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What's really going on with the Ralph Nader-Carl Icahn axis

Wednesday, 8 Jan 2014 | 11:49 AM ET
Ralph Nader
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Ralph Nader

You may have heard that Ralph Nader has called on Carl Icahn to help him resist the plan by Liberty Media to acquire the rest of Sirius XM.

It seems like a case of strange bedfellows. The famed consumer-advocate attempting to make common cause with the guy who was the original corporate raider. It even has some very smart people scratching their heads.

For example, here's Matt Levine of Bloomberg Views:

I do not understand the thing where Ralph Nader has now devoted himself to protecting the rights of shareholders. Are shareholders oppressed? I mean, sure, probably, but compared to what, y'know? The appeal of sticking up for shareholder rights is not usually that you're the only thing that stands in the way of widespread serfdom and immiseration for millions of people. Usually the appeal is that it makes you money. It makes Carl Icahn lots of money. Does it make Ralph Nader money? How?

It's easy to see why this is confusing.

Long ago, Nader was actually something of an opponent of shareholder supremacy. He was an advocate of the rights of "stakeholders" back when he wrote Taming the Corporate Giant in 1976. For the uninitiated, the term "stakeholders" generally refers to people other than shareholders who might have a "stake" in corporate decisions. Mostly workers but also local communities and even environmental activists.

So how did Nader go from stakeholder advocate to shareholder advocate? The answer is that the two positions aren't really that far from each other. What they have in common is that both are an attempt to rein in the primacy of corporate directors.

Under our current system—which is mostly one of director primacy—control of the corporation is primarily in the hands of the board of directors. The board, of course, is duty bound to maximize shareholder wealth.

But the decisions about how that is best done are typically in the hands of directors rather than subject to shareholder or stakeholder consent. (For more on the concept of director primacy, start with this paper by UCLA professor Stephen Bainbridge and then move on to just about everything else he's ever written.)

Most of the proposals that allegedly expand the rights of shareholders or stakeholders are aimed at curtailing the primacy of directors by requiring substantive or procedural deference to the judgments of those not on the board.

So in a stakeholder-rights regime, a board would have to consult its workers before approving an acquisition or a new corporate strategy. In a shareholder rights regime, boards would be required to poll owners of shares for important corporate decisions (we've recently moved in this direction when it comes the pay of chief executives).

Guys like Carl Icahn aren't necessarily big advocates of expanded legal rights for shareholders (although Icahn himself has endorsed "Say on Pay" measures). Often they're content to speak the language of shareholder primacy while actually seeking seats on corporate boards. Which is to say, the strategy is to employ the rhetoric of shareholder rights to gain power in a regime of director supremacy.

This dual strategy has become more pronounced over the years as the money managed by activist hedge funds has grown, allowing them to buy big stakes in more and more companies.

This isn't necessarily detrimental to other types of shareholders, including households and mutual funds. Although sometimes accused of pursuing short-term, quickie profits through financial engineering or asset sales, this isn't really the case.

It's actually pretty much impossible since share prices reflect discounted future earnings, which means that short-term gains that are long-term detrimental to a company tend to immediately reduce the share price—and therefore the gains of the activist investors. For the most part, guys like Icahn can only make money by making their fellow shareholders money, too.

(Read more: Welcome to the golden age of activist investors)

(A wonky nuance. Guys like Icahn tend to have very different portfolios from other shareholders. A diversified shareholder doesn't necessarily want a company to gain at the expense of others, since his portfolio just follows the broader market. Hedge fund guys, however, can reap rewards from corporate strategies that help one company at the expense of the rest of the market. So Icahn's interests aren't quite as aligned with the ordinary shareholder as they might appear to be.)

Ralph Nader represents a different sort of shareholder activist.

He is generally in favor of expanded legal rights for shareholders. One of the things these expanded rights do is transfer power to shareholders with the largest concentrations of shares who have the ability to extract gains that other shareholders cannot not.

The group that can do this best is pension funds. In particular, public pension funds controlled by municipal and state unions can extract labor concessions from corporate managers that don't improve the fortunes of disinterested shareholders. A union pension fund's interest is not necessarily the same as the other shareholders.

(Read more: Beware of pension fund activists)

Both types of shareholder activists, however, stand to gain from legal rules that expand shareholder rights through the very same mechanism—the ability to put pressure on boards and management to make the kind of changes they demand. The difference is that hedge fund activists make gains in ways that tend to benefit the other holders of the shares in the companies they target, while labor-related activists can make gains that only benefit labor.

Because both see their interest in curtailing corporate board primacy, we can expect to see more of these not-really-so-unlikely alliances in the future.

—By CNBC's John Carney. Follow him on Twitter @Carney

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