Stakeholder Capitalism: Yvon Chouinard’s Bold Play

Patagonia Inc. founder and avid climber Yvon Chouinard’s autobiography, Let My People Go Surfing, provides important insights into his background and recent decision to sell his company. In 1970, he lamented the damage caused to his beloved Yosemite by fellow climbers hammering pitons into the rock. For Chouinard, this issue was personal because his company was selling the pitons. Unable to stomach the environmental degradation, he transitioned from selling invasive pitons to smaller chocks that did not require hammering. He advertised the use of these chocks as “clean climbing.” They became a smashing success.

By the 1990s, Chouinard was struggling to reconcile being “in business to save the world” with profiting off the resource-intensive clothing industry. A hired consultant challenged Chouinard’s commitment to philanthropy, “I think that’s bullshit…if you’re really serious about giving money away, you’d sell the company.” Chouinard balked at the idea. He worried that new management would do away with his initiatives to use costly organic cotton and donate one percent of yearly revenue to environmental causes. Chouinard continued his activism for decades, all the while worrying that “it wasn’t enough.” 

In 2022, Chouinard found a solution. He transferred Patagonia’s voting shares to the Patagonia Purpose Trust and its non-voting shares to a 501(c)(4) called the Holdfast Collective. The trust, which will hold two percent of Patagonia’s total shares, will have sole authority to appoint members of the board and structure the company charter. This will allow Chouinard to keep control in the hands of family and trusted advisers who will uphold the company’s mission statement: “We’re in business to save our home planet.” The Holdfast Collective will receive the company’s yearly profits as a dividend, all of which will go to environmental causes. Chouinard  structured the Holdfast Collective as a 501(c)(4) so it can make political contributions. Because of this choice, he received no tax benefits for giving away his multi-billion dollar company. More than fifty years after building a company on the ethos of clean climbing, some hope that Chouinard just laid the foundation for an era of clean capitalism. 

Chouinard’s innovation is one of the bolder examples of stakeholder capitalism. This idea that businesses should pursue goals other than profits for shareholders recently gained support from the Business Roundtable, a yearly gathering of prominent CEOs. For decades the meeting promulgated the idea that corporations exist to serve their shareholders. However, in 2019, the CEOs issued a statement that corporations must start placing the interests of the environment, workers, and communities on equal footing with the quarterly earnings report. 

Reasonable minds differ as to the viability of stakeholder capitalism. In 1970, Milton Friedman published an article decrying the intrusion of social responsibility into boardrooms. He believed a corporation’s only responsibility is to “increase its profits so long as it stays within the rules.”  Vivek Ramswany, a healthcare entrepreneur and prominent critic of stakeholder capitalism, echoes Friedman’s concerns. Ramswany further argues that corporations entering the political sphere will give corporate executives the power to decide our social values, eventually causing “rampant and…irresolvable cultural discord.”

For now, Patagonia is popular on both sides of the aisle, despite its long history of political activism. But, some evidence supports Ramswany’s fears. Ron DeSantis, the governor of Florida, has been vocal in his opposition to socially responsible companies. After Disney criticized a controversial Florida education bill, DeSantis pulled their tax exemptions and lambasted them in the press. Conservative state treasurers are also entering the fray. The treasurers of Arkansas and Louisiana pulled over half a billion dollars from BlackRock, an investment manager, due to the firm’s commitment to environmental causes. It remains to be seen if Patagonia’s restructuring will result in a similar backlash.

Friedman saw stakeholder capitalism as an effort by citizens to “obtain through undemocratic procedures what they cannot attain by democratic procedures.” He is right, but this is not the searing indictment he believes it to be. The filibuster effectively makes the United States the only member of the OECD (a club of advanced economies) that requires a supermajority to pass simple legislation. With the public sector perpetually gridlocked, it is unsurprising that citizens look to the private sector to combat the seemingly inexorable march of climate change. Chouinard’s restructuring of Patagonia constitutes a welcome act of unfathomable generosity and a noteworthy innovation in corporate governance. Patagonia’s ability to continue thriving under this new structure will be a bellwether for those who wish to change the nature of corporate boardrooms. Friedman and Ramswany may yet be right that the private sector is fundamentally unsuited to solve our social ills. But, when confronted with warming oceans and a limp legislature, what else was Chouniard to do?


Generation Z’s ‘Big Brother’ – TikTok’s Intrusive Data Collection Practices and Regulations

TikTok, arguably the most popular social media platform among gen-Z, has faced legal scrutiny over the past two years regarding its data policy and ties to China. The debate about cybersecurity is not an unfamiliar one, as it’s commonplace for social-media giants, such as Facebook and Twitter, to invasively collect and use personal information from its users for targeted content and ads. Similar to Facebook and Twitter, TikTok collects users’ data in a variety of ways — compiling information on user contact lists and calendars on their phones, gathering user’s search and view history, content of their messages, and geolocating devices on an hourly basis. What distinguishes TikTok from the other social-media platforms is not only its “more aggressive” and “intrusive” data collection practices, which are granted by the app permissions automatically, but also its close ties to the Chinese authorities.

