JAMIE DIMON wanted to be President Trump’s Treasury secretary, according to several sources. But billionaire investor Carl Icahn preferred Steven Mnuchin for the job. Mnuchin got it. How did Icahn get his pick?
Icahn endorsed Trump for president in September 2015, barely three months after Trump announced his candidacy and long before he was considered a serious contender. “He’s the only candidate that speaks out about the country’s problems,” Icahn explained at the time. “He’s sending a message to the middle class that’s getting through. How do you justify a mediocre CEO making $42 million while the guy really doing the work makes $50,000? There’s no justification in a free society. In feudal times or czarist Russia you’d kill someone who tried to unseat you. Here all you have to do is vote. I don’t know why anybody wouldn’t vote for someone with that message.”
Icahn’s net worth was then $16.8 billion. Three years later, after Trump’s tax cut and regulatory rollbacks, Icahn’s net worth was $18.4 billion. One might well ask whether there’s any justification for this in a free society.
Like Trump, Icahn can sound like a tribune of the people even though he has spent most of his career shafting people. A reporter once asked him why he kept making money when he already had more than he could ever spend. “It’s a way of keeping score,” he said. In King Icahn, a 1993 biography, author Mark Stevens describes Icahn as a “germophobic, detached, relatively loveless man,” and quotes one contemporary saying, “Carl’s dream in life is to have the only fire truck in town. Then when your house is in flames, he can hold you up for every penny you have.” Isaac Perlmutter, the CEO of Marvel Comics and a veteran of the Israeli Army, likened dealing with Icahn to negotiating with terrorists.
Also like Trump, Icahn came to prominence in the roaring 1980s. As America’s preeminent corporate raider, he was part of the inspiration for the character Gordon Gekko in the 1987 film Wall Street. When Oliver Stone was researching the film, he visited Icahn and borrowed one of Icahn’s observations for the Gekko character: “If you need a friend, get a dog.” (Icahn borrowed the phrase from Harry Truman’s description of life in Washington. It’s unclear whether Icahn also supplied the most memorable line in the film: “Greed, for lack of a better word, is good. Greed is right. Greed works.”)
One of Icahn’s other specialties has been investing in distressed debt, and Donald Trump has been among America’s most distressed debtors. By the time Trump’s infamous Taj Mahal gambling casino on the New Jersey shore opened in the early 1990s, it was already deep in the red. Icahn bailed out Trump by purchasing its outstanding bonds at a steep discount.
It’s no surprise that the ruthless corporate raider and ruthless real-estate developer were attracted to one another. Within days of his election, Trump asked Icahn to help him staff major government agencies. Once installed in the White House, Trump named Icahn his “special adviser” on regulatory issues. Icahn was assured he didn’t have to divest any of his financial holdings, and he had no qualms about telling Trump to take actions that benefited his own companies—like rolling back environmental regulations affecting CVR Energy, an independent oil refinery in which Icahn held an 82 percent stake. In early May 2018, the Environmental Protection Agency granted Icahn’s refinery a so-called financial hardship waiver, allowing it to avoid clean air laws and potentially saving Icahn millions of dollars. Icahn is not exactly a hardship case.
Icahn’s raids typically involve identifying businesses whose assets are worth more than their stock value. Icahn then acquires enough shares of stock to force the company to make changes—such as laying off workers and taking on debt—that drive up its share price. He then sells his shares for a fat profit. Seeing Icahn coming, some companies have tried to fight him off, buying back his shares at a premium—a practice known as “greenmail,” roughly analogous to paying ransom. Over the years, Icahn has made high-profile raids on companies such as Texaco, RJR Nabisco, and Phillips Petroleum. In 1985, after winning control of the now-defunct Trans World Airlines, he loaded the airline with more than $500 million in debt, stripped it of its assets, and pocketed nearly $500 million in profits. Before TWA went under, Icahn waged a bitter fight with the flight attendants’ union. Because most attendants were women, he insisted they were not “breadwinners” and should not expect the same pay as male employees. Former TWA chair C. E. Meyer Jr. calls Icahn “one of the greediest men on earth.”
