It's Up to the Shareholders, Not the Government, to Demand Change at a Company

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.

Mr. Icahn is chairman of Icahn Enterprises, a publicly traded diversified holding company.