If you had told me in 2003 that HealthSouth Corp. (NYSE: HLS) would become a shining beacon of good corporate governance, I would have laughed.

That was when former chairman and CEO Richard Scrushy was charged with securities fraud by the SEC. In 2005, he was convicted of money laundering, extortion, obstruction of justice, racketeering, and bribery. Now he's wasting away in Club Fed -- a far fall for a CEO who was so narcissistic that he insisted that his portrait be hung in the lobby of every one of the rehab facilities his company operated.

Not so long ago, the formula for activist investing was simple: Buy a 5% stake and file a 13-D, blasting the company's management for its poor performance and excess compensation. Raise hell until they put the company up for sale and a private equity firm takes advantage of the company's low stock price. Then cash out, having made yourself and your fellow shareholders rich. What if the company headed into the toilet after it was taken private? Not your problem.

Those days are long gone. With the private equity business the quietest it's been in a long time, there are no third parties ready to scoop up bargain-priced stocks after activist shareholders push them to the auction block. Increasingly, activist shareholders are having to stick around for the long-term, pushing for improved corporate governance and better management as a way to increase returns.

With outrageous and undeserved pay packages gaining unprecedented attention at shareholder meetings this year, some activist investors are taking on one of the most egregious perks of the executive suite: "golden coffin" payments made to the estates of executives who die.

My favorite example is Nabors Industries (NYSE: NBR) which will have to pay the estate of 78-year old chairman an astounding $263 million if he kicks the bucket.

But today's Wall Street Journal reports (subscription required) that some activist investors and pension funds are taking on these death benefits this proxy season, with a pretty good argument: Paying executives large bonuses for dying is the polar opposite of pay-for-performance -- although a crass person might argue that General Motors (NYSE: GM) would be in much better shape had it paid CEO Richard Wagoner a couple hundred million to take a dirt nap a few years ago.

With stock prices plunging, many investors are mad as hell and they're not going to take it anymore.

Brad M. Barber, a professor of finance at the University of California, Davis, Graduate School of Management told (subscription required) The Wall Street Journal that hedge funds are sparring with management more because it "gives them someone else to blame for their misfortune."

Maybe that's part of it, but I don't think it's just a rationalization thing. The reality is that the vast majority of companies would likely benefit from a large activist hedge fund smacking people around and keeping things honest. Most public companies have seen their operational and stock price performance tumble over the past year but executive compensation hasn't budged. Corporate governance in America is essentially a joke and if a bear market brings about a renewed focus on managerial neglect and incompetence, that's a good thing.

It might well be that many fund managers are motivated by frustration at their declining performance and are lashing out at anyone who had anything to do with it but in many cases investors are victims of bad and self-serving management.

Shares of Dillard's (NYSE: DDS) rose 35% yesterday. But the occasion wasn't a buyout or a great earnings report. Instead it was the news that hedge funds Barington Capital Group LP and Clinton Group want CEO William Dillard II fired over the company's dismal performance.

You can read the investors' letter here -- it was attached to a 13-D filed with the SEC. A quick sample:

Despite the generous compensation that has been paid to Dillard family members, the performance of the company over the past ten years has been atrocious. . . . As significant shareholders of Dillard's, we therefore call upon you to work with the Board's Class A directors to IMMEDIATELY begin the process of looking for a new chief executive officer. We recommend that this new chief executive be someone with exceptional integrity and proven leadership and turnaround experience in the retail industry.

You can read the letter for more detail but the market's reaction tells you pretty much all you need to know. The stock was up 35% on the suggestion that the CEO be replaced -- on a day when the Dow was down more than 200 points. What else do you need?

Dillard's insiders bought a few shares of stock last week, perhaps in anticipation of this letter. But investors are likely to see through it: decades of under-performance are not undone by a few token insider buys.

When most investors are down on a stock they own, they get depressed and sell.

Not so for Carl Icahn. Since he first bought shares of Lions Gate Entertainment Corp. (NYSE: LGF) back in mid-2006, the stock has fallen from around $10 per share to the current price of just over $7. Now Icahn has doubled his stake in the film house to 9.2%. Lions Gate is best-known for hit movies including "Crash" and "Saw", along with TV shows such as "Weeds" and "Mad Men." Icahn may see tremendous value in the company's library of films.