Greedy or not, Icahn ushered in a systemic change in the American corporation that continues to this day. As Icahn and other corporate raiders made fortunes, CEOs began to devote themselves entirely and obsessively to maximizing the short-term values of their shares of stock in order to prevent a takeover.
Before Icahn and the corporate raiders, it was assumed that large corporations had responsibilities to all their stakeholders, not just their shareholders. “The job of management,” proclaimed Frank Abrams, chair of Standard Oil of New Jersey, in a 1951 address that was typical of the time, “is to maintain an equitable and working balance among the claims of the various directly affected interest groups…stockholders, employees, customers, and the public at large.” In November 1956, Time magazine noted approvingly that business leaders were willing to “judge their actions, not only from the standpoint of profit and loss but of profit and loss to the community.” General Electric, the magazine noted, sought to serve the “balanced best interests” of all its stakeholders.
This was not just public relations effluvium like “corporate social responsibility” is today. In that era, CEOs of big companies earned modest sums—rarely more than twenty times that of their employees (now, they are paid more than three hundred times more). Many had spent their entire careers within their companies, sometimes working their way up from the factory floor or front line. Their companies were anchored in the same places they had been founded—GE in Schenectady, New York; Procter & Gamble, Cincinnati; Eastman Kodak, Rochester, New York; General Motors, Detroit; U.S. Steel, Pittsburgh. Other employees, from mid-level executives down to foremen and line workers, lived with them in the same communities. In a palpable sense, those CEOs were linked to those companies, the companies were linked to their employees, and all were rooted in their communities.
CEOs of that era saw themselves as corporate statesmen responsible for the common good. They were expected to be public leaders. Most had grown up during the Great Depression, when one out of four Americans was out of work and when Franklin D. Roosevelt had public backing to “try anything” to get the nation back on its feet—collaborating with big businesses in order to boost their profits (the National Recovery Administration); constraining them with tight regulations (the Securities and Exchange Acts, Glass-Steagall Act, Fair Labor Standards Act); making it easier for workers to unionize and forcing companies to negotiate (National Labor Relations Act). Many of these CEOs had served in World War II. Some had participated in the vast mobilization of American industry into war production.
At that time, the privilege and status of being the CEO of a large public company was as much a reward as the pay that went with it. CEOs were not expected to show high profits each year or to increase their companies’ share prices. As paper executive J. D. Zellerbach told Time magazine, Americans “regard business management as a stewardship, and they expect it to operate the economy as a public trust for the benefit of all the people.” Reginald Jones, CEO of GE, noted that “what will be expected of managers in the future [will be] intellectual breadth, strategic capability, social sensitivity, political sophistication, world-mindedness, and above all, a capacity to keep their poise amid the crosscurrents of change.” In 1981, the Business Roundtable formally adopted a resolution noting that although shareholders should receive a good return, “the legitimate concerns of other constituencies must have appropriate attention.” But starting in the 1980s, as a result of the takeovers mounted by Icahn and a few other raiders such as Michael Milken and Ivan Boesky, a wholly different understanding about the purpose of the corporation emerged. The system changed profoundly. Raiders targeted companies that could deliver higher returns to shareholders mainly by abandoning their other stakeholders—increasing profits by fighting unions, cutting workers’ pay or firing them, automating as many jobs as possible, abandoning their communities by shuttering factories and moving jobs to states with lower labor costs, or simply moving them abroad. The raiders pushed shareholders to vote out directors who wouldn’t make these sorts of changes and vote in directors who would (or else sell their shares to the raiders, who’d do the dirty work).
During the 1970s there were only 13 hostile takeovers of companies valued at $1 billion or more. During the 1980s, there were 150. Between 1979 and 1989, financial entrepreneurs like Icahn mounted more than 2,000 leveraged buyouts, in which they bought out shareholders with money they borrowed, often at high rates, with each buyout exceeding $250 million. In the 1980s and 1990s, almost a quarter of all public corporations in the United States were at one time the target of an attempted hostile takeover opposed by a firm’s management. Another quarter received takeover bids supported by management.
