They swoop in with big stakes in major companies, demanding change. But are they good for the economy?
The news today is that so-called activist investor Nelson Peltz lost his proxy fight to install himself on the board of Procter & Gamble and force shattering changes on one of America’s most iconic companies. It’s close, and he refuses to concede, so the battle is far from over.
According to The Wall Street Journal, Peltz, whose Trian Management Fund has accumulated a large stake in the consumer products company, “has argued the company needs to streamline its operations and bring in outside talent.”
That’s code for killing product lines, siphoning cash from such activities as marketing and R&D to shareholders, and, most of all, cutting jobs. General Electric, which just caved to Peltz, will find this out the hard way (or its workers will).
When people debate the rise of inequality in America and the loss of good jobs, many factors are blamed. Among them: Mergers and industry consolidation, loss of a progressive taxation system, globalization and financialization. And all those have played a role.
But the cult of the activist investor often gets a pass. Yet since the 1980s, especially, they have been responsible for the loss of companies and jobs while increasing concentration of wealth at the top. They come in many flavors, from ’80s raiders and “rip, strip and flip” vandals — often saddling the remaining company with fatal debt — to more respectable private equity. They gained cultural status with the character Gordon Gekko in the film Wall Street.
But the goal is almost always the same: Raise the stock price at any cost, short-term gains, cut jobs. The P&G proxy fight alone cost $60 million that won’t go to jobs, research or other productive avenues.
Among the most destructive of these ‘activists’ is Carl Icahn, who famously savaged TWA in the 1980s and served for a time as special adviser to President Trump. He resigned ahead of a New Yorker article detailing his many conflicts of interest. Still, it’s telling that Trump’s idea of sound economic advice is to listen to Carl Icahn. Certainly that’s not what the struggling white working class wanted. It also shows how these players have become so powerful in the economy. Are they good for the national interest? Only if you’re rich and want to be richer still.
P&G is an unusual case, deeply rooted in its headquarters city of Cincinnati and with an unusual percentage of both local and individual shareholders. If it survives, this will make the difference. CEO David Taylor said the company was already on a turnaround (all this is aimed at the stock price, not, say hiring people or serving customers). “We’re willing to change anything except our core purpose, values and principles,” he said. How Cincinnati, where in the 1980s Kroger’s then-CEO Lyle Everingham rebuffed a feared corporate raider by refusing to take his calls.
Don’t be smug, Seattle. Activist investors could be coming for our crown jewels, too. Nordstrom comes to mind. But that’s a different column.
Today’s Econ Haiku:
Who will head the Fed?
If it’s one of Don’s cronies
Invest in prayer beads