Vice Chairman Michael Burns told (subscription required) The Wall Street Journal that "Mr. Icahn and Lions Gate seem to share a similar vision of the growing value of content as platforms increase delivery around the world."

It'll be interesting to see if Icahn gets active in this company. He has said that he views the company as underleveraged, but current market conditions may make it tough for the company to pursue some of Icahn's favorite value-creation strategies: borrowing money to buy back stock and/or pursuing a sale or merger.

The long-awaited blog of billionaire activist investor and sometime "corporate raider" Carl Icahn has gone live and the results are delightful. So far The Icahn Report has seven posts, none of which discuss his own holdings.

Much of what's on The Icahn Report will be familiar to anyone who has followed Icahn's grumblings about corporate governance in the past. Here's a great quote: "Poor corporate governance now threatens more than just potential shareholder value; it threatens this country's very economic survival."

The name of the post? "Corporate democracy is a myth."

The stuff on the site so far is classic Icahn -- nothing new, but a refreshing expose of corporate America nonetheless and talk you won't hear anywhere else. Normally talk about compensation gone wild is addressed as a populist issue, but Icahn discusses it the way it should be addressed: as a corporate governance issue.

If Icahn can keep up his blogging, the site could well become one of the most important financial blogs going. To learn more about the early part of Icahn's career, check out King Icahn -- one of the best out-of-print business books I've found.

I'd be thrilled to see future posts lashing out at management teams and directors at specific companies.

In a column that's supposed to pass for supportive of shareholder activists, breakingviews opines (subscription required) that "Despite their nature to overreach, many of these voices deserve to be heard by investors."

The piece doesn't really expand on their tendency to overreach, other than saying that Carl Icahn's push to remove YAHOO!, Inc. (NASDAQ: YHOO)'s entire board of directors "seems excessive", even though that board badly mishandled a takeover offer from Microsoft Corporation (NASDAQ: MSFT), resulting in a crumbling share price.

Is Icahn overzealous? Perhaps, but that's a matter of opinion. What isn't a matter of opinion is this: corporate executives and directors can have many motives. Good corporate governance aligns their interests with those of shareholders, but issues of job security, empire buildings, relationships, and emotional ties can often reign supreme over a commitment to shareholder value, especially when an executive owns a small chunk of stock and receive a large cash compensation package.

The New York Times Co. (NYSE: NYT) has agreed to give activist hedge funds Harbinger Capital Partners and Firebrand Partners control of seats on its board of directors. The funds own a 19% stake in the company, but that really doesn't matter. The New York Times Co. has a dual-class voting structure, so the Sulzberger family controls 10 directors while the outside shareholders elect 5. So Harbinger and Firebrand control 2 out of 15 directors and the maximum any shareholder could ever dream of electing is 5 out of 15 directors.

In a display of journalistic integrity, the New York Times itself admitted that this move is pretty much irrelevant, saying that "The new arrangement could make for some uncomfortable internal politics, but it is not clear that it will have any effect on the company's direction."

The company says, of course, that it looks forward to working with the new directors, who have pushed for asset sales and more aggressive investment in the internet.

But the problem is that having 2 seats on a 15-member board won't provide any additional leverage, as far as I can tell.

This quixotic activist campaign, however noble, is likely to result in a big fat nothing.

Shares of Nautilus (NYSE: NLS), the maker of the BowFlex and the StairMaster, have hit a 6-year low after the company reported another disappointing quarter last week. To make matters worse, Herb Greenberg wrote an interesting piece on the company, based on an interview with an analyst who claimed that the company was giving him the silent treatment after he downgraded the stock. So investors are left questioning the character of top executives, while the company's operational failures speak for themselves.

