Back in December, Carl Icahn was featured on the cover of Time Magazine as the “most important investor in America.” Bleh. Really?
The Apple of his Eye
Much of the hubbub around Icahn these days centers on what he’s trying to do with Apple. Like any good scavenger, Icahn smelled vulnerability. In this case, it’s the flack Apple has received for sitting on a huge pile of overseas, un-repatriated cash that it wants to keep free from the reach of U.S. corporate taxes. It’s kind of embarrassing to Apple, so, in stepped Icahn with a great idea for what to do with that cash: why not give a big chunk of it to him?
Icahn has been having ‘polite‘ conversations with Tim Cook, to help Cook see that Apple “isn’t a bank” and that that cash really needs to be distributed as short-term gains to shareholders, either through increased dividends and/or stock buybacks that drive up share prices.
Essentially, what Icahn was proposing is that Apple load up on $150 billion in debt to do this. It’s almost like he was betting we’d all forgotten the 1980’s, Gordon Gecko, and all the damage this kind of massive debt did for similar raids on companies back then. Let’s be clear, Icahn and his imitators are calling themselves “shareholder activists” these days, but that’s really just a euphemism for what they really are: “corporate raiders.”
Well, Apple was definitely listening. Over the last few weeks, its management has embarked on a massive stock repurchase program. As a result, Icahn announced today that he’s now calling off the dogs.
This wasn’t your typical raid on some weak, stumbling firm. Apple’s arguably the most powerful brand in the world right now. It’s unclear whether the company would have repurchased all those shares so aggressively without the pressure from Icahn, but to me it seems unlikely.
So, yeah, I guess Icahn is “important,” but more in the way the word “cancer” is important when your doctor mentions it. He is an “icahnic” figure in this sense, but more because he so clearly represents what is wrong with American business right now: our worship of the myth of “shareholder primacy.”
Shareholder Primacy
Shareholder primacy sees a business as merely a piece of property; something that exists primarily to maximize returns for shareholders. In short, it says that firms exist to enable investors to extract wealth from business.
Don’t get me wrong. I know that investors are really important stakeholders in the long-term success of any business. But many of us have a mistaken understanding about investing in public companies.
Very, very little of the share purchases that happen around publicly-traded companies are actually real investments that go to the firm itself. Just one percent of what we call “investments” are actual investments that go into companies through things like Initial Public Offerings. The remaining 99% is aftermarket trades; you know, me selling my shares in Apple or whatever, and you buying them. If I sell them for more than I purchased them, I get a capital gain. But just to be clear, when you buy those shares from “me” through an exchange, none of that money goes to Apple.
It’s kind of like the market for new and used cars. The first time a car is sold, the money goes to Ford, but after that it just goes to the previous owner of the car. Ninety-nine percent of publicly traded shares fall into this “aftermarket” category.
Here’s the even more interesting part. Companies expend huge amounts of money just making these aftermarket shareholders happy through dividends and by growing share prices, if need be, by buying back the stock (as Apple just did). In 1998-1999, just as an example, sales of new stocks – i.e. actual, real investments in firms – were $83 billion. In contrast, dividends were $238 billion and stock buybacks were another $350 billion. So what that says is that in that year – which was not an atypical year, by the way – the outflow of money from publicly traded companies to investors was seven times larger than the inflow of money from investors to companies.
This is what shareholder primacy tells companies to do, and that’s exactly what they do.
Entitlement
“I think I inherited from my father a certain sense of outrage about people who believe themselves to be entitled.”
This is a line from Icahn straight out of the Time interview. You see, he’s trying to paint this picture of the fat cats running these corporations as entitled. Well, there’s truth there (and it has a lot to do with shareholders attempting to align CEO loyalties to shareholders – but that’s another story). The real story though, is that it’s Icahn who has a much more powerful sense of entitlement – the entitlement of shareholder primacy, the kind that says these companies are there for the primary purpose of making him even more rich than he already is.
To hear Icahn tell the story, he’s standing up for the little guys here! Yay. Here’s how he talks about his mission:
The Shareholders’ Square Table (SST) is a platform from which we can unite and fight for our rights as shareholders and steer towards the goal of real corporate democracy.
There are a lot of people who are responsible for building Apple’s huge pile of cash: its employees, its customers, its suppliers (many with notoriously awful work conditions), its distributors, its software partners and countless others. These are the stakeholders that actually built that massive stock of cash for Apple. And these are the people who will be there for the company, ensuring that it continues to succeed in the future.
Among this group of people who are important to Apple are its long-term investors. There are very real reasons why it’s important for a company to keep its stock price strong over time. But Carl Icahn is not one of those investors. He’s a raider. He’s in it for the short-term, the quick kill, and he doesn’t give a damn about what happens to the company and the people who rely on it, once his raid is done.
This man is an icon of what’s wrong with business in America. Seeing him celebrated on the cover of time when I was working out the other day was just too much for me to bear. Hence this post.
Apple, please don’t give in to this guy and what he represents. Continue to remain focused on the long-term in your strategy, and note that that inevitably entails taking good care of all your key stakeholders, not just the ones that threat to storm the castle.
References and Resources:
Stock market figures from The Divine Right of Capital: page 33.
“I Am Also An Apple Shareholder, And I Have Also Written A Letter To Tim Cook!“
More articles from me on shareholder primacy:
Let’s Expel Shareholder Primacy from Business School
The Business of Humanity
Regenerative Business
People who added insights on this topic when I first posted on it on Google+:
Antoine Carriere
Peter Strempel
Chris Seifert
Denis Wallez
Jesse Hollington
Sakari Maaranen
Alex Schleber
John Kellden
Gregory Esau
Bruce Marko
Among the insights added by this group are:
- the importance of shareholder voting rights;
- the point that “aftermarket” stock purchases, unlike cars, come with voting and dividend rights;
- highlighting the importance of share trading to the liquidity of shares, which is critical to enabling early investors to convert gains into earnings and diversify their holdings;
- a clarification that in Delaware law (which is critical because so many public companies are headquartered there), boards of directors do not have to be shareholders; and
- alternative models for boards of directors that mandate board positions for additional stakeholder groups.