The Capital Note

NASDAQ — The Woke Exchange

Adena Friedman, President and Chief Executive Officer of Nasdaq speaks during a news conference in Mumbai, India, July 2, 2018. (Francis Mascarenhas/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: NASDAQ’s mission creep, COVID and cars, Washington State’s (proposed) wealth tax, France’s wind-power follies, and the Piggly Wiggly short squeeze. To sign up for the Capital Note, follow this link.

NASDAQ’s Quota Regime
A month or two I wrote an article describing how NASDAQ was looking to introduce quotas into the boardroom.

I quoted from a the Wall Street Journal piece from December, from which this is an extract:

Nasdaq Inc. is pushing to require the thousands of companies listed on its stock exchange to include women, racial minorities and LGBT individuals on their boards, in what would be one of the most forceful moves yet to bring greater diversity to U.S. corporations.

The exchange operator filed a proposal with the Securities and Exchange Commission on Tuesday that would require listed companies to have at least one woman on their boards, in addition to a director who is a racial minority or one who self-identifies as lesbian, gay, bisexual, transgender or queer. Companies that don’t meet the standard would be required to justify their decision to remain listed on Nasdaq.

At the time, I commented that:

NASDAQ, a private institution, is, of course, entitled to set its own rules, just as (to quote the Journal) “banks and asset managers” are entitled to try to push their clients or portfolio companies to change their ways. Nevertheless, it is hard to miss the mission creep that is currently occurring across a wide range of institutions, some private, some parastatal (take a look at the effort central banks are increasingly making with regard to climate change) to impose different aspects of a “progressive” agenda on private companies without the bother of going through the usual democratic mechanisms. In effect, they are, in different ways, gnawing away at the right of shareholders to have the last word on the way that their companies are run.

Traditionally, denying that last word to shareholders has been justified on prudential grounds directly related to the core function of the body that is setting the rules — it makes clear sense, for example, for NASDAQ to insist that listed companies satisfy certain disclosure requirements. It is, however, an entirely different matter when the reason for restricting the ultimate shareholder right of decision is, one way or another, political . . .

Under the circumstances, I looked at this interview with NASDAQ’s CEO, Adena Friedman, in McKinsey & Co’s Quarterly. McKinsey, of course, is a firm that is (despite a recent slip-up in Moscow) itself a strong supporter of issues such as “socially responsible” investing (SRI), stakeholder capitalism, and so on. Much of the interview covers the ground that might be expected (growth, innovation, and the like), but an early promise that the interview would cover NASDAQ’s “thinking about environmental, social, and governance (ESG) issues” caught my eye.

Scrolling on down a bit, I was not disappointed:


Our investor-relations business, for instance, is well established among corporate clients. They know they have to establish great investor-relations capabilities, and they know we have a lot of data and analytics that can help them target investors the right way. Many were less sure, however, that they would need advisory services around ESG. Still, we launched an ESG advisory practice in 2019. We took a risk in launching it ahead of the demand curve, but that business is now growing.

One entertaining feature of SRI — at least for cynics — is the rich ecosystem that it has nourished: consultants here, new funds there, and fees scattered all over the place.


US companies have had to move very quickly to think about operating their companies in new, more sustainable ways, where they care about the communities around them, as well as their employees.

In itself, that sentence carries the interesting implication that U.S. companies do not care about “the communities around them.” In fact, some do and some don’t, but in the reality that Friedman is peddling the definition of “caring” revolves around the word “sustainable,” which in this context, tends to mean caring about climate change (and what should be done about it) in, of course, the approved way.


Our focus on ESG falls into two different areas. One is providing companies the support and advisory work, as well as the technology and tools, they need to manage their ESG reporting.

To repeat myself, I suspect that such work is not pro bono (my apologies if I am wrong).