In steps Sherborne Investors, which reported a 19.9% stake in the company this morning. This is especially interesting because according to the firm's website: "Sherborne Investors is a 'turnaround' investment firm which targets publicly quoted European and US companies that have underperformed the market due to operational, rather than capital structure, issues. We develop a turnaround thesis, acquire a significant equity position, and then obtain a shareholder mandate to effect a change in board composition. Sherborne does not agitate for others to make changes; rather, we assume responsibility for directing or managing a turnaround for the benefit of all shareholders."

The shares are badly beaten down and the company is need of a turnaround. But there's no question that the core brands have a lot of value, and stock may be undervalued now that someone has arrived on the scene to shake things up.

While it's hard to imagine Peter Lynch tossing Dan Loeb-ian epithets at incompetent executives, there is evidence that mutual fund managers are waking up from their long slumber and joining hedge funds in the fight for stronger corporate governance. Increasingly, prominent funds are pushing for governance changes, mergers and sales, and changes in management.

According to the Wall Street Journal (registration required), the change is motivated by practical factors: increased media and regulatory scrutiny of corporate governance is casting an eye at mutual funds (who for years have not been proactive shareholders), and they are facing competition from hedge funds for investor dollars.

I'm thrilled to see mutual funds stepping up to the plate, and taking on their responsibilities to shareholders. For too long it seems, management teams have been insulated from the shareholders by the mutual funds that wouldn't do anything. As Carl Icahn has said, "With some exceptions, the wrong people are running U.S. companies. It's been that way for years, and it hasn't gotten much better." With increased spotlight on management at publicly traded companies, and the specter of activist hedge funds and less-lethargic mutual funds haunting the boardrooms of corporate America, maybe that will change.

Anyone who reads my posts on BloggingStocks knows that I have lot of respect and admiration for that much-maligned group of people known as activist hedge fund mangers. The other day, I discussed a recent study that indicates that these investors are good for small shareholders. This week's issue of Barron's features an interesting piece on Ralph Whitworth and his fund Relational Investors, who played a key role in the ousting of Robert Nardelli from the Home Depot Co. (NYSE:HD). (On a side note, it may not have been quite as tough as it sounds. A $210 million severance package? Boy, they sure showed Nardelli who's boss). The piece also featured a prescient quote from Adam Smith, the 18th century philosopher/economist best known for writing The Wealth of Nations:

"The trade of a joint stock company is always managed by a court of directors...It cannot well be expected that they would watch over it with same anxious vigilance with which the the partners in a private copartnery frequently watch over their own...Negligence and waste, therefore, must always prevail, more or less, in the management of the affairs of such a company."

There's nothing quite as exciting as a nasty dispute between a company's management and one of its largest shareholders. There's also no dispute between a company's management and one of its largest shareholders quite as exciting as a dispute between a company's management and hedge fund manager Dan Loeb.

Loeb has gained fame for his letters accusing management teams of incompetence using such language as "inexplicable insouciance" (Go ahead. You can look it up. I had to the first time, too.). In a letter to the directors of Nabi Pharmaceuticals last year, he wrote:

"You hide your heads in the nearest warm aperture in an apparent ostrich defense and ignore your shareholders."

In a letter to the (now former, thanks to Loeb) CEO of Star Gas Partners, Loeb wrote:

"It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites. The matter of repairing the mess you have created should be left to professional management and those that have an economic stake in the outcome. "

On February 16th, Loeb fired off a letter to the Chairman, President and CEO of Pogo Producing Company, Paul G. Van Wagenen. Loeb's fund Third Point LLC owns 7.9% of the company. Here are some of my favorite parts:

"Needless to say, we are disappointed by the results but not surprised--given the Company's sad history of failing to meet projections...Not only does Pogo allocate capital poorly, but it seems unable to operate within its stated budgets...Hiring Goldman, Sachs & Co. and TD Securities Inc. to help the Company explore strategic alternatives is a positive step, but we have no faith in the current board's ability to oversee such a process..."

Loeb ended the letter by saying that he intended to wage a proxy fight at the 2007 annual meeting. While most Wall Street insiders can only shake their heads and smile at Loeb's verbally abusive tactics, they certainly draw attention to his causes. The media spotlight that his beautifully-worded tirades draw to the performance of management leads many investors to Loeb's conclusion: These guys have got to go.