While TikTok has consistently stated that the data it gathers from U.S. users are stored in the U.S., not China, leaked audio from more than 80 internal TikTok meetings revealed Chinese TikTok employees can access U.S. users’ data. Additionally, the Chinese government could potentially force ByteDance, TikTok’s Beijing-based parent company, to collect and turn over user data to the government. The Chinese government would use this data to build a “vast database of information that could be used for espionage,” by “identifying U.S. government employees who might be susceptible to blackmail.” As data security worries mount, the U.S. government has repeatedly questioned and imposed restrictions on TikTok, including an executive order to ban TikTok issued by Trump in September, 2020, and revoked by Biden in June, 2021.

In September, TikTok reached preliminary agreement with the U.S. government to resolve its national security concerns. TikTok and the Committee on Foreign Investment in the United States (CFIUS) crafted a deal to address national security concerns. They agreed upon three main changes TikTok must implement. First, TikTok will store all data collected in the U.S. solely on servers run by Oracle, a cloud platform headquartered in Texas, instead of on its own servers. Second, Oracle will monitor TikTok’s algorithms of content recommendations, in order to address concerns that the Chinese government could influence American public opinion via TikTok’s personal feed. And lastly, TikTok will set up a board of security experts responsible for reporting to the U.S. government and overseeing TikTok’s U.S. operations. This preliminary draft is being reviewed by U.S. national security officials, and many hurdles still remain. 

For one, big data and data privacy and security has been a focus of government regulation and enforcement for the past few years – many federal agencies, such as the Federal Trade Commission and Cybersecurity and Infrastructure Security Agency, are working on new rules, and “in 2021 alone, 36 states enacted new cybersecurity legislation.” Moreover, the government’s close scrutiny of TikTok’s data privacy policies are intertwined with the whims of the global political spectrum, “as TikTok has become a symbol of the Cold-War-like atmosphere in relations between Beijing and Washington.” In a sense, suspicion toward TikTok reflects a suspicion of China, and criticisms of TikTok are unlikely to cease even if an agreement is reached with the U.S. government. 

Furthermore, the three changes TikTok agreed to implement are unlikely to make any significant progress in clearing the legal cloud surrounding the potential national security threat of its data practices. First, even with data stored on American servers, the concerns about national security remain, because physical storage on U.S. soil does not preclude the Chinese government from  accessing user data. As the leaked recordings show, data freely flows between the U.S. and China through TikTok and ByteDance’s tools for data visualization, content moderation, and monetization, and more. Additionally, data stored on Oracle servers will only include data not publicly available on the app, meaning that public content will still likely be accessible to the Chinese government. TikTok must go further to address the national security concerns raised by the U.S. government, as its ties to China increase TikTok’s threat perception by the U.S. TikTok’s global reach and recognition will be hindered if the platform is banned in America.  


Sentenced to Life (Unemployed): Hiring the Formerly Incarcerated Amid Labor Shortage

An increasing number of businesses are adopting open hiring practices—often referred to as second-chance hiring—by eliminating previous restrictions placed on applicants with criminal records. In doing so, these companies have produced a two-fold economic and societal gain. That is, these amended hiring processes help alleviate the gaps of the current U.S. labor shortage, all while taking steps towards addressing the detrimental impacts of mass incarceration in the U.S. and the social and racial inequities that plague the criminal justice system.

This year, the labor shortage in the U.S. has reached unprecedented levels. The U.S. Bureau of Labor Statistics reported just over 10 million job openings at the end of August 2022. In an effort to fill these spaces in the workforce, employers have pursued multiple avenues of recruitment. For instance, in May 2022, 49% of businesses reported raising compensation for open positions. Others—both small businesses and larger companies—have shifted their hiring focus towards “different groups they hadn’t looked at before,” such as those without degrees, candidates with less relevant experience, and people with criminal records.

Previously incarcerated individuals have historically struggled to reenter the workforce upon release. This is exacerbated by the fact that a large majority of job applications require background checks. For many employers, notice of any sort of criminal record is enough to place an application in a separate pile and often in the trash. The Prison Policy Initiative reported that the unemployment rate for formerly incarcerated individuals in 2018 was over 27%, whereas the overall unemployment rate in the U.S. is only 3.5%. Almost half of formerly incarcerated people are unemployed one year after being released from prison.

Big companies like JP Morgan Chase and CVS Health have led the way in attacking the root of this issue by disposing of traditional hiring restrictions based on criminal history altogether. Jamie Dimon, chairman and chief executive of JP Morgan Chase, describes the unemployment rate amongst formerly incarcerated individuals as a “moral outrage.” His company’s hiring process is dedicated to targeting and overcoming barriers posed by occupational licensing rules and systemic racism in the U.S. criminal justice system. Last year alone, JP Morgan Chase hired 4,300 people with criminal records.