The second is somewhat more anodyne, at least in the beginning, but take a look at the last sentence (my emphasis added):

In the Nordic countries, we have the green-bond exchange. We now have a sustainable-bond network in the US, too, where companies that are certified as green—or whose bonds and financial assets are certified as green—can be listed and that information made available to investors. That gives investors a kind of Good Housekeeping seal of approval on whether or not these are, in fact, sustainable bonds. Over time, we expect to launch ESG-oriented indexes and provide even more ESG services to clients, on the back of all the data that’s becoming available.

Once again, those “additional ESG services” are unlikely to be pro bono. We hear often enough about Big Oil, but rather less about the financial interests that are now aligned behind today’s green agenda.

And there is this.


The question for us is always, how do we preserve the best of capitalism and still recognize that we have a role to play in the communities around us, and not just a role to play for shareholders?

For someone heading a major stock exchange to use a phrase that includes a reference to preserving the “best” of capitalism, suggests that that she is, at best, playing defense. Yes, capitalism does a decent job, but . . .

In reality, most advocates of capitalism or, in particular, of free markets (the two are not the same), concede that capitalism may not be perfect, far from it (not least because trial and error lies at the heart of a market economy). However, the fact remains that, taken as a whole, capitalism has delivered more prosperity to more people, by a very long way, than any other system.

As for the seeming subordination (that “just”) of shareholders (again, a strange qualifier from someone heading a stock exchange), that is consistent with the view of those who have embraced the ideology of stakeholder capitalism, and with it, the view that shareholders, mere owners of the company, are just one stakeholder among many.


We talk a lot about the idea of inclusive capitalism—an understanding that companies need to evaluate their businesses in the eyes of their clients, employees, suppliers, and the communities in which they operate.

“We” do?

This is a sentence built on the caricature of capitalism that is one of the cornerstones of a belief in stakeholder capitalism, a caricature that owes more to caricatures of the Gilded Age than, for the most part, any contemporary reality, at least in the West (broadly defined). There, at least, businesses that pay no attention to how they are seen by their clients, employees, suppliers, and, depending on what that phrase means, “the communities in which they operate” are unlikely to do well.

The Quarterly:

Nasdaq recently proposed that listing companies have two diversity candidates on their boards. What prompted that proposal?


Nasdaq has a specific role to play in the US economy as a self-regulatory organization. We are kind of a gatekeeper to public investors. In this role, we provide certain sets of rules that govern the companies that go public. The SEC [US Securities and Exchange Commission] does, too, but its rules are focused on business purpose, risks, and ensuring that investors have a full set of information to make informed decisions about companies. By contrast, our rules are focused on governance—for instance, the composition of the board, the number of independent directors, and so on. There’s an overwhelming amount of research, including from McKinsey, that demonstrates that diverse boards perform better and tend to manage risk more successfully.

Then again, McKinsey, pushing its stakeholder capitalism shtick, has a vested interest in taking this line (which, in any event — if I had to guess — may well owe more to correlation than causation). Some may find it odd (except that it’s not) that Friedman makes no reference to this research, published in the Harvard Business Review (a journal by no means hostile to diversity — on the contrary):

Evidence that board diversity benefits firms, however, has been mixed. A 2015 meta-analysis of 140 research studies of the relationship between female board representation and performance found a positive relationship with accounting returns, but no significant relationship with market performance. Other research has found no relationship to performance at all.

We interviewed 19 board directors (15 women and four men) to learn whether and how corporate boards were benefiting from diversity. Combined, the board members held seats on 47 corporate boards in the U.S. across a variety of industries. The research found that diversity doesn’t guarantee a better performing board and firm; rather, the culture of the board is what can affect how well diverse boards perform their duties and oversee their firms . . .


Friedman explains what NASDAQ is going to do to increase boardroom diversity:

We launched a new rule focused on disclosing the diversity of boards, so investors can make informed decisions if diversity is an issue they care about. We’re also using a uniform reporting format so we can actually research trends in this area. The standard we set is at least one woman and one underrepresented minority on every board that’s listed on Nasdaq. The obligation the company has is either to meet the standard or to disclose why they are unable to. They won’t get delisted if they don’t meet the standard. But they should disclose that to investors. It’s not a high bar, but we feel like it’s an important one to further the notion of providing more opportunity and bringing more diversity into the boardroom, which we think creates better companies.