Few conditions change minds more profoundly than the imminent possibility of being sacked. Hence, across America, CEOs who were now threatened by being replaced by CEOs who would maximize shareholder value began to view their responsibilities differently: They would maximize shareholder value even more. The corporate statesmen of previous decades became the corporate butchers of the 1980s and 1990s, whose nearly exclusive focus was—in the meat-ax parlance that became fashionable—to “cut out the fat,” “cut to the bone,” and make their companies “lean and mean.” By 1997 the Business Roundtable reversed the position it had taken in 1981. Now it declared the “job of business is in fact only to maximize shareholder wealth.” (In August 2019, the Roundtable swung partly back to its earlier position. Later I’ll discuss the meaning of this.)
Between 1981, when Jack Welch took the helm at GE, and 2001, when he retired, GE’s stock value catapulted from $13 billion to $500 billion. Welch accomplished this largely by slashing American jobs and abandoning the communities GE had been rooted in. Before he became CEO, most GE employees had spent their entire careers with the company, usually at one of its facilities in upstate New York. But between 1981 and 1985, a quarter of them—100,000 in all—were laid off, earning Welch the moniker “Neutron Jack,” along with the growing admiration of the business community. Between the mid-1980s and the late 1990s, GE slashed its American workforce by half again (to about 160,000) while nearly doubling its foreign workforce (to 130,000). Welch encouraged his senior managers to replace 10 percent of their subordinates every year in order to keep GE competitive. As GE opened facilities abroad, staffed by foreign workers costing a small fraction of what GE had paid its American employees, the corporation all but abandoned upstate New York.
CEOs have become so obsessed by shareholder value that Robert Goizueta, CEO of Coca-Cola, proclaimed in 1988 that he “wrestle[d] with how to build shareholder value from the time I get up in the morning to the time I go to bed. I even think about it when I am shaving.” Goizueta’s obsession starkly differed from the views of his predecessors, such as Coca-Cola’s former president William Robinson, who in 1959 told an audience at Fordham Law School that executives should not put stockholders first. They should “balance the interests of the stockholder, the community, the customer, and the employee.”
Over the past forty years, corporate raiders have morphed into more respectable-sounding “shareholder activists” and “private equity managers” who take over “underperforming” companies. Outright hostile takeovers have become rare, but that’s only because corporate norms have changed. CEOs now run corporations only to maximize shareholder returns.
This systemic change could not have occurred without changes in laws and regulations that encouraged it. Some appeared small at the time, which is often the case with systemic change: It’s not the size or visibility of specific legal or regulatory changes that count but their consequences for how the system functions. Ronald Reagan’s administration looked favorably on the corporate raiders. Although the raiders’ tactics might easily have been seen to violate the Securities Acts of 1933 and 1934 because of their reliance on risky loans, Reagan’s Securities and Exchange Commission made no attempt to stop them. In fact, the Reagan administration’s laissez-faire approach to antitrust allowed the raiders to mount acquisitions that the government would have challenged before.
By the mid-1980s, some in Congress considered possible curbs on the raiders. A bill proposed by Wisconsin senator William Proxmire, then chair of the Senate Banking Committee, aimed to curb the takeover frenzy. His bill would also have given management more leeway to protect their companies against takeovers financed by risky (junk) bonds. Beryl Sprinkel, then chair of Reagan’s Council of Economic Advisors, testified against Proxmire’s bill, telling the banking committee that the takeovers were making American industry healthier and the nation wealthier. “They improve efficiency, transfer scarce resources to higher valued uses and stimulate effective corporate management,” he said. “The evidence is overwhelming that successful takeovers substantially increase the wealth of stockholders in target companies.” The Securities and Exchange Commission also opposed Proxmire’s bill, claiming it would “alter fundamentally not only the market for corporate control, but also the structure and operation of the nation’s securities markets as a whole.” The bill never got out of committee.
