Wealthy predators are playing stock market games with companies needed to develop and produce clean technology
Lynn Parramore is Senior Research Analyst at the Institute for New Economic Thinking.
Cross-posted from the website of Institute for New Economic Thinking
Think the government should do more to deal with climate change? You’re not alone – so do most Americans, according to a 2020 Pew poll.
With Biden in the White House and Democrats controlling Congress, plans to get moving on some form of a Green New Deal could finally emerge. The Texas blackout heightened the sense of urgency, and everybody’s talking about upgrading the power grid, renewable energy, and what it will take to have a greener, cleaner future. Meanwhile, the climate change-denying political right is determined to crush any proposals before they have a chance.
Here’s what you might not know: Players on Wall Street have been torpedoing our chances of averting environmental catastrophe for years. A group of billionaire financiers has made sure the companies the government must partner with to fight climate change are focused on one thing only – making these men (they all seem to be men) even richer. Instead of leading the world in climate change technology, firms like Apple, GE, and Intel have been pressured to become the personal piggy banks of powerful moneymen—known as hedge fund activists—who can’t see beyond the next quarterly report.
These guys are blocking their fellow Americans from the chance to leave their kids a safe, sustainable world. That world will never materialize unless we understand what they are doing and stop them. Let’s dive in.
Games hedge funds play
You may have heard the term “activist shareholders.” These are people, usually hedge fund managers, who buy shares of a public company’s stock and then demand that the company do whatever it takes to jack up their stock price. The hedge fund then quickly sells out—a move called “pump and dump.”
People who did this used to be called “corporate raiders.” They took over companies, fired people, played stock market games to swell the stock price, made a quick buck, and then split. Remember Gordon Gekko from Oliver Stone’s movie, “Wall Street”? The main difference between the Lizard of Wall Street and today’s hedge fund activist is that Gekko wasn’t shy about his motives: “Greed is good.” What has changed is that today’s raiders don’t typically gain control over target companies before they put the squeeze on. Instead, they make company execs do the squeezing or, when that doesn’t work, fire them and replace them with ones that will.
The playbook of today’s hedge fund activists looks like this: Buy a wad of shares of a company on the stock market. Then, line up the proxy votes of the managers of funds who let have hedgies manage pieces of their portfolio. Next, send a letter to the CEO of a target company demanding that he or she get busy pumping up the stock price. Hedge funds with deep pockets will spend millions making this happen – remember, their money comes from rich people or institutional investors like pensions and mutual funds who are seeking high yields. Occasionally hedgies will use their own money – those whose “war chests” have come from previous raids.
Activists will also fight proxy battles, launch publicity campaigns, or litigate to get a company to do their bidding. Some shout about what they’re up to, others whisper behind the scenes. A lot of them talk about making the company more honest and accountable and so on, but this is mostly a smokescreen. Their influence always ends up pushing companies to gin up short-term profits by any means necessary – like laying off workers or diverting money from research and development in order to – you guessed it! – jack up the stock price and make them richer.
Carl Icahn, the infamous corporate raider of the ‘80s, pioneered this aggressive approach to “unlocking shareholder value” from companies he targeted. In plain English, this means figuring out how to rip money out of a company so that you can buy a superyacht.
Today, the number of activist campaigns has exploded: In 2019, they set a record in the number of companies targeted. As the Harvard Law School Forum on Corporate Governance put it, “No company is too large, too popular, too new or too successful” to fall prey to these predatory financiers.
What does this have to do with fighting climate change? A lot, it turns out.
The government can’t just snap its fingers and make batteries for electric cars, renewable energy storage, and advanced computer chips (needed for everything). It has to partner with companies that have the deep know-how and the substantial resources to develop these complicated and cutting-edge technologies. The government looks to collaborate with companies that are the very best at what they do and will even subsidize them for the long-term goal of saving us from climate disaster. Economist Matt Hopkins, who studies business corporations, stresses that as a taxpayer, you are asked to support such companies not only in the form of direct subsidies, but also indirectly through government-supported research. Not to mention all sorts of tax credits that drive nascent markets for clean technologies.
“The government supports all the industries in the clean tech space, one way or another, to the tune of billions,” Hopkins notes.
