October 28, 2021
Situational awareness: U.S. GDP grew at a disappointing 2% pace in the third quarter.
- In this week's newsletter: Controlling shareholders; wealth taxes; allegations about the S&P 500; the Theranos sales pitch; and much more. All in 1,580 words, a 6-minute read.
1 big thing: Out of control
It's common for a single individual to control a massive corporation, even when he (and it's invariably a he) holds only a minority economic interest. But there are limits to control, and controlling shareholders can lose their power surprisingly swiftly.
Why it matters: There's control within the four corners of the corporate bylaws — and then there's actual real-world ability to continue to control the corporation. Those can be two different things.
Driving the news: Canada is currently gripped by the Rogers Communications drama, where the country's largest telecommunications company currently has two rival boards of directors.
- Rogers has a dual-class share structure, where the overwhelming majority of the voting shares are held in trust for the benefit of members of the Rogers family. One family member, Edward Rogers, controls the board of directors of that trust, and survived an attempt to oust him as its chair.
- Edward Rogers claims that, armed with control of the trust's voting power, he has fired five Rogers board members and replaced them with his own loyalists, who in turn have appointed him chairman of the company. The official corporate line is that his move was legally invalid.
The intrigue: Edward's father, Ted Rogers, set up the trust structure and envisaged exactly this outcome. "In the worst case, he could call a shareholders meeting and fire the board and the CEO," Ted told his biographer.
- Edward's sister, Martha Rogers, is much less impressed. "This should be taken as seriously as if he appointed himself the King of England," she tweeted.
Between the lines: The spectacle is very un-Canadian. "In over 35 years of involvement in boards and governance, I have never seen anything like this before," says Richard Powers of the Rotman School of Management at the University of Toronto. "It is bizarre and the end is still a ways off unless some sort of compromise takes place."
- The mayor of Toronto, who was CEO of Rogers Media in 1995, is attempting to mediate the dispute — but the final verdict will probably come from a court in British Columbia.
The big picture: Edward Rogers is not the first controlling shareholder in recent corporate history to find himself fighting for the control he thought he had in the bag. Other men — think Travis Kalanick, at Uber, or Adam Neumann, at WeWork — ended up losing their control just when they needed it most.
- Even Mark Zuckerberg, having granted himself and his heirs outright control of the company he founded, seems to want to give up the most important parts of that control — either to his own quasi-judicial oversight board, or else to governments.
- As Axios' Scott Rosenberg writes, however, Zuckerberg's true desires remain opaque.
The bottom line: Super-voting shares are powerful. But they're not all-powerful.
2. Why it's so hard to tax wealth
The wealth tax that wasn't a wealth tax isn't even a tax, now. The Democrats had a meticulously-constructed 107-page proposal to pay for a large chunk of their spending plans with a tax on billionaires, but it died ignobly on Wednesday, the same day it was unveiled.
Why it matters: The dream of a wealth tax will never die, since it so neatly generates revenue by reducing inequality. But there are three main reasons why that dream is likely to remain unrealized.
1. The Constitution
Article I of the Constitution, Section 9, bars any "capitation, or other direct, tax" — unless such a tax is levied in direct proportion to the number of people who live in each state.
- The Supreme Court ruled in 1895 that a federal income tax was therefore unconstitutional. The 16th Amendment, ratified in 1913, made income tax constitutional, but many scholars believe it doesn't cover a wealth tax.
- An outright tax on wealth, as proposed by Elizabeth Warren, would face a massive obstacle in the current Supreme Court.
- The billionaire tax proposed this week didn't tax wealth directly — billionaires would owe nothing if their wealth was falling rather than rising. But it would still have faced a stiff legal challenge.
2. The billionaires
The world's richest person, Elon Musk, opposed the tax in public; it's reasonable to assume that the overwhelming majority of the 700 or so other billionaires affected by the bill opposed it in private.
- Those billionaires, collectively, have enormous political power — and they also have the best legal advice that money can buy. They seem to have done very well, overall, in the current round of fiscal negotiations.
The American Dream envisages accumulating wealth through hard work, while a wealth tax — almost explicitly Marxist, in the sense of "from each according to his ability" — cuts in the exact opposite direction.
- Many Americans, including Sen. Joe Manchin, who killed the billionaire tax on Wednesday, see something unfair about singling out billionaires for extra taxation — especially when many of them dream of one day joining those ranks themselves.