Similarly, CVS Health has made hiring efforts concentrated on mitigating the racial inequities produced by the criminal injustice system. In the U.S., people of color are disproportionately at risk of conviction, and are far more likely to receive longer and more severe sentences than their white counterparts. Amongst previously incarcerated individuals, Black women face the highest rates of unemployment estimated at 43.6%, followed by Black men at 35.2%. By comparison, previously incarcerated white women and men, experience lower unemployment rates of 23.2% and 18.4%, respectively. Women of color are disproportionately placed in part-time jobs as well. By focusing its hiring initiatives on communities of color, CVS has made real steps towards addressing these major gaps of inequality, and smaller businesses across the country have begun to follow suit.

Services like 70 Million Jobs and the Redemption Project help facilitate second-chance hiring on a wide scale. Genevieve Martin, executive director of Dave’s Killer Bread Foundation, advises companies on how to effectively execute this approach. She emphasizes that “Second-chance hiring is less likely to work if an organization is doing it for the wrong reasons… It’s not a program. It’s a business model.” In other words, the intention behind implementing second-chance hiring is vital to the model’s success. Thus, fostering a corporate culture with a commitment to hiring the best candidate requires upholding an emphasis on inclusion.

Several studies have established a high correlation between unemployment rates and recidivism. One study from the Indiana Department of Correction concluded that the recidivism rate among unemployed offenders was 42.4%. For employed offenders, these rates dropped to 26.2%. A representative from Progressive—another company expanding their hiring practices to formerly incarcerated applicants—raises, “If we can’t be part of the solution, providing people with opportunity, how can we be surprised when people repeat the same cycle?” Second-chance hiring is one of many examples of how placing a rehabilitative lens on criminal punishment can lead to tremendous and widespread societal benefits. There is no reason that even short criminal sentences should carry consequences for life.

This growing trend in open hiring initiatives has demonstrated substantial positive effects on both the U.S. economy and labor force. Nonetheless, there is more work to be done. In order to fully address the inequities that pervade the criminal justice system, it must be restructured at its foundation—beginning with extensive policy reform and systemic change. Administering restoration mechanisms, limiting public access to criminal records, implementing fair employment and licensing laws, and providing financial support upon release are just a few of the many proposed solutions at the forefront of this discussion.

The Knives Are Out for Startup Acquisitions: Predictions on the Adobe-Figma Deal

Big Tech has grown in size and scope over the past decade through acquisitions of hundreds of smaller players in the market. Emerging tech startups with innovative products and business models were attractive targets in the eyes of Big Tech and technology investors.

US antitrust regulators have historically paid less attention to these tech deals, but now regret the limited antitrust scrutiny. With Lina Khan’s appointment as chair of the FTC in June 2021, major tech company takeovers of small businesses, otherwise known as “killer acquisitions,”  face heightened antitrust review. This new combative approach was further signaled with the FTC’s unexpected move to block Meta’s purchase of a VR gaming startup; a move generating great concern among Big Tech gatekeepers. Meta’s antitrust challenge serves as a preview of future FTC efforts, and all eyes now turn to Adobe’s acquisition of Figma.

What happened in FTC v. Meta?

Within was founded in 2014 and focuses on fitness-related virtual reality apps. Within’s most renowned product Supernatural, is an app offering various workout choreographies in virtual locations such as the Galapagos Islands, China’s Great Wall and the surface of Mars. Meta designs and sells VR headsets, hardware and software including its famous rhythm game Beat Saber. Meta’s potential acquisition of Within put the company and Mark Zuckerberg on the FTC’s radar. On July 27, 2022, the FTC filed a complaint in California alleging the acquisition of Within would substantially lessen competition and create a monopoly in two different markets.

This deal concerned the FTC, especially to Lina Khan, for several reasons. In the VR fitness app market, the FTC considers Meta as a potential entrant, and claims the deal will prevent entrance to the market because of Within’s status as an established incumbent. According to the FTC, Meta reduces innovation by buying what is already on the market rather than developing its own VR fitness app. Yet, ironically, Meta describes the FTC’s intervention as an “attack on innovation” with no legal grounds but “[ideological] speculations . . . sending a chilling message to anyone who wishes to innovate in V.R.”

The FTC also seeks to preserve the existing competitive dynamics in the VR fitness app market with their acquisition challenge, as Meta’s Beat Saber and Within’s Supernatural are regarded as “close competitors.” A relationship known to increase innovation and customer choice. Coincidentally enough Meta – previously known as Facebook – announced this acquisition just one day after changing its name to Meta, which prompted the FTC to perceive Meta’s rebranding as efforts to become a monopoly in the metaverse.

Should tech startups be concerned?

