Why the American economy isn’t working for most Americans in the age of shareholder capitalism

The inevitable logic of CEOs, private equity, and “activist investors”

Friends,

I am not crying for Carl Icahn, who has lost about $17 billion over the last few weeks as investors have fled Icahn Enterprises stock.

I’m talking about it today because the saga offers an important lesson about why the American economy hasn’t been working for most Americans in this era of shareholder capitalism.

Icahn was one of the first of the breed of corporate raiders — now more politely deemed “private equity” managers and “activist investors” — who take over or push corporations to make more money.

In 1985, after winning control of the now-defunct Trans World Airlines, Icahn stripped its assets, pocketed nearly $500 million in profits, and left the airline more than $500 million in debt. Former TWA chair C.E. Meyer Jr. called Icahn “one of the greediest men on earth.”

Another of Icahn’s raids involved RJR Nabisco, the food and tobacco giant, which he pushed to spin off its food business, leading Icahn to make a cool $884 million when he sold his stock in late 2000.

Icahn has estimated that his activist campaigns at a dozen companies, including Apple, eBay, PayPal, Forest Labs, Herbalife, and Netflix, helped generate $300 billion in additional value for the shareholders of those companies. His campaigns also made him one of the wealthiest people in America.

But the costs of Icahn’s deals have fallen on hundreds of thousands of people who lost their jobs and hundreds of communities that lost their major employers.

Few individuals have done more to harm America’s working class than Icahn and other private equity managers and activist investors who have followed in his wake.

Private equity and activist investors have been stripping corporations bare — taking profits that otherwise could have created good jobs at good wages and siphoning them off to themselves.

Not surprisingly, Icahn was a Trump backer from the start and benefited immensely from his presidency.

Trump made Icahn his special regulatory adviser, until lawmakers raised concerns about potential conflicts of interest. Days before Trump announced hefty tariffs on foreign-made steel, Icahn sold off $31.3 million in stock he owned in the Manitowoc Company, an American manufacturer of steel cranes.

Manitowoc and other construction equipment manufacturers relied heavily on foreign steel in their manufacturing work, making Icahn’s sale just before the tariff announcement look mighty suspicious. After the announcement, Manitowoc’s shares tumbled. 

Icahn said he had no inside knowledge of Trump’s move, but it was hard to believe him. The Trump presidency was awash in conflicts of interest, lies, payoffs to friends, insider deals, and utter disdain for the public.

Icahn’s steel deal was chickenfeed relative to the billions Icahn pocketed courtesy of Trump’s tax cut. Icahn is said to have spent $150 million lobbying for it, which made it one of his best investments. Last year, Forbes estimated Icahn’s fortune at $18 billion.

So, what led to Icahn’s recent undoing?

The U.S. Securities and Exchange Commission found that he failed to disclose to his shareholders that between 2018 and 2022, he used more than half of his company’s shares of stock as collateral for personal loans worth billions of dollars. (Last month, Icahn and his company agreed without admitting wrongdoing to pay $2 million in civil fines to settle the charges.)

The SEC investigation followed a report published in May 2023 by New York-based short seller Hindenburg Research alleging that publicly traded Icahn Enterprises was overvalued, had inflated the value of assets on its balance sheet, and was engaged in “Ponzi-like economic structures.” Icahn’s shareholders have been fleeing, causing the share value of Icahn Enterprises to tumble. (On Monday, a federal district court judge in Florida dismissed a lawsuit by shareholders accusing Icahn of fraud.)

Icahn’s fate is the logical consequence of corporate raiders and the private equity managers and activist investors who have emulated them.

These people put an end to the era of “stakeholder capitalism,” in which corporations and their CEOs had responsibilities to their workers and communities, as well as to their shareholders. In its place they launched the era of “shareholder capitalism,” in which a CEO’s only responsibility is to maximize shareholder returns.

But ever since CEOs disavowed any responsibility to the common good, an ever-increasing portion of their income and wealth has depended on the value of their shares in the corporations they run. The line between management and ownership has blurred.

CEOs have assumed that their own wealth is synonymous with the wealth of their shareholders. Hence, they’ve been on a slippery slope that has led to CEOs selling out shareholders to pad their own pockets.

It has become common, for example, for CEOs to authorize stock buybacks that raise share prices, at the expense of those who sell their shares back to the corporation. And it’s now common for CEOs to time the buybacks — and the higher share prices buybacks create — to coincide with when they cash out their own shares and options.

Private equity managers are doing essentially the same thing, on a larger scale: They buy up the shares of a corporation and then make it more valuable for themselves, reaping fortunes when they sell it (or what’s left of it).

Private equity managers, activist investors, and CEOs have become fabulously wealthy — while American workers have been shafted, whole areas of the country have been abandoned, corporations have been deprived of funds they need to grow, and unwitting shareholders have been left holding the bag.

A report by the nonpartisan Congressional Budget Office (CBO) released this month shows that between 2019 and 2021, average household income, before taxes and transfers, increased by about $12,000. But most of that money went to the richest of the rich — among them, top corporate executives, private equity managers, and activist investors — in the form of capital gains. Labor income across all income levels barely budged. 

The American economy has performed well under Biden and Harris, but this deeper structural doom-loop must be addressed if most Americans are to gain from economic growth. Shareholder capitalism isn’t working.

What to do? The “carried-interest” tax loophole must be closed. Taxes on capital gains must be hiked. The SEC must return to its old rule, prior to the Reagan administration, that stock buybacks are illegal manipulations of share prices. Other corporate stakeholders — workers and communities — must be given larger voices in corporate decision making.

Finally, the SEC must crack down harder on self-dealing. Fining Icahn $2 million for using most of his corporation’s shares as collateral for personal loans worth billions is barely a slap on the knuckle.

Many of Icahn’s shareholders caught on and got out, costing Icahn a bundle. But they presumably lost a great deal in the process. Shareholders can’t police shareholder capitalism. That’s the point.