Carl Icahn opened a new battle in his ongoing war with eBay (NASDAQ:EBAY) last week with an open letter posted on Shareholders Squaretable. In the letter, the world's most successful activist investor opines that he views the upcoming annual meeting at eBay as a "watershed moment" for shareholders everywhere. Icahn argues that in order to create an optimal environment for investment in America's public companies, institutional investors need to "stand up" and hold eBay's board of directors accountable for blatant conflicts of interest and self-dealing. A persuasive appeal? Absolutely. Sincere? Maybe not.
In his opening salvo to eBay's board several weeks ago, he submitted a non-binding proposal for the company to spin off its PayPal electronic payment unit. As eBay's fastest-growing division, Icahn believes that PayPal will significantly benefit from a separate management team that will place the company in a position to pursue its significant growth potential.
Icahn is not alone in his opinion. As PayPal co-founder Elon Musk put it, "It's as if Target owned Visa or something…. It will either wither or be spun out."
An intertwined model
eBay's board, however, rejected Icahn's proposal. In its announcement of the decision, the board argued that payment "is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at global scale, creating value for consumers, merchants, and shareholders."
Icahn, who has a little more than 2% stake in eBay, wasn't of course expecting the board to simply roll over and accept his proposal.
So, he changed course and began a very public campaign to highlight the state of corporate governance at the Silicon Valley giant. In letters to eBay's shareholders, Icahn set forth his argument that through a series of actions and inactions, the company's board of directors have breached their fiduciary duties.
The Andreessen angle
At the crux of Icahn's corporate governance crusade is an alleged conflict of interest involving eBay director Marc Andreessen. An extraordinarily successful venture capitalist, Andreessen was a member of eBay's board when he purchased Skype from the company in 2009 as part of an investor group. The purchase was for $4.5 billion. Andreessen and the investor group then turned around 18 months later and sold Skype to Microsoft for $8.5 billion.
It is difficult to understand how any eBay shareholder could read Icahn's letters about the company's board of directors without demanding an immediate investigation by an independent auditor. Those letters lay out a compelling basis for Icahn's statement that he has "never seen worse corporate governance" -- a truly stunning admission when one considers just how many companies he has invested in over the years.
There is very little downside to such an investigation. Even if a culture of wrongdoing is uncovered, this is not an Enron-type situation where the company will cease to exist. Nor do I believe that this is a situation where an investigation will result in the devaluation of eBay's stock. eBay is a significant player in online commerce and is built on a solid foundation. Rather, an independent investigation will demonstrate whether the inappropriate actions of a few are potentially hampering the financial reward (both past and future) of many.
In Icahn we trust?
The problem, however, is that eBay's shareholders may be grappling with the same issue that I have ever since reading Icahn's latest missive. Just how sincere is he about the need for investors to "actively exercise their voting rights" with the companies in which they invest? After all, Icahn's letter comes just a week after he extended his version of an olive branch to eBay's board. Following weeks of railing against the board, Icahn proposed that the company spin off 20% of PayPal through an initial public offering. What happened to the claims of breached fiduciary duties, failed leadership, and inherent conflicts of interest?
eBay almost immediately rejected Icahn's new proposal. And now, his "watershed moment" letter, which leads to the question of whether Icahn would still be pressing to hold eBay's board accountable if the company had accepted his 20% spin-off proposal. Is this corporate governance crusade nothing more than a part of an overall strategy by Icahn to try and increase the short-term value of his holdings in eBay?
With Icahn's motives now in question, the burden falls upon eBay's other shareholders, whose interests in eBay are likely more long-term, to carry the flag for good governance. This is particularly disappointing when considering that Icahn is one of the few individuals who has a forum and the financial power to truly elevate the standard of corporate governance in America.
Regardless, if eBay's annual meeting comes and goes without any widespread support among shareholders for an investigation – particularly with respect to the Skype transaction, it will signal a substantial problem. Simply put, shareholders can't afford apathy when it comes to corporate governance. The long-term value of their holdings depend upon transparency and accountability from the highest levels of the corporations in which they invest.