Today, most startups desire acquisition by a large company, a concept often termed the “exit strategy.” According to a PitchBook report published in April 2022, the total exit values for VC-backed startups in the US were calculated as $265.8 billion in 2019, $324.8 billion in 2020, and $776.4 billion in 2021. This dataset exemplifies the value of mergers and acquisitions and the reasons many startups proceed with an exit strategy in mind.

In the past, the FTC had prevented deals involving acquisitions of dominant competitors in the relevant market, but this is changing. The FTC’s recent efforts to stop startup acquisitions indicate the agency plans to expand the scope of traditional antitrust applications. In other words, the scope of premerger review is expanding to cover startup acquisitions considered to be potential entrants/competitors. Some argue the increased scope of review may lead to a decrease in startup takeovers, as Big Tech may be reluctant to go through the cumbersome and lengthy process of antitrust review. Some critics further argue that the agency’s new approach will hurt future startups by restricting possible acquisitions and may “have the unintended effect of helping Big Tech by disincentivizing entrepreneurs from launching startups.”

Will the FTC kill Adobe’s $20 billion deal?

“Our goal is to be Figma not Adobe” – A tweet created by Figma’s CEO Dylan Field on January 29, 2021. On September 15, 2022, Adobe officially announced in a press release that it will acquire Figma at a massive price of $20 billion. If successful, this will be the biggest acquisition for a VC-backed, privately owned startup in the last 20 years, according to Bloomberg.

Considering Meta’s ongoing antitrust litigation, this deal is large enough to draw the FTC’s attention. In contrast to the Meta case, where Within was not seen as a major competitor to Meta, and yet the FTC still filed a lawsuit, here, the software giant Adobe and the collaborative design platform, Figma, are direct competitors in the design software market; meaning the deal is likely to be seen by the FTC as a “killer acquisition.” Escaping regulatory antitrust attention in the current FTC environment will not be easy for Adobe’s acquisition. If they do, it would likely serve as a shift in FTC’s antitrust enforcement efforts.

Does Russia’s War in Ukraine Mark a Shift in Corporate Policy?

With the recent sanctions imposed by the US and Europe Union, Russia is facing mounting economic pressure to stop its invasion into Ukraine. In order to comply with the sanctions as well as the requests of Ukrainian officials, Western companies ranging from energy to technology sectors have curtailed their operations in Russia.

However, many corporations have gone above and beyond what is needed to align with the sanctions by either withdrawing completely or providing additional support to Ukraine. For example, SpaceX has sent Starlink terminals to provide internet access to Ukraine in response to faltering Ukrainian communication and Airbnb is providing short-term housing for Ukrainian refugees.

It is rare to see a company to do more than the bare minimum in order to affect politics. One could optimistically argue that the companies have suddenly developed a moral compass, but the likely motivation for taking a stance in this geopolitical conflict is the fear of reputational damage to the companies’ brands. This is evident from WeWork, which previously announced that it would not remove business from Russia because its “assets were doing incredibly well” but now has divested its operations after criticism from consumers.

Thus, the Russia-Ukraine war begs the question: have corporations begun to shift their focus from just shareholder concerns to stakeholders more broadly or is this just a one-off?

There is an age-old debate regarding corporate objectives. On the one hand, shareholder primacy requires companies to care solely about shareholder interests – making profits. On the other hand, stakeholder primacy gives corporations the freedom to seriously consider the concerns of other stakeholders, like consumers and employees, which often run counter to shareholder interests. For example, higher wages for employees may decrease the amount of money payable to shareholders, but will benefit employee morale.

In this geopolitical conflict, consumers have demanded that companies with considerable  political power forego potential profits and do more than what is simply required by law. Many of these corporations are financial powerhouses as well as global enterprises. The vast amount of money that these corporations hold allows them to support important causes that need financial stimulation. Furthermore, globalization has led to the inherent involvement of companies in other countries and makes them inescapably influential in foreign politics. For example, although social media platforms like Meta Platforms and YouTube are American corporations, they connect people from all over the world and are therefore used by many consumers outside the US. Since there are many users in Russia, these companies play vital roles in this war by ensuring their platforms are not exploited by the Russian government to promote propaganda and false information.

Because of this potential to shape political landscapes, consumers have been rightly advocating for companies to use this power to take a stance in political conflicts, even to the detriment of shareholder profits. To a hopeful mind, this war could represent a turning point in corporate objectives, allowing for stakeholder voices to be heard in addition to shareholders, and treating corporate social responsibility more seriously in the future.

However, some express concern that the corporate actions in the Russia-Ukraine war might only be an exception to the norm for two reasons. First, while Russia’s actions have received almost unanimous outrage, other conflicts with similar human rights implications have received less international condemnation, whether it is due to racial bias, unequal media coverage, or other reasons that have resulted in less stakeholder pressure. Second, many technology companies do not have large operations in Russia, making the burden of losing profits in that region much less significant in comparison to the wrath of consumers.

