Property Rights Foundation of America®

Speech from PRFA's Eleventh Annual National Conference on Private Property Rights

Invest for Freedom — To Stop the Use of Capitalism Against Capitalism
Thomas J. Borelli, Ph.D.

Thank you, Carol. Thanks to all of you for coming here this morning. A little change in direction. I'm not a lawyer. I don't know if that is good news or bad news. I also am very involved in advocacy but let me first describe the problem we are facing.

The problem that we're facing is that social activists and social activist investors are basically using corporations to advance their social and political goals. It's a strategy movement.

What we have done is registered a mutual fund. It's called the Free Enterprise Action Fund, and it's tailored for the free market investors who want to make a financial return and at the same time support their belief in liberty and freedom. It is an activist fund. Why do we need this now?

I gave you a brief description, but The Wall Street Journal wrote an editorial about two years ago. This is what they said, their quote: "This is the new politics of capital in which liberal activists attempt to turn entire corporations into lobbyists for their social and political goals, all their campaigns disguised as shareholder activism."

The activists are basically taking a corporation and transforming it for their own purpose. What does that mean to us? That means we have a huge challenge. I am not sure if any of you are Ayn Rand fans or read Atlas Shrugged, but this is Atlas Shrugged come alive. It is ironic. It is fifty years since Ayn Rand published this novel, and it was written as a fiction but it is really a nonfiction as we are looking at it today. For those who haven't read it, it is about the downfall of capitalism and how capitalists actually lead to the downfall of capitalism and society at large. So we're really taking on the capitalists. And it's ironic because most people think companies would only do things in their financial interest. In many cases that's just absolutely wrong.

Many CEOs today are acting more like politicians, because they want to be loved, rather than making money for their shareholders. And politically, this is a huge risk. Just imagine and visualize the marriage of Sierra Club, Natural Resources Defense Council, and The Nature Conservancy, with huge corporations. That's a tremendous amount of money, power and influence of which many of us are locked out. You are not going to be able to influence the Sierra Club. You're not going to be able to influence the Natural Resources Defense Council. How many people can influence publicly owned corporations? There's only one way to do that, and that is to be a shareholder, and that's where we come in.

A very huge tipping point here—two of the biggest public policy issues are going to be decided in the next few years. I'm talking about global warming regulations that can change the way energy is priced and regulated here in the United States, and the next one down the pike is universal government-funded health care. The resolution of these issues is going to depend on where corporations lie, because they have the money, power, and influence to direct where these things go. So the battle of ideas has really moved to the boardroom, and we are your voice of liberty in that boardroom. Let me give you a few examples.

Keeping with the theme of property rights, what the activists are doing with corporations, in some instances, is silencing them on very important public policy matters. That would be like having land you can't develop because someone is intimidating you. Another way is basically hijacking your property, hijacking the power money in the corporation and redirecting it for your political purpose. That is like somebody coming on your land and building a building on your land without your wanting them to. Let me give you an example.

Social Security reform. How many people remember those commercials where you had the bulldozer taking out the house and the commercial saying we don't need to reform social security? Those commercials ran once a week. They were a million-dollar-a-week ad buy. They were funded by AARP, which was against Social Security reform. That image was able to really affect people's minds in terms of what Social Security reform would mean. Ripping down the whole system would be bad.

Does anybody remember the commercials run by a financial services company that showed the potential return on your money and your property through private accounts? Anybody know those commercials? You shouldn't, because there were none. The reason why there were none is because union activist shareholders went out and intimidated publicly-owned companies not to get involved in Social Security reform debate. For example, they went to the meeting of the Charles Schwab investment company. They went to this shareholder meeting, and they took it over. Union activists stood up and shouted down the chairman at his own meeting. If you own property rights in Charles Schwab, you were silenced by this activist. They protested outside the shareholder meeting and they also protested at branch locations around the country. The message that was sent was, if you try to promote Social Security reform, we are going to take you down. What happened was silence from financial services companies, who would make money by providing personal accounts. So that was kind of a looting of property rights in that example.

The next big issue, as I mentioned before, is global warming. Right now it is really, truly frightening. There is a coalition of corporations—DuPont, General Electric, Caterpillar, Pepsico, Alcoa—with environmental activist groups —the Environmental Defense Fund and a few others — that are lobbying for global warming regulations. So, you have this huge grassroots advocacy component of the environmental activists and you have the money, power and influence of corporations, married together to lobby for global warming regulations. Now, of course, you might be skeptical and say, well, companies have to be doing this because they want to make money on this. Not necessarily, and I'll go into a few examples on how all of these companies actually are lobbying against their own financial interests, which is really counterintuitive.

Before I get to that, let me just mention that we are an investment vehicle. We are a mutual fund. I now want to talk about our performance, both in financial and advocacy because that is why people invest with us. We are happy to report that we registered in 2005. Our shareholder returns are up over twenty percent and year-to-date this year we are up over ten percent. The market has been good. We perform with the market. As you know, investing in market securities involves risk and one can never promise financial future returns. But so far, so good.

Now let me get to our values-based return. Getting back to global warming, the question is, is it good for these companies? Is it good for their financial performance? Well, one thing we know about global warming regulation is that it is going to increase energy costs. So the first question is, how is a corporation going to increase its profits in an environment and an atmosphere where energy prices are high? In fact, government studies have shown that gasoline prices can go up over fifty percent and energy prices up over eighty-six percent. So how are these companies going to make money in such an environment? A lot of times it turns out that many of these companies really haven't thought through these economic impacts for the shareholders.