Again, who does “we” really represent?

The Quarterly:

What’s the reaction been to this proposed rule change?

Adena Friedman:

It’s largely been positive, but we’ve certainly had some opposing views. The rule still needs to be approved; the proposal sits at the SEC. In the process of gathering comments and feedback, we’ve reached out to all our issuers and to a lot of institutional investors. The institutional-investment community is, I would say, universally positive, and they’ve written a lot of comment letters to the SEC to show support. The vast majority of our issuers are quite positive, but some do have concerns. For instance, what if they meet the standard today, but then a board member resigns, bringing them out of compliance, and they haven’t found a replacement yet? They don’t suddenly want to be moved to a different list. Another concern has come from smaller boards. This is a universal standard, regardless of board size. Should we tweak the standard to accommodate smaller boards?

Perhaps it’s unfair to think that if the reaction (a few quibbles apart) had been as positive as Friedman had suggested, there would have been no need for the change that the exchange is suggesting.

And yet . . .

In the Wall Street Journal article I quoted in December and again yesterday, there was also this:

In a review carried out over the past six months, Nasdaq found that more than three-quarters of its listed companies would have fallen short of the proposed requirements.

And so, regulation will be used to force through something that legislators have not approved, and about which shareholders appear to be unconcerned. Stakeholder capitalism is nothing if not consistent.

Around the Web
Working from Home hits carmakers in yet another way.

The Hustle:

If it’s not nice to kick someone while they’re down, then COVID has been quite the car bully.

After US auto sales ended 2020 down 15%, the industry is now grappling with a global semiconductor shortage — the result of millions working, schooling, and entertaining themselves from home

So manufacturers are slashing outputs . . .

. . . and making the assembly line industry look more like a dotted line as brands announce pauses in production:

  • GM, Toyota, Honda, Volkswagen, Fiat Chrysler, Nissan, and Mazda, all announced Q1 production cuts
  • Ford is reducing F-150 production shifts and is expected to drop output by 20% in Q1

As cars have modernized, they’ve become increasingly dependent on computing power and electronic tech (think: 17-inch touch screens, Wi-Fi, collision avoidance).

New cars can use 100+ semiconductors and, in 2019, auto manufacturers made up ~10% of the semiconductor market.

Problem is, COVID means everything from PCs to iPhones to data centers to Xboxes (Xboxen?) became essential, leading to chip backlogs 40+ weeks.

The wealth tax bandwagon rolls on . . .

The Hill:

Washington state’s proposed wealth tax would cost Amazon CEO Jeff Bezos $2 billion per year, CNBC reported on Monday.

State legislators in Washington proposed a bill that would institute a 1 percent tax on wealth more than $1 billion.

Bezos is one of four mega-billionaires that tax experts say would face the brunt of the cost under the proposed tax, along with Microsoft co-founder Bill Gates, Bezos’s ex-wife MacKenzie Scott and former Microsoft CEO Steve Ballmer

Lawmakers have said the tax, aimed to combat inequality in the state without an income tax, would raise about $2.5 billion total per year.

Jared Walczak, the vice president of state projects for state tax policy at the Tax Foundation, estimated in a post that 97 percent of that revenue would come from the four mega-billionaires in the state, citing data from Forbes.

According to CNBC, Gates would owe $1.3 billion per year, Scott would owe about $600 million per year and Ballmer would owe about $870 million per year. Walczak argued that the wealth tax would prompt these individuals to move and/or change their state of residence to avoid the payments.

I think he’s right.

France’s wind follies.

Standpoint, July 2020:

France will, over the next eight years, build 6,500 new wind turbines to add to the 8,100 it already has. They will be larger than the existing ones so the new wind farms will enable France to more than double its existing installed wind power capacity.