Years before, the economist Milton Friedman had urged CEOs to give up stakeholder capitalism. “What does it mean to say that ‘business’ has responsibilities?” he wrote in 1970; “businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” But it was really Michael Jensen, an economics professor who arrived at the Harvard Business School in 1984, who gave academic ballast to the notion that the sole purpose of the corporation should be to maximize shareholder returns. In his many papers, public lectures, and oversubscribed classes—from which generations of business school students launched careers on Wall Street and management consulting—Jensen reasoned that hostile takeovers disciplined what he termed “inefficient firms.” He felt too many resources were “locked up” in unproductive ways. CEOs were too complacent, corporations employed workers they didn’t need and paid them too much, companies were unnecessarily and inefficiently bound to their communities. Substantial value could be “extracted” by streamlining these operations, by which Jensen meant cutting payrolls and abandoning communities for new ones.
Jensen forgot one big thing. He overlooked those who would bear the burden of the changes he pushed for. As Jensen predicted, stockholders of targeted companies have continued to do well. That’s because the so-called efficiency gains have gone to them, as well as to the raiders and top corporate executives. The costs of these maneuvers and of the obsession with maximizing share values, however, have been borne by workers who have been sacked or whose paychecks have stagnated and whose benefits have been cut and by the communities that have been left behind.
The academic conceit that workers are simply “resources” that will move to “higher valued uses” has proven to be crushingly and cruelly naïve. Human beings are not like financial resources. They do not move easily or seamlessly to different jobs and other places. They are rooted in families and communities. They have particular skills, established routines, abiding understanding of positions and roles. They depend on some degree of security, predictability, and stability. They want to be respected and valued. When “efficiency” gains go to a comparatively few people at the top, while the costs and burdens are borne by many others—as has been the case since the 1980s—the common good is not improved. It is cast to the winds.
By 2019, corporate profits had reached record levels and share prices had soared. This has been a boon to shareholders, especially the richest 1 percent of Americans, who own 40 percent of all shares of stock, and the richest 10 percent, who own 80 percent. Top corporate executives, whose pay is linked to share prices, have reaped a bonanza. Pay on Wall Street has reached jaw-dropping heights, as exemplified by Jamie Dimon’s $31 million compensation package for 2018. But most Americans have not benefited. Many have lost ground. For most, wages have been flat or have declined, their jobs have become less secure, and their pensions have been turned into 401(k)s or have disappeared altogether. Abandoned communities are now scattered across the nation. Entire regions of the country have been left behind.
Executives claim they have a fiduciary obligation to maximize shareholders’ returns. This argument is rubbish. It’s also tautological. It assumes that shareholders are the only people worthy of executive concern. Yet as a practical matter they are not the only parties who invest in corporations or who bear some of the risk that the value of their investments might drop. All Americans are stakeholders in the American economy. Workers who have been with a firm for years develop skills and knowledge unique to it. Others may have moved their families to take a job with the firm, buying homes in the community. The community itself may have invested in roads and other infrastructure to accommodate the corporation. When a firm abandons those workers and those communities, these stakeholders lose the value of their investments. Why should no account be taken of their stakes?
Corporation after corporation began laying off workers in the 1980s without easing the often difficult transitions that followed—without providing workers with severance payments, job retraining, job search assistance, job counseling, help in selling homes the values of which predictably dropped when businesses left town, or help moving to where jobs existed; without aiding affected communities that were being jettisoned, or seeking to attract other businesses to make up for their losses of jobs and tax revenue, or finding other uses for the abandoned infrastructure of schools, roads, pipes, and real estate; without giving workers and communities sufficient advance notice so they could plan their own transitions. Absent any of this, millions of Americans were left to fend for themselves. It was a systemic change that would scar the nation for decades, contributing to rising anxiety, anger, and resentment across the land.