Loeb's penchant for verbal sparring does not end with the executive he targets. It also extends to those unfortunate enough to seek employment at his firm without playing by his rules. Take a look at some of the highlights of this gem of an email exchange. When a prospective hire declines Loeb's request for his "3 best current European ideas," things get interesting.

Loeb: "We find most Brits are a bit set in their ways and prefer to knock back a pint at the pub and go shooting on weekends rather than work hard. Lifestyle choices are important, and knowing one's limitations with respect to dealing in a competitive environment is too. That is Lesson One at my shop. It is good that we learned about this incompatibility early in the process, and I wish you all the best in your career in traditional fund management."

Lewis: I am half-American and half-French, and having spent more than half my life on this side of the pond I think I know a little something about how one conducts business in the U.K. and Europe.

Loeb: Well, you will have plenty of time to discuss your "place in society" with the other fellows at the club. I love the idea of a French/English unemployed guy, whose fund just blew up, telling me that I am going to fail.

At Third Point, like the financial markets in general, "one's place in society" does not matter at all. We are a bunch of scrappy guys from diverse backgrounds (Jewish, Muslim, Hindu etc.) who enjoy outwitting pompous asses, like yourself, in financial markets globally.

Your "inexplicable insouciance" and disrespect is fascinating; it must be a French/English aristocratic thing. I will be following your "career" with great interest.

I've always been amazed at how much grief activist investors get. Management teams often attack them as being interested in breaking up the company for a short-term profit at the expense of longer-term shareholders. But the thing is, an activist investors interests are almost always better aligned with those of investors than the management. The break-up or sale of the company (or whatever change the activist is pushing for) may hurt the wallet of the entrenched managers. He may have a vested interest in acting in ways that are not in the best interest of shareholders. But as an investor, the activist fund's interests are essentially exactly the same as the shareholders: they want a higher stock-price.

In Sunday's New York Times, investment newsletter guru Mark Hulbert wrote about a study conducted several academics called "Hedge Fund Activism, Corporate Governance, and Firm Performance." The results of the study are not surprising, to me anyway. According to study, stocks where activists are involved outperform the market by 7% on average over the 2 weeks leading up and the 2 weeks after the 13-D filing indicating ownership of greater than 5%. Furthermore, Hulbert writes that "In the year after that initial month of market-beating performance, the average target company's stock kept pace with the overall market. And over the subsequent two years, the professors also found, the operating performance of the target companies improved markedly."

So what is it managers are really running scared about?

Saturday's New York Times featured an excellent piece on the evolution, or lack thereof, of corporate raider turned activist investor Carl Icahn.

Ichan made his first fortune in the 1980's along with the other junk-bond fueled raiders where he went after companies like Texaco and TWA. In the last decade, he has reinvented himself as a more statesman-like activist investor, involving himself in companies like Imclone, Blockbuster, WCI Communities, Time Warner Inc. (NYSE:TWX) and, most recently, Motorola, Inc. (NYSE:MOT).

But has Icahn really changed? Some would argue that it is corporate America that has changed and that Ichan's tactics, once considered egregious and ungentlemanly, are now part of the landscape of the business world. Activist investors, some well-known and many not, routinely file 13-D's and attempt to shake things up at publicly-traded companies.

What's interesting is that Icahn's reputation as an opportunistic vulture/sith lord persists. Defending Carl Icahn is a lot like announcing that you're a Yanni fan: It's just not a very good way to make friends. But if Warren Buffett is the good cop advocate for strong corporate governance, Icahn is the bad cop. Managers who are not good stewards of shareholder value must live in fear of Icahn, or someone like him, filing a 13-D and putting an abrupt end to the party. Some of my favorite Carl Icahn quotes:

"With some exceptions, the wrong people are running U.S. companies. It's been that way for years, and it hasn't gotten much better."

"We have bloated bureaucracies in Corporate America. The root of the problem is the absence of real corporate democracy."

"Too often it's not the most creative guys or the smartest. Instead, it's the ones who are best at playing politics and soft-soaping their bosses. Boards don't like tough, abrasive guys."