investors and boards invariably lead some observers to question the legitimacy of the prevailing corporate board structure. A recent paper by the Federal Reserve Bank of New York includes a survey of several economic studies about the purpose and function of boards. The article asks a logical question: "If boards are so bad, why hasn't the market" improved or done away with them?"

The bank's study concludes, somewhat ambiguously, that there's no correlation between the composition of boards -- as measured by the number of inside and outside directors -- and corporate performance. It draws one conclusion with which Icahn would certainly agree: boards dominated by managers and their "affiliated blockholders" are more likely to resist hostile takeover bids.

Hand-wringing about the ineffectuality of boards will probably persist for years to come -- in part, because board members struggle with their own mixed incentives. They are motivated to build reputations as stewards of shareholders and monitors of management. However, they don't want to cause too much trouble for their CEOs, lest they jeopardize their own standing as well-compensated directors.

At the time of publication, the author did not own any of the stocks mentioned.

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This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Brian Egger is the founder, publisher and gaming and travel analyst of During the last twenty years, he has held positions of increasing responsibility as a gaming, lodging and travel analyst at Goldman Sachs, Donaldson Lufkin Jenrette, Credit Suisse, BMO Capital Markets and Topeka Capital Markets. He also served as Associate Director of Research at BMO and Director of Research at the Institutional Research Group. Brian has held four team positions, including two second-place rankings, in Institutional Investor's Gaming, Lodging and Leisure categories. He has also been recognized as a six-time Wall Street Journal "Best on the Street" analyst. Brian taught securities analysis to MBA students as an Adjunct Professor in the Finance department of Columbia Business School. He received a BSE from the Wharton School of the University of Pennsylvania and an MBA from the University of Chicago Booth School of Business.

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