08With the growing apprehension of a possible conflict between China and Taiwan, it will be interesting to see if companies will continue to value stakeholder concern and take similar measures in a situation where such actions could significantly impact corporate growth and profits.


SPAC Mania: A Volatile Market and Undaunted Backers

In the last two years, Special Purpose Acquisition Companies (SPACs) have taken the financial world by storm, outdoing both IPOs and direct listings. SPACs have increased speed and the certainty of deal completion. However, SPACs are notorious for allowing companies to make projections about future performance—conduct that is strictly prohibited in traditional IPOs. In the face of increased regulatory and judicial scrutiny, and in a cooling market, it is unclear whether they will have a lasting place in the capital markets or will prove to be a passing fad.

While many companies have followed through on their mid-“de-SPAC” financial projections, many others haveunderperformed and left investors holding the bag.  of For instance, last year, Grab Holdings Ltd. began trading on Nasdaq after closing its SPAC merger at a $40 billion valuation with almost no redemptions. However, its shares fell following their listing debut, taking its market capitalization down to around $12 billion.

Though redemption rights originally acted as a risk reduction mechanism for investors by providing a “money-back guarantee,” the rocky performance of many post-de-SPAC companies had led to redemption rates as high as 97%. In the event of such radical redemption rates, the cash proceeds of de-SPAC transactions for the company are drastically reduced. As investors continue to redeem their funds at an increasing rate, SPACs are struggling to fulfill their minimum cash requirements that are crucial to close the transaction.

This phenomenon has led many SPAC companies into short-term agreements with alternative asset managers and private equity groups in order to replace cash being pulled out by investors. The redemption option creates uncertainty as to the amount of cash available after the business combination takes place, and SPACs are attempting to mitigate this risk by issuing securities to institutional accredited investors in a PIPE transaction that is contingent upon closing of the initial business combination. Under the provisions of such agreements, asset managers and private equity groups agree to buy shares from investors who are willing to withdraw their funds and the company gathers enough funds to meet its minimum cash requirements.

However, even with the security of a PIPE transaction, going public via a SPAC poses risk for private companies. For instance, in December 2021, Virgin Orbit closed a deal with NextGen Acquisition Corp II where Virgin Orbit had expected to raise $483 million in total gross proceeds, including a $100 million Private Investment in Public Equity (PIPE) transaction led by Boeing, AE Industrial Partners, and others. However, due to an 82.3% redemption rate ahead of the transaction, the SPAC’s trust account lost $315 million. As a result, the company only raised half of what it had originally anticipated.

According to SPAC Research / SPAC Alpha, last year, while the average monthly SPAC redemption rate ranged from 7%-43% from January to July, the market witnessed a 60% redemption rate from July to November as the range jumped to 43% to 67%. As the SPAC frenzy appears to have cooled down and more companies are starting to perform poorly in the stock market, SPAC executives are getting desperate to close their deals.

Many critics argue that the agreements illustrate how desperate SPAC executives are to close their deals and how alternative funds have targeted the investments to generate returns, with dealmakers viewing the terms granted as very favorable to the funds. Amidst all the regulatory scrutiny and poor performances, while entering into agreements with forward funds may ensure that deals get closed, such transactions may add to the financial crunch being faced by the public companies and may not solve long-term problems.

The Delaware Court of Chancery has also been looking more critically at SPACs in recent months. In In re Multiplan Corp. Stockholders Litigation, while the key issue revolved around fiduciary duties in the context of SPACs, the court also highlighted the significance of robust disclosure of material information so that all risk factors can be carefully considered. The court held that certain key officials of the SPAC, including its directors and CEO, violated their fiduciary duty of loyalty to the SPAC’s stockholders by failing to disclose material information regarding its target.

However, despite changing market conditions and an increased regulatory scrutiny, SPACs are here to stay, and the SPAC deals in the future will be of higher quality. Despite all the risks present, SPACs may attempt to protect themselves from high redemption rates in many ways. For instance, “bulldog provisions” limiting the percentage of total outstanding shares a single shareholder can redeem have begun to appear in SPAC agreements.  SPACs may be down right now, but these setbacks likely do not mean it is the end for the instrument. SPACs have revolutionized the capital market, and while they may need to change for it, it will need to change for them too.

A Digital Dollar: Pending Homework for the Fed

The history of money is entering a new chapter. The world’s central banks are realizing that they need to respond to the increasingly proliferating cryptocurrencies and stable coins. The alternative they propose is a digital fiat currency backed by central banks that functions similarly to traditional fiat money, so-called Central Bank Digital Currency (CBDC). It will operate just like cash, but instead of carrying it in a physical wallet or putting it into a bank account, it would be stored and accessed digitally, make payments more cost-efficient, and increase access to financial services. All told, as of February 2022, 91 countries are exploring CBDC at one level or another with some researching, some testing, and a few already distributing CBDC to the public.