The bottom line: A wealth tax, or even something like the billionaire tax that's wealth-tax adjacent, carries an unmistakable aroma of socialism. And America isn't (yet) a socialist country.
3. S&P denies allegations it sells index inclusion
Can companies buy their way into the S&P 500? That's the explosive allegation made by a recent NBER paper — one that's strenuously denied by S&P itself.
Why it matters: According to S&P's own calculations, some $13.5 trillion is indexed or benchmarked to the S&P 500. That's well over $100,000 per U.S. household. Any question as to the integrity of the index has to be taken seriously.
The intrigue: Three researchers, including former Asian Development Bank chief economist Shang-Jin Wei, now at Columbia University, spent two years examining additions to the S&P 500, and whether they could be explained using published criteria.
- They found that when a firm purchases a credit rating from S&P (but not when it purchases a credit rating from rival Moody's), its chances of being added to the S&P 500 rise significantly.
The other side: S&P says there's simply no mechanism whereby that could happen; that its ratings and indices arms are two separate companies that don't talk to each other.
The big picture: S&P Dow Jones Indices is something of a black box when it comes to decisions as to which companies belong in the S&P 500, and when they should be admitted.
- Published criteria for inclusion can feel arbitrary — Tesla was excluded from the index for years, for instance, because it wasn't consistently profitable enough. And most hot recent IPOs are also excluded from the index because of their dual-class share structures.
- The index therefore isn't the 500 largest companies listed in the U.S. — in fact, most of the time it isn't even 500 companies. S&P has significant discretion when it comes to which companies it includes in the index, although the researchers and S&P disagree on just how much S&P exercises that discretion.
Between the lines: The paper shows that companies step up their purchases of S&P ratings when vacancies appear in the index, or when they become large enough to qualify for inclusion. They don't act in a similar manner with respect to Moody's ratings.
The bottom line: The paper has not yet been peer reviewed, but it undoubtedly raises serious questions, many of which could be fixed by S&P moving to a much more automatic and much less discretionary methodology for composing its flagship index.
4. Even billionaires get FOMO
Elizabeth Holmes had astonishing powers of persuasion, convincing billionaires like the DeVos, Murdoch, and Walton families to invest hundreds of millions of dollars into Theranos — and using fear of missing out, or FOMO, as a key means of doing so.
Between the lines: Testimony in the criminal trial against Holmes shows that flattery was a large part of the pitch — Holmes spent a lot of time with the families' representatives, and stressed to them that she wanted them as investors rather than institutions that might pressure her to go public earlier than she wanted.
Bloomberg reports on testimony from Lisa Peterson, who managed the DeVos family's money:
Peterson allowed that Holmes held a strong sway and admitted to “fear” of missing out if she passed up a chance to invest in the startup. Probing too deeply into the company’s commercial partnership with Walgreens might mean “we wouldn’t be invited back to invest,” she said.
The bottom line: The DeVos family ended up doubling its investment in Theranos to $100 million. Murdoch put in $125 million, while the Walton family invested $150 million.
5. Coming up: COP26
A crucial climate summit, COP26, begins Sunday in Glasgow, Scotland, Axios’ Hope King and Jacob Knutson write.
Why it matters: Climate scientists warn that time is running out to secure necessary cuts in greenhouse gas emissions to avoid potentially devastating climate change impacts during the next several decades.
- The goal: Enough new emissions reduction pledges to keep viable the objective of limiting global warming to 1.5°C above pre-industrial levels by 2100.
6. Building of the week: Villa Planchart, Caracas
Italian architect Gio Ponti designed the Villa Planchart — "a big butterfly poised on the hillside," with a roof that seemingly floats above the walls — for Venezuelan art (and orchid) collectors Anala and Armando Planchart in 1953.
- The house is an icon of bold, colorful modern design — do check out the interiors — and also represents the wealth and hope of Venezuela in the 1950s. The NYT's Pilar Viladas calls it "one of the postwar era's most exuberant works of domestic architecture."
- If you're brave enough to visit Caracas, the house, run by the Planchart Foundation, is open to visitors.
Finally, if you prefer your sibling rivalry in fictional form, you can watch a Siobhan Roy vs. Kendall Roy battle in episode three of "Succession," airing this Sunday on HBO. Shiv will attempt to take Ken's legs out; my podcast recap, with Emily Peck and Matt Haber, will be available first thing Monday morning.