The North Dakota Bonus

Carl Icahn, the billionaire corporate financier -- and sometime corporate take-over specialist -- has an op-ed in today's New York Times that points out "shareholder control" of public corporations is largely a myth. ["We're Not the Boss of A.I.G."]

"Under American corporate law," he writes, "share ownership does not count for much." That's why, he argues, lousy executives get showered with out-of-whack corporate salaries, perks, and bonuses like these and these and these, to take three of the latest examples.

The fact is, prevailing state laws almost everywhere -- except for North Dakota, it seems -- practically guarantee that corporations will be run like a banana republic, no matter who holds the shares:

The legal landscape is filled with devices designed by state legislators and courts to prevent shareholders from influencing how companies are run and so allow management free rein. Legal mechanisms known as poison pills, permitted under the laws of most states, effectively prohibit shareholders from accumulating a large position in a company or working with other large shareholders to influence the company.

Furthermore, public corporations may legally adopt a staggered board, whereby board members are grouped into classes, with each one representing about a third of the total number of directors, so that only one class comes up for election in a year.

This means that seriously shaking up a board would require at least two very expensive proxy contests over two years. And current state laws permit incumbent board members access to the corporate treasury, allowing them to spend millions of dollars, to hire lawyers and public relations firms, run ads and mail materials to prevent shareholders from adding their designees to the board of directors.

Long-standing special federal tax breaks and a willfully toothless SEC also tilt the field decidedly in favor of greedy execs and their hand-picked pals on the board.

To be sure, Icahn has a large personal interest in taking out some corporate executives. Nevertheless, we like his proposals to "re-enfranchise" shareholders by permitting "proxy access" and "say on pay."

At bottom, they are only small-d democratic reforms. By themselves, they don't eliminate executive avarice or erase the incestuous relationships that predictably grow up between board members and executives; no more so than democracy itself ensures our political leaders will be bright and honest.

But, as Eric Johnson pointed out recently, often it is enough to have "the risk of being fired by shareholders" on the minds of CEOs and board members. What's more, if corporate executives and their board member buddies keep compensation within reasonable limits, their real bonus could be they don't have to move to North Dakota.