As for the United States, the Federal Reserve finally released an authoritative paper on CBDC in January 2022, following past Fed experiments with a hypothetical CBDC. This marks the first step in a public discussion between the Fed and stakeholders about CBDC. In the paper, the Fed takes a comprehensive look at the advantages of CBDC, such as speeding up electronic cross-border payments in an already highly digitized world. The paper also highlights CBDC’s potential to support the U.S. Dollar’s international role and promote financial inclusion by expanding access to digital money for unbanked persons. Further, the Fed suggests that a U.S. CBDC would best serve the needs of the U.S. by being privacy-protected, intermediated, widely transferable, and identity-verified. However, the paper also discusses some issues with a CBDC, such as financial stability, changes to the structure of the financial sector market, and maintaining privacy while guarding against fraud. To explore design options for a CBDC, the paper includes 22 items for public feedback in a 120-days comment period.

Many CBDC enthusiasts, as well as some cross-border payment associations, welcomed the Fed’s paper as the first key milestone in the U.S. digital dollar policy. Still, the paper made no clear policy recommendations and offered no clear signal on where the Fed stands on the launch of CBDC, causing some economists to see this project as a long shot. The Fed emphasized that they would not proceed with creating CBDC without support from the executive branch and authorization from Congress. In fact, the executive branch gave the green light on March 9 through the President’s Executive Order on Ensuring Responsible Development of Digital Assets. One key takeaway from the order is that the Biden administration “places the highest urgency on research and development efforts into the potential design and deployment” of a U.S. CBDC. On the other hand, Congress is still divided over the need for a CBDC. Some members of Congress are concerned about privacy and surveillance issues, while others support a digital dollar to boost financial inclusion.

In contrast to the U.S. government’s slow pace, a handful of countries have firmly expressed their interest in CBDC through accelerated experimentation. Nine countries have already successfully launched a digital currency. Claimed as the first nationwide CBDC, the “Sand Dollar” in the Bahamas has been in circulation for more than a year. It holds an identical function and legal status as Bahamian cash dollars. Individuals, including non-residents of the Bahamas and businesses, can use the Sand Dollar through mobile e-wallet applications for many transactions in authorized merchants. In addition, 14 countries, including China, are now piloting their CBDCs ahead of a potential full launch.

China, as one of the world’s leading countries in the payment industry, started its research on CBDC in 2014 as part of its broader efforts to internationalize the Yuan, maintain control over its financial system amidst proliferating private cryptocurrencies, and increase surveillance over individuals’ transactions. Further, a digital Yuan would also allow Chinese firms and their trading counterparties to reduce reliance on the U.S. dollar for cross-border payments and potentially circumvent payment channels subjected by U.S. sanctions. A pilot program of China’s digital Yuan, launched by the People’s Bank of China two years ago, has reached 87.57 billion yuan ($13.68 billion) in cumulative transactions. To push the development of its CBDC, earlier this year China’s central banks released pilot versions of a digital yuan wallet mobile application (e-CNY) to expand CBDC access for selected users such as domestic banks, followed by a nationwide rollout. Furthermore, to secure the legal foundation of its CBDC, China is also drafting a general revision on the People’s Bank of China Law, which suggests that Chinese currency includes both physical and digital forms (e-CNY). The draft law provides the central bank with the broad power to plan, organize, and supervise the payment system and financial infrastructure. The Central Bank of China will have the responsibility to coordinate the work on national financial security, with the goal of developing a cyber-resilient CBDC.

As stated by a Bank for International Settlements economist, digital currencies, including CBDCs, are the next wave in the evolution of the nature of money in the digital economy. However, CBDC in the U.S. is still in its infancy. There remain unsolved issues and commonly identified obstacles. Once the world leader in digital payments and technological innovation, the U.S. is now being outpaced by its top global adversary and much of the industrialized and the developing world.


Short-Term Investors Are Behind the Increase of Your Netflix Monthly Subscription

Hopefully, this article will be more thrilling than the latest show you binge-watched on Netflix. Bill Ackman, a famous activist shareholder, announced on January 26 that Pershing Square acquired more than 3.1 million shares of Netflix in a 1.1-billion-dollar transaction. As a top-20 shareholder in the company, Pershing Square is now “all-in on streaming” and believes in the long-term growth of this industry. Looking at the big picture, this transaction compliments a growing sentiment that regulators should incentivize investors to base their decisions on long-term trends instead of short-term profits.

In 2020, Netflix’s stock price gained more than 60%. However, this price surge was motivated by the pandemicand increased media consumption causing 37 million new subscribers to join the platform. In other words, Netflix’s stock price was driven by a temporary event rather than a long-lasting growth opportunity.

