Share and Follow
“An imbalance between rich and poor is the oldest and most fatal ailment of all republics” – Plutarch
The previous article that I had written which appeared in this space sought to highlight how a great many institutional investors in the United States, through their permissive “say on pay” voting records, have served to perpetuate income inequality, the “other” existential risk, second possibly only to climate change in terms of its threat to overall stability. Paradoxically, a number of these same institutions have expended a significant amount of effort in recent years seeking to promote enhanced ESG policies at the companies in which they invest, often justifying such efforts based on the theory that implementing such enhanced ESG policies lessens overall systemic risk and, concomitantly. a company’s cost of capital.
And so, while championing their efforts seeking to enhance ESG policies, these institutional investors have overwhelmingly voted to approve the compensation awarded to the executives of publicly-traded companies, which in 2022 resulted in the CEOs of S&P 500 companies receiving $16.7 million in average total compensation, or an average of 272 times that of what the median worker was paid at such companies, as discussed in more detail in said previous article (see below). One does not need a Ph.D. in economics or political science to recognize a glaring and escalating problem when CEOs are making an average of 272 times that which is made by workers, particularly when considering that a similar statistic from 1989 indicated that CEOs were “only” paid an average of 44 times that of what workers were paid. Anyone looking for a concrete, and timely, example of the consequences that can start to emerge from this problem should note the recent strike mounted by the UAW against General Motors, Ford Motor Company, and Stellantis, and the surrounding focus on the relative compensation afforded to the automobile executives versus that of the workers.
While there are numerous factors contributing to the widening disparity of overall income and wealth, it is generally accepted that runaway executive compensation is a key factor. The above previous article made reference to the work of the Economic Policy Institute detailing the link between executive compensation and inequality, and the noted economist Thomas Piketty also discusses this connection (e.g., in a Forbes article written by Alexander Pepper and dated January 10, 2019, Mr. Pepper writes: “In his bestseller “Capital in the Twenty-First Century,” economist Thomas Piketty attributed inflated rates in executive pay to one of the most significant factors contributing to growing inequality in the Western world.”) And while the often-criticized CEO-to-worker pay ratio is an admittedly imperfect metric, it is perhaps the most widely-recognized statistic seeking to quantify these disparities which play such a major role in overall inequality.
While inequality in terms of income and/or wealth is often cited when discussing some of the more pervasive issues plaguing the United States, institutional investors (read: ETFs, mutual funds) who own close to 74% of all U.S stocks, do not appear to recognize the potentially grave risks posed by this issue. It is thus of great significance that some of the loudest voices warning of the existential threat posed by inequality come from some of the most successful investors in modern times, notwithstanding the considerable irony of a handful of billionaires (multi-billionaires, in fact) warning of a vast and growing chasm between the haves and the have-nots in this country.
Four Billionaire Investors are Sounding the Alarm
The following four billionaires, listed alphabetically, have within the last decade been quite clear as to their concerns surrounding the risk that inequality poses to the very stability of the United States, though each attributes varying reasons as to its root causes. What must be emphasized is that, occupationally, each of them is an investor first and foremost, and part of any investment process involves the contemplation of a myriad of existing and potential risk factors that impact, or could impact, the underlying value of a prospective investment. As such, each has extensive experience in successfully assessing and managing risk, which makes their views regarding the specific risks posed by income inequality all the more meaningful. (Note that this article makes no representation as to the accuracy of any of the following information or net worth estimates presented, though it should be noted that certain of the following biographical information and all of the following net worth estimates for each respective individual have been obtained from the “World’s Billionaires” sub-section of the “Billionaires” section on the Forbes website, which contains the article/searchable list entitled “Forbes World’s Billionaire’s List – The Richest in 2023,” which is edited by Rob LaFranco and Chase Peterson-Withorn and in partnership with Richard Mille, with all net worth data estimated as of April 4, 2023.)
The CEO and founder of Pershing Square Capital Management, a hedge fund with approximately $13.8 billion of assets under management as of September 30, 2002 according to Bloomberg, Bill Ackman, age 57, had an estimated net worth of $3.4 billion as of April 4, 2023 according to Forbes. Well-known as a prolific activist investor, he has morphed his investment style to contemplate a less-contentious approach and has witnessed great success with a number of recent macro bets.
In his “Letter to Shareholders,” which is included in the 2020 Unaudited Condensed Interim Financial Statements as of June 30, 2020 of Pershing Square Holdings, Ltd., Mr. Ackman writes: “If we are to avoid continued political risk and disharmony which create serious risks to the sustainability of the capitalist system, we need to find a way for those left behind to participate to a greater extent in capitalism, broadly defined,” and further notes that: “If capitalism continues to leave behind most Americans as the growth in wages has not come close to the more tax-efficient compound growth that has been achieved by investing in the stock market, more and more Americans will seek changes, potentially radical ones, to the current system, or seek an alternative system.”
Ray Dalio founded Bridgewater Associates, the world’s biggest hedge fund, with assets under management of approximately $125 billion according to Bloomberg. Mr. Dalio, age 74, had an estimated net worth of $19.1 billion as of April 4, 2023 according to Forbes and his best-selling 2017 book Principles: Life and Work introduced his thoughts on leadership to a wide audience.
On several occasions, Mr. Dalio has warned, in quite stark terms, of the risks posed by income inequality. Specifically, in an interview with CNN in December of 2020, of which certain comments were published in a CNN Business article dated December 22, 2020 and written by Matt Egan, Mr. Dalio said: “There will have to be a resolution of the system working for the majority of the people in which there’s productivity,” and further stated: “And that could be obtained either in a smart, bipartisan way – or it will come by greater conflict.”