For example, let me talk about J.P. Morgan Chase, the bank. This is a great case study. A couple of years ago J.P. Morgan Chase was being protested by a group called the Rainforest Action Network. They're a radical environmental group, and they were protesting J.P. Morgan Chase because the bank did not have an environmental policy. So after protests outside the company's office, including one where they had second graders protest on the streets of Manhattan, because they said that J.P. Morgan Chase was destroying the rainforests in foreign countries, the company gave in.

After that kind of intimidation, strong CEOs certainly gave in to second graders and the Rainforest Action Network. The company came out with an environmental policy. Not only did they have an environmental policy, but to really get on the good side of these groups, J.P. Morgan Chase agreed to lobby the Bush Administration for global warming regulations. This is brilliant on their side. You have a bank whose primary interest should be growing economies and lending money. You transform that into a lobbyist, your lobbyist for global warming. So if you own shares in J.P. Morgan Chase, your value is being looted by these people having the corporation take their agenda instead of yours.

What should J.P. Morgan Chase be worried about? It turns out they have litigation expenses of over $600 million a year. So from a property rights perspective we own shares. We went to them and filed a shareholder resolution and said that we think they should be more interested in litigation reform than global warming regulations. We were able to get that on the proxy statement, and we ended up getting 24 percent of the shareholder vote of J.P. Morgan Chase saying, give us a report on how you determine your lobbying priorities because, clearly, $600 million out the door is far more important than your freelancing on global warming.

J.P. Morgan Chase also gave $1 million to ACORN, which is a community activist group. Their most recent head of what they call the "Department of Corporate Social Responsibility" ran Al Gore's election campaign in 2000. Now all of their government affairs and worldwide public affairs reports to this individual. So we know where their nonprofit money will be going in the future.

Another case study—Caterpillar, the heavy equipment construction company. Caterpillar is part of this climate-action partnership lobbying for global warming regulations, and, again, you would think, well, obviously they have something financially to gain. Well, it turns out that their business is mining. They supply equipment for mines. Well, who is going to be harmed by global warming regulations? The coal industry. According to the Congressional budget office, the coal industry could lose up to forty percent of production of coal in the United States. How is this in their best interest to be lobbying for regulations that are going to harm one of their key customers? Obviously it's not.

So, we went to their shareholder meeting, and we also had support from another policy group, The National Center for Public Policy Research—we have some members here today. We went to their shareholder meeting and were able to ask the chairman a pointed question. Did you do a cost/benefit analysis of what these regulations would do to your shareholders? His answer, "No, I did not." "Why did you do it?" "I want a seat at the table."

So political correctness has run rampant in the boardroom. DuPont and General Electric are also part of this coalition. We've filed shareholder resolutions with them as well. We asked for an explanation from the chairman of General Electric, who is leading the pack on this because he believes he can make more money by selling windmills, which he might, but he has a huge conglomerate. He has to worry about the overall economic impact of global warming regulations on his bottom line. As always, they never think about the unintended consequences.

The first unintended consequence was when California started to ban the incandescent light bulb, which happens to be an invention of Thomas Edison, the founder of General Electric, which is kind of ironic. Also, General Electric has new research going and they supply a lot of equipment to coal-fired electricity production plants. They sell those turbines, and they also have the technology to bury CO2 because of global warming regulations. They think they can play global warming regulations to their advantage. The problem is that the activists don't like coal, period. And they're, one by one, stopping the construction of new coal-fired plants. So basically, General Electric is being used as a tool for these activists and then we're all losers.

Pepsico is another group that is a part of this climate-action partnership. So what's Pepsico's interest in higher energy prices? God only knows. They did sponsor Al Gore's Live Earth concert, and they are part of this lobbying group. Well, okay, what's the unintended consequence for Pepsico? Bottled water. It turns out that bottled water is now said to be an "environmental threat." One, because of the plastic it takes to bottle it, and two, to ship it. So you have Pepsico who essentially is whipping up global warming fears and now it is backfiring on its bottled water business. The mayor of San Francisco recently banned the purchase of bottled water by city agencies. There is now a tax proposal in Chicago to tax bottled water. Another member of this lobbying group with Pepsico is the Natural Resources Defense Council. They are the leading critic of bottled water. So once again you have Pepsico who is actually promoting the destruction of its own brands. And there was an article in Ad Age just the other day talking about how this is a big threat now.

This is why shareholder activism is important and why we come in, because we are legitimate shareholders. We can ask those pointed questions, those embarrassing questions, "How is this possibly in your best shareholder interest?" And again, the big one coming up is nationally-funded health care. There was a Wall Street Journal editorial about two weeks ago that talked about how the union pension funds were going to do the same thing as they did in Social Security reform. Only, this time, they are going to go after corporations to silence them on individual accounts, because they really want to promote universal government-funded health care.

So this is the battle that we are involved in. This is the role that we play and what I would really ask you to do is carefully consider making an investment with us so we can promote your values of liberty in the new battle of the board room. And again, investing always carries risk, but not investing in the future and freedom and liberty also carries risks. Thank you.

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