In late 2020, a small hedge fund called Engine No. 1 purchased a $40 million stake in Exxon-Mobil, a sum of around 0.02% of the oil company’s market capitalization. The hedge fund hoped to utilize the proxy voting process — where shareholders vote on Exxon’s Board of Directors among other things — to nominate new directors to Exxon’s board.
The proxy vote resulted in two new directors being named to Exxon’s board. Although these two new board directors have experience in Oil & Gas, the WSJ Editorial Board described the shareholder undertaking as “a progressive political coup” because the hedge fund has advocated for a stronger shift toward renewable energy. In the Editorial Board’s opinion, activist investors are motivated by political rather than economic outcomes – surely a threat to free markets. The opinion piece quietly omits any mention of ExxonMobil’s stock price which, as Engine No. 1 points out on its website, has underperformed by most measures.
Consternation over activist investors is not limited to those fearing a progressive takeover of flailing oil companies. In March 2021, the Institute for New Economic Thinking published an opinion piece highlighting Carl Icahn’s campaign with Apple which began in 2013 and ended in 2016: “[Icahn] would force Apple to use its billions in profits to enrich shareholders through massive stock buybacks instead of using them to invest in our renewable future.” The argument imagines that in the absence of Carl Icahn’s demand for share buybacks, Apple would have invested in climate change-solving technology to rescue mankind.
What this argument misses by using this example is that Apple was stashing cash overseas for the purpose of avoiding U.S. taxes during this time. The sum of cash on Apple’s balance sheet stashed abroad was $178 billion in May 2015, a sum greater than its prior four years of profit (2011-2014 net income totaled $144.2 billion). According to the Pecking Order Theory of corporate finance, Apple should have been depleting – instead of increasing – its cash stash to fund internal projects. The accumulation of many years of net income in cash balances suggests there was no set of hypothetical world-saving technology projects that Apple passed over to initiate buybacks. Rather, a pesky set of rules known as the U.S. tax code caused Apple to build a hoard of cash far in excess of plausible investments into R&D or other corporate projects.
In Tim Cook’s opinion, it was more favorable to Apple shareholders to keep foreign profits overseas to avoid paying taxes in the United States. Indeed, Carl Icahn’s letters critically point out that the tax rate Apple used in its public filings likely exceeded by a wide margin the tax rate it would actually face, implying that Tim Cook’s argument that shareholders were best served by the practice of hoarding cash profits overseas rather than repatriating profits to fund buybacks was overstated. If activist investors are thwarting a Green New Deal, as suggested by the headline in the Institute for New Economic Thinking piece, it is not by forcing companies to face more scrutiny over cash hoards stashed abroad.
Activist investors, as a broad class, are as good or as bad as their ideas and execution. More frivolous activist ideas, like this hedge fund which hoped to have its tax bill reduced after successfully lobbying for sell-off of a company’s division, certainly give fodder to critics of activist investors. But in an age when many stock market participants are passive shareholders through ETFs or low-cost retirement funds, the opportunity for the CEOs of companies to underperform without accountability is likely as high now as it has ever been. Critiques of activist investors strained through a political lens will nearly always miss the mark simply because activist investors are seeking financial, rather than political, outcomes.
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