These comments follow Mr. Dalio’s previous remarks in an much-discussed essay that he had written, which was dated April 4, 2019 and entitled “Why and How Capitalism Needs to be Reformed,” which notes: “In addition to social and economic bad consequences, the income/wealth/opportunity gap is leading to dangerous social and political divisions that threaten our cohesive fabric and capitalism itself. I believe that, as a principle, if there is a very big gap in the economic conditions of people who share a budget and there is an economic downturn, there is a high risk of bad conflict.”
Paul Tudor Jones, II
Paul Tudor Jones, II is Co-Chairman and CEO of Tudor Investment Corporation, a hedge fund that he founded in 1980, with about $12 billion in assets currently under management according to Bloomberg. With an estimated net worth of $7.5 billion as of April 4, 2023 according to Forbes, Mr. Jones, age 68, was a pioneer of macro trading across asset classes and, in addition to being a well-known conservationist, in 1988 co-founded the Robin Hood Foundation, a pioneering charitable organization focused on tackling poverty which is now New York City’s largest local poverty-fighting philanthropy.
According to comments made at a TED talk in Canada, which were cited in a CNBC article written by Robert Frank and dated March 20, 2015, Mr. Jones said: “The gap between the 1 percent and the rest of America, and between the U.S. and the rest of the world, cannot and will not persist,” and further stated: “Now here’s a macro forecast that’s easy to make, and that’s that the gap between the wealthiest and the poorest, it will get closed. History always does it. It typically happens in one of three ways—either through revolution, higher taxes or wars.”
In further subsequent commentary made by Mr. Jones on CNBC and cited in a CNBC article written by Robert Frank and dated June 12, 2018, Mr. Jones said: “In 1985, 35 percent of the wealth in this country was owned by the bottom 90 percent,” and further stated: “Today, 23 percent of the wealth is owned by the 90 percent and that 12 percent difference has gone to the top one-tenth of the 1 percent. Capitalism may need modernizing.” It bears mention that Mr. Jones was one of the co-founders of JUST Capital, a not-for-profit 501(c)(3) registered charity founded in 2014, whose goals according to the “Our Mission” section on the “About” tab of its website are “to build an economy that works for all Americans by helping companies improve how they serve all their stakeholders” and notes the need to “address systemic issues at scale, including income inequality and lack of opportunity,” which signifies the importance of dealing with inequality.
David Rubenstein co-founded The Carlyle Group in 1987, a private investment firm that has grown into an investment powerhouse with approximately $385 billion in assets under management according to Bloomberg. Mr. Rubenstein, age 74, had an estimated net worth of $3.2 billion as of April 4, 2023 according to Forbes, and has been a frequent presence on television, hosting The David Rubenstein Show: Peer-to-Peer Conversations on Bloomberg TV and PBS and Bloomberg Wealth with David Rubenstein on Bloomberg TV.
Sounding the alarm as early as 2013, Mr. Rubenstein, in a December 6, 2013 article in USA Today written by Susan Page, said: “Society can only survive if people feel the benefits of society are good for everybody,” and further stated: “So if you have people at the top who are very wealthy and they’re getting all the great financial benefits and people at the bottom don’t feel they have any way to get to the top, you’re going to have a fissure in the country and you’re going to have the kind of disequilibrium that you don’t really want in society. We don’t want to have a country broken apart because of inequality.”
Mr. Rubenstein has continued to voice his concerns, and in a March 12, 2020 article in the New York Times written by David Gelles, Mr. Rubenstein stated: “Well, there’s no doubt that the wealth gap today is greater than it’s ever been, at least since the 1920s. And the resentment factor is obviously very high. I am surprised that you don’t see more people marching in the streets.” And as recently as earlier this year, Mr. Rubenstein, in a Bloomberg article dated July 20, 2023 written by Sonali Basak, was quoted as saying: “The people who don’t have the wealth are increasingly exposed to it through social media and other things. They now see what’s possible, how other people are living. And increasingly you’re going to see income inequality greater than it has been. And that’s not a good thing for the world. In the US, income inequality has increased over the last 10, 20 and 30 years and that’s the opposite of what we really should have as a society.”
The Risks Are Real
It is sobering to consider that the above commentary makes explicit reference, variously, to dramatic potentialities such as “radical” change, “bad conflict,” “people marching in the streets,” and “revolution,” as some of the prospective consequences that could result from escalating inequality. These stark and increasingly dire warnings is not hyperbole being voiced by left-wing propagandists or paranoid reactionaries, nor is it the work product of ivory-tower academics or street-corner anarchists, but reflect the concerns, each voiced independently, of some of the most astute investment practitioners in the world, who by profession must be rational, fact-based, and pragmatic.
While the French Revolution, which started with the storming of the Bastille as depicted in the painting at the top of this article, was an extreme and very rare example of a country turned upside down by a revolution spawned by pervasive inequality, the risk of growing societal unrest is not to be dismissed. The leadership at the institutional investment firms in the United States, including but certainly not limited to “The Big Three” index fund managers (BlackRock, Vanguard, and State Street), and particularly any institution who champions enhanced ESG policies in order to reduce investment risk, should heed the warnings of some of the most successful investors in the world when assessing the corporate governance policies of the publicly-traded companies of whose stock they own. And, accordingly, they should use their voting stakes in these public companies wisely when voting for the directors of these companies and the pay policies that such directors sanction.