However, investments for short-term profits increase the volatility of our financial markets. Studies even find that they might cause a “price distortion, or bubble.” For example, Netflix suffered a 23% backlash when its annual subscriber growth suffered a downturn in 2021. Short-term investors probably did not account for encouraging signals, such as Netflix winning most Emmy awards in 2021 or Squid Game, which launched in 2021 and proved to be the most successful show on the platform.

On the other hand, value-driven investors were not deterred by Netflix’s slower subscriber growth in 2021. They are motivated by long term profits and took advantage of pessimistic reactions. As Ackman noted in its letter to investors, the “opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance.”

Pershing Square’s financing of the transaction also demonstrates that investors continuously balance short- and long-term interests. Ackman’s letter explains that the transaction was financed with $1.25 billion proceeds from an interest rate hedge. He notes that Pershing Square “could have likely realized more gains” with this interest rate hedge, but Netflix “offered a more compelling risk/reward and likely greater, long-term profits for the funds.”

Many investors would have probably stuck to the short-term profits from the interest rate hedge. In a reportfrom 2018, Nasdaq already observed a concerning “trend toward exerting pressure for short-term gains at the expense of long-term health.” The same pressure for short-term gains is probably behind the price increase of your Netflix monthly subscription. Indeed, short-term pressure pushes managers to immediately deliver results instead of focusing on value creation. A study by Graham, Harvey and Rajgopal found that “managers appear to be willing to burn ‘real’ cash flows for the sake of reporting desired accounting number.” Interestingly, their study notes that 80% of the managers would “decrease discretionary spending on R&D, advertising and maintenance to meet an earnings target.”

In the case of Netflix, slower subscriber growth means less revenues than expected. Managers could thus be tempted to spend less on content development to meet their earning targets. This might be good news for some of us desperately trying to stop spending countless hours on the platform, but less quality content would hurt Netflix’s growth in the long run. An alternative would be to increase subscription prices to generate higher income and meet earning targets. Managers implemented this option on January 14, 2022 and the stock price went up.

Similarly, Almeida, Fos and Kronlund found that companies generally buyback their shares to meet earnings per share targets. Netflix probably implements this strategy too. For example, a Forbes article from 2021 announced “Netflix Shares Plummet After Q1 Subscriber Miss, But Buybacks Coming.” This demonstrates that short-term investors and market volatility constrains managers to focus on accounting rather than improving products and business strategies.

This short-term pressure will not only prevent you from enjoying Netflix shows at $8.99 per month—it has broader implications. Indeed, corporations are currently expected to become more inclusive and to reduce their environmental impact. Implementing these changes requires substantial investments potentially reducing short-term returns. But if investors continue to focus merely on quarterly earnings reports, managers will more likely save their balance sheet rather than our planet. Regulators might thus have a role to play. For example, the SEC requested comments on the timing of earning releases and scholars suggested to allow shareholders to vote only after holding shares for a certain period of time. Hopefully, regulators will find effective ways to encourage investors to focus on long-term growth, like Bill Ackman in his Netflix acquisition.

Venture Capital Values: How China Can Shape Its Innovation Environment

In the modern era of commerce, Silicon Valley stands as a monument to fast-paced, unrestrained, competitive innovation. According to an article by Grep Ip, many countries have long envied American startup culture, and have sought to compete with Silicon Valley. China is the only country who has come close to succeeding.

China’s influx of venture capitalists in the late 90s and early 2000s helped spawn some of its more transformative industries. This growth sparked brilliant innovation that raised $111 billion last year, brought them close to the same level as the United States, and created products that even the United States had not offered. American venture capitalists clearly saw potential in China’s market, and their foresight was rewarded.

However, their celebration might have been premature. With President Xi and the CCP’s crackdown on many VC backed corporations, venture capitalists find that their rewards are waning. In the past two years, China has strengthened its antitrust laws, tightened regulations over cybersecurity, and induced self-regulation in the video game industry in response to accusations of promoting addiction. This has caused a near $1 trillion drop in market value as well as the pushing out of many high-profile VCs. China promises that this is just a fix for industry-specific issues, but the problem with these claims is that the government goes beyond simple regulation. Beijing is effectively directing innovation to serve the state’s direct interests.

What can we learn from these events? Not that corporate regulation is inherently bad, nor that the current state of near hands-off regulation in the United States is particularly desirable, just that there are tradeoffs to consider. Some of these regulations are desirable for their own targeted effects. Anticompetitive behavior can itself slow innovation by raising barriers to entry and choking out competition. Protecting data security is a good thing too, as investors are more likely to put their money in areas that are less susceptible to leaks or liability. Even limits on video game playing time, as intrusive as a regulation is, potentially has a positive effect on education. However, if we want to seriously regulate, we should expect some levels of dampening innovation. Conversely, if we want to encourage unrestrained innovation and fast-paced market growth, we may need to forego some regulation.