The problem is, activists usually aren’t interested in companies being the best at what they do, or doing anything, really, except handing over money to shareholders. A favorite tactic is to force companies to use their cash, or even borrow it, to buy back outstanding shares of their own stock. This neat Wall Street trick reduces the total number of shares available, so it boosts the value of the shares that remain. Presto! The hedgies holding the shares have just made easy money because their shares are now worth more and can be sold at a hefty gain.
Economist William Lazonick, who has written extensively on how businesses do business, explains that this becomes a big problem when we need innovative companies to make stuff we all need. “Companies grow and do things like create new technology, not because of stock market games,” he explains, “but because they develop their capabilities and invest in their people. And they can’t do this when hedge fund managers are calling all the shots and telling them to direct all the profits to shareholders.”
Unfortunately, in the U.S., there is a widespread and very stupid idea — no less a person than Jack Welch, the former head of GE, called it “the dumbest idea in the world” — that it’s ok for people who do nothing but buy and sell shares of a company’s stock to boss it around and pocket all its profits. It really makes no sense, but it permeates American business schools.
As you will see, the shareholder value ideology is wreaking havoc on our climate future.
Let’s look at how companies that could help us fight climate change have been attacked by activist investors.
Carl Icahn and a rotting Apple
In 2013, Carl Icahn, one of the wealthiest men in America, started buying up Apple stock. Soon, he became one of the company’s biggest individual shareholders, owning one percent of Apple’s outstanding shares. Now, one percent is a lot of money in dollar terms — Icahn paid $3.6 billion for his Apple stake. But why should he get to order Apple around just for buying and selling shares? Yet, that’s just what Icahn did. The Wall Street honcho used his public platform to convince other people to buy shares, thereby pumping up the stock price, and he pressured the company to get busy doing stock buybacks through his letters and prolific tweets.
Lazonick explains that Icahn’s goal was to pump up Apple’s stock price to double its value, and then dump it. He would force Apple to use its billions in profits to enrich shareholders through massive stock buybacks instead of using them to invest in our renewable future. Icahn hoped that Apple would make a fortune on watches — and today it does a decent business in wearables — but he wasn’t interested in other business opportunities, like, say, software to drive renewable energy smart grids or even electric vehicles.
As Lazonick put it in a letter to Apple CEO Tim Cook, “It’s a travesty for Apple to throw away tens of billions of dollars on buybacks when it has the knowledge and power to contribute to the solution of a plethora of social ills.”
On October 1, 2013, Icahn tweeted: “Had a cordial dinner with Tim last night. We pushed hard for a 150 billion buyback…”
When you’re a multibillionaire, this works: Cook did the largest buybacks in history in 2014 and 2015. Then, in 2016, Icahn took the money he had extracted— $2 billion to be precise — and ran, leaving Cook with an Apple in danger of rotting.
Lazonick points out that given Apple’s capabilities, it should be “right in the thick” of any Green New Deal that might be on the table, noting that Steve Jobs had once talked about leading the world on initiatives like electric vehicles. “Apple could be doing that right now, making electric cars, making batteries and all kinds of things critical to fighting climate change,” says Lazonick. “It has tremendous capabilities, it’s still hugely profitable, and its products are used and loved by millions of people.”
Instead, the company is sidelined in the climate challenge. Lazonick points out that since 2013, Apple has done over $400 billion in stock buybacks—a staggering sum that is unprecedented. As Icahn was bailing out of Apple in the winter of 2016, multibillionaire Warren Buffett was using Berkshire Hathaway money to eventually purchase $36 billion in Apple’s outstanding stock. Buffet has been cheerleading Apple’s record-setting buybacks ever since.
For his part, Icahn went on to buy a couple of Trump casinos, donate tons of money to the Donald and even served as an economic advisor to the former president.
But wait, isn’t there anybody who could push the company in a better direction? Al Gore, Mr. Climate himself, joined Apple’s board in 2003, just a few years before he released his famous documentary, “An Inconvenient Truth.”
In Lazonick’s view, the man you would expect to be a champion of Apple’s forays into green technology has become part of the problem: “He has overseen the looting of Apple to the tune of $403 billion in buybacks since 2013 (on top of more than $100 billion in dividends) without a public word of dissent. He is one of only seven people on Apple’s board, but shareholders like Icahn and Buffett, who have not invested a penny in Apple’s productive capabilities, are, apparently, still telling Tim Cook what to do. Board members fear that if they object to things like stock buybacks to prop up the stock prices, then the hedge fund activists will unleash a giant proxy war and kick them out.”