France is engaged in an act of landscape spoliation on a massive scale, from the vineyard slopes of Burgundy to the fortified medieval city at Carcassone. Construction recently began of a windfarm next to the Mont Sainte-Victoire, the craggy mountain near Aix-en-Provence, the one that Cézanne painted over and over again . . .

None of this would be alright if it didn’t cost anything but, according to the French Court of Audit, the newly-agreed expansion of renewable energy (including solar, biomass, etc.) is going to cost £110 billion.

And here’s the good bit. For this money, France is going to get no reduction in carbon emissions. Thanks to the nuclear power programme begun by General de Gaulle in 1945 that made France by far the biggest per capita nuclear power producer in the world, 90 per cent of French electricity is already carbon-free. In 2019 French electricity was 71 per cent nuclear, 11 per cent hydro, 6 per cent wind and 2 per cent solar. Only 10 per cent was CO2-producing thermal (mainly natural gas).

France is spending £110 billion to solve a problem it doesn’t have.

Cults are what they are. Please read the whole thing.

Random Walk
The Random Walk will not solely be concerned with great short squeezes of the past, but some stories are too good not to retell. Last week, Daniel Tenreiro featured the Stutz short squeeze of 1920.

Today, we turn our attention to . . . Piggly Wiggly.

From the Financial Times:

Clarence Saunders was not a man to be pushed around. When members of his golf club complained that he was overtipping the caddies, his response was to construct his own private golf course in the grounds of the pink palace he was building for himself in Memphis, Tennessee. And when, at the end of 1922, Wall Street speculators — or “welchers” as he liked to call them — started to sell shares in his company, Piggly Wiggly Stores, he decided to buy them up, and to keep on buying.

He was, he said, determined “to beat the Wall Street professionals at their own game”. The result turned out to be the last big head-to-head clash between private individuals and the financial establishment for nearly 100 years, but one that is now being played out again in a rather different form by legions of outsiders on the Reddit platform.

Individually, they don’t have anything like the resources that Saunders could bring to the game. But collectively they pack a real punch which, like him, they focus on a single target. Like him, they take pleasure in giving the Wall Street professionals a black eye. And they are not shy about touting the bargains to be found in whatever they happen to be promoting.

Saunders didn’t have the internet to rally his supporters, so instead he placed giant newspaper advertisements to promote Piggly Wiggly shares. “Opportunity! Opportunity! It knocks! It knocks! It knocks!” And, like the Reddit crowd, he presented himself as being on a crusade against the amoral barons of the stock exchange.

The big question is whether Reddit’s traders will suffer the fate that met Saunders at the end of his struggle. Bankrupt and fired from the company he had built, he cried out to the assembled mob of reporters: “They have the body of Piggly Wiggly, but they cannot have the soul!”

At the start, everything seemed to be going his way. Convinced that Piggly Wiggly was heading for a fall, Wall Street traders borrowed the shares and sold them in large numbers, hoping to be able to buy them back later at a lower price to clear a profit.

What they hadn’t reckoned on was that Saunders would be willing to borrow so much money that he could buy just about all the shares there were. He had created a corner in Piggly Wiggly, which meant that the only person able to sell the Wall Street traders the shares they needed to settle their transactions was Saunders himself. And, since there were no other sellers around, he could charge them whatever he liked . . .

By late January, the company’s share price had jumped by around a half to $60, and on March 20 it briefly touched $124. On paper, Saunders had made millions, and senior members of the stock exchange who had been actively selling the shares faced ruin. But the authorities spotted a crafty way out. They changed the rules.

Trading in Piggly Wiggly was suspended, and the delivery deadline for those who had sold shares they didn’t own was extended until further notice.

This was bad news for Saunders, who had built up enormous debts to acquire the shares that had to be repaid. He mounted a valiant campaign to persuade the citizens of Memphis to bail him out. As his newspaper advertisement said, “For Piggly Wiggly to be ruined would shame the whole South”. But not enough people rallied to his cause, and by August it was all over . . .

— A.S.

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