So, rather than a leader on climate change, Apple is a laggard. As Greg Petro of Forbes noted, the company just isn’t innovative at its core anymore. Thanks, Carl Icahn! And you, too, Warren Buffett! (And can we hear from you, Al Gore?)
Nelson Peltz ushers in dark ages at GE
General Electric has been around since Edison set up his lab in Menlo Park, New Jersey in 1876.
Today, the long-admired company produces electric power systems, jet engines, and most of the wind turbines in the U.S. “There’s really no other company like it when it comes to the capacity and potential to produce renewable energy technology,” notes Lazonick.
It ought to be a no-brainer that this iconic firm would be a leader on climate change, and not so long ago, it appeared to be headed in that direction.
Then, Nelson Peltz came along.
The name Nelson Peltz may not be as familiar as that of Carl Icahn, but he’s a big wheel on Wall Street. Peltz is the billionaire founder of the investment firm Trian Partners, known for a lifestyle so opulent that he owns not one but two private jets and a mansion (one of several) with an indoor hockey rink. And some albino peacocks.
At Wendy’s, where Peltz owns 12.4 percent of the shares, he has profited from not only paying low wages to Wendy’s direct fast-food employees but also by screwing farmworkers out of decent wages and subjecting them to unsafe conditions. Peltz, a big fan of nepotism, is the board chair at Wendy’s and has also given his son Matthew a seat on the board. He is also a loyal supporter and lavish funder of his friend, Donald Trump.
In 2015, Trian took a $2.4 billion stock position in GE—equal to about 0.09% of GE’s outstanding stock. GE had a long history of being shareholder orientated. Besides ample dividends, it was among the largest repurchasers of its own stock in the two decades before Peltz bought his stake. Nevertheless, at the same time, longstanding CEO Jeffrey Immelt was keen on investing in technology and renewables that would pay off in the future. He had actually invited Peltz to support these and other plans for GE as a shareholder.
But Peltz didn’t want to wait around. So, he pressured Immelt to cut expenses, hit more ambitious earnings targets, and do even bigger stock buybacks. In 2016, GE did $22 billion in buybacks, “all for the purpose of boosting the stock price so Nelson Peltz could achieve his goal of doubling his money when he was ready to sell his shares,” Lazonick observes. GE also continued to increase its dividend payouts.
Unfortunately, GE could not sustain these distributions to shareholders and invest in its businesses at the same time. “The stock price went into the toilet,” explains Lazonick. “Peltz has lost a lot of money and has helped destroy the company, or at least set it back in terms of its ability to invest in the technologies of the future.”
In 2017, Trian orchestrated the ouster of Immelt, replacing him with John Flannery, a veteran GE finance guy, in August. In October, Peltz installed a son-in-law, Ed Garden, on GE’s board. When Flannery could not engineer a stock-price recovery, he was fired, too, replaced in October 2018 by Larry Culp, who remains GE’s CEO.
Today, GE is struggling to stay alive and is selling off pieces of itself instead of investing in climate change-fighting batteries or other renewable-energy technologies.
“GE had the best researchers and the ability to hire the best employees, but has missed windows of opportunity to be a leader in fighting climate change,” says Lazonick. “All because a guy with a lot of money — in this case, money from pension funds, endowments and wealthy investors — was allowed to tell it what to do.”
Dan Loeb chips away at Intel
The Intel corporation, situated in Santa Clara, California, designs and manufactures semiconductor chips. You need semiconductors for just about anything — especially anything connected to clean technology. A sustainable future requires more efficient computing systems to manage sophisticated clean energy grids and reduce power consumption while doing it.
The Taiwanese are the leaders in the highly capital intensive and technologically dynamic fabrication segment of the semiconductor industry. Besides its leadership in the design of processors, Intel was the pioneer in chip fabrication and remains one of the few companies in the world that manufactures the chips that it also designs.
So far, the company has been profitable, but its costs a ton to manufacture chips, so Intel has been making capital investments of $15 billion per year and rising, trying to stay at the technological forefront of chip fabrication. But it’s no longer a leader in this area, perhaps because its senior executives have been distracted. Besides its huge investments in chip fabs, Intel also did $11 billion in buybacks in 2018 and $15 billion in 2019, trying to keep the activist predators at bay. When it determined to use a large portion of its cash to upgrade its fabrication capabilities, the hedgies complained of “waste.” They wanted more buybacks.
Enter billionaire Daniel Loeb. Loeb is the founder and chief executive of Third Point, a New York-based hedge fund. He’s quite a character, fancying himself a literary man and writing scathing letters to CEOs, presumably in between his Transcendental Meditation sessions (TM is beloved by Wall Street, perhaps because it is a very expensive way to learn to say a mantra). He’s also a big art collector, having become smitten in college upon beholding Poussin’s “Rape of the Sabine Women.” His great-aunt invented the Barbie doll and ran Mattel until she was convicted of securities fraud. Whoops!
In 2020, Dan Loeb set his sights on Intel, purchasing a bit less than half a percent of the company’s total shares through Third Point. Then he started pushing for changes at the chip giant, sending a nastygram to Intel Chairman Omar Ishrak. Loeb urged the company to split off its chip manufacturing operations from its chip design, despite the fact that Intel’s roots in making chips instead of outsourcing them had made it stand out from rivals. This move, the Wall Street Journal noted, “would end Intel’s long-held status as America’s leading integrated semiconductor maker.”
Right now there is a global chip shortage, and Intel’s chips are sorely needed in myriad products. But Loeb is also pushing Intel to do more buybacks—it did $14.2 billion in 2020 along with $5.6 billion in dividends, absorbing 92% of Intel’s net income. Intel could potentially receive subsidies from the Biden administration it had asked for in order to keep fabricating chips. But you can’t do escalating buybacks and invest in cutting-edge chip manufacturing at the same time.
So, Intel may lose its chance, all for the sake of Loeb wanting it to play Wall Street casino games and maybe buy another waterfront home.
In 2017, after Trump was elected president, Loeb cheered him for reviving activist investing.
Lazonick thinks this story could end in Intel being bought by a Taiwanese company—quite possibly the world leader TSMC. “This has huge geopolitical implications,” he warns. “Do you really want Taiwan having almost complete control of the U.S.’s computer chip supply?”
Bottom line: Whether it’s Apple, GE, or Intel, or any other number of companies, that could potentially be mobilized for a Green New Deal, they can’t do it while being held hostage by hedge fund activists looking for quick and easy money. Because they are irreplaceable in their capacities, knowledge-base, and talent, it means that the U.S. is severely hampered from being a climate change leader on the world stage.
“Predators like Carl Icahn, Nelson Peltz, and Daniel Loeb are the new Koch brothers,” says Lazonick. “By holding these companies hostage, they are scuttling the opportunity for a Green New Deal. They are playing manipulative Wall Street games with our future.”
What to do?
Now that we understand the activist predator problem, what is the solution? Meaningful plans to fight climate change require money – though they cost less in terms of resources and human misery than what’s coming if we don’t act. Nevertheless, as taxpayers we want our money spent wisely. If a company is going to get special status and funding in a Green New Deal, then we’d rather not see our hard-earned cash ending up funding a party for Donald Trump or exotic birds for Nelson Peltz.
Lazonick recommends that if the government wants to partner with a company to develop and produce climate change-fighting technology, the following rules should apply:
1. Ban stock buybacks: Prohibit large corporations from buying their own stock through open market repurchases. Buybacks are just a manipulation of the stock market.
2. Limit the hedge fund activists: Don’t let hedgies control proxy votes of the company that enable them to threaten top executives, even though they only hold a small fraction of the company’s shares. (For more on this, see Lazonick’s book, Predatory Value Extraction, co-authored with Jang-Sup Shin).
3. Protect U.S. taxpayers and workers: Place stakeholder representatives on corporate boards.
4. Change incentives for company insiders: Reward senior executives for building up capabilities and new technologies and training employees rather than playing stock market games.
5. Set up oversight procedures: Scrutinize companies so that you know subsidies are going into actual productive investments rather than into the pockets of corporate executives and hedge fund activists.
America can have a Green New Deal. But first we have to free corporations from the predations of hedge fund activists who are mainly interested in the kind of green that fills their pockets.
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