The problem with the regulatory scheme in China is that the government appears to be utilizing its laws to direct industry toward its particular goals. For example, China’s desire to catch up with the United States in the semiconductor industry has allowed semiconductor investors more freedom to operate. This regulatory scheme conflicts with the very nature of venture capital, which depends on freewheeling, entrepreneurial innovation to survive. VC investments make are high risk and often subjected to rigid discipline, which produces transformative ideas and inventions. This investment model cannot survive in an environment of near total state control, where the direction of investment is subject to the interests and goals of the administration. It is also quite self-defeating, as industries often influence and inform each other. Innovations in artificial intelligence may mean innovations in automated processes and commercial software. Innovations in antibiotics may mean growth in both medicine and commercial farming. Shutting off other forms of innovation while narrowing in on one goal shuts it off from the economic boons of tangential industry.

There is a more important lesson to learn, and one that China’s tech industry could learn as well. If China is serious about competing with the United States, it has to take stock of its values and goals. Innovation is desirable not just for economic means, but to serve a variety of state interests. Innovation can lead to growing living standards at home, and an expansion of both soft and hard power abroad. Innovation is beneficial to soft power as a means of opening up new industries and reaching foreign markets that the US can exert influence through. And innovation is also beneficial in developing hard power because these new technologies, including artificial intelligence, can often become tools of war. A country that wants to remain competitive militarily, as well as economically, cannot be indifferent to the benefits of innovation.

“Monopoly”, “Monopsony”, “Middleman.” FTC Takes Big Tech Head-On

Nearly 100 years ago, Supreme Court Justice Louis Brandeis wrote “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” Keeping those words in mind, the U.S. House Democrats’ antitrust subcommittee published an Investigation of Competition in Digital Markets report in late 2020 demonstrating the need for serious reform and action to rein in the unfair power that Big Tech companies hold today in their respective markets. Following the report, President Biden issued an Executive Order with the aim to ensure strict enforcement of his antitrust policies. Biden then appointed Lina Khan, the progressive author of the controversial Amazon’s Antitrust Paradox article, as Chair of the Federal Trade Commission (FTC). Khan was a surprise appointee but a clear indication of the administration’s strong pro-enforcement and pro-competition approach to antitrust. Today, Khan is leading the charge against Big Tech with just one mantra in mind – any harm to competition is enough justification to go after companies that use their size and market power to squash competitors.

For decades, antitrust law has been implemented with the aim to prevent dominant companies from capturing the market. Over the last couple of years, regulators at the FTC and the Justice Department have been aggressively, albeit, unsuccessfully attempting to rein in the unfettered monopoly power of Big Tech using this traditional monopoly theory. In 2020, the FTC sued Facebook alleging that the company had been anti-competitive in its personal social networking market wherein it had a dominant position. But a federal judge dismissed the antitrust suit citing “lack of evidence” on the part of the FTC. Recently, the FTC, led by Lina Khan, refiled the antitrust suit, and in January 2022, the regulator secured a major victory when a U.S. District Judge denied Facebook’s motion to dismiss. The court held that the FTC had enough facts to plausibly establish that Facebook possesses monopoly power and had “willfully maintained that power through anticompetitive conduct.”

But more interestingly, the FTC has now come up with an innovative argument that has not previously been seen in the antitrust ecosystem. Regulators are now focusing less on consumer harm and leaning towards how Big Tech dominance harms businesses that sell goods and services to, and on, tech platforms. Apple, Google, Amazon, and Meta all depend on their suppliers. Whether for ad space on Meta and Google, apps on iOS, or small-scale manufacturers on Amazon, the FTC is taking a strong stance that these platforms are middlemen who by virtue of their powerful hold over the market, are adversely impacting sellers on their platforms. In fact, there is a new word now being thrown around by the regulators – “monopsony”. As opposed to a monopoly, the seller in a monopsony is not the dominant party. Instead, it is the buyer who is the dominant party. Just as monopolists can affect consumers adversely, regulators are arguing that monopsonists can similarly control and adversely affect sellers.

In the eyes of the FTC, Big Tech platforms are abusing their power and position as monopsonists as they are, in effect, proxy buyers for all consumers on their platforms. The longstanding view that vertical mergers usually pose no threat to competition is also being undone by the monopsonist view. It is not essential whether mergers or acquisitions of smaller players make the market more efficient. Rather, it is more important to ensure that Big Tech companies do not accumulate too much power and that competition remains healthy for all consumers and sellers alike. This is especially true where these companies are deciding how the market works, how the pricing is done, and at the same time participating in them. Take Amazon as an example– it creates the rules on how sellers are to participate on its platform, it decides how the goods are displayed on its platform, it further decides on how advertisements are placed, and how delivery charges are to be priced. Moreover, Amazon itself takes part in the marketplace by selling its own products on the same platform. Thus, Amazon wears two hats or maybe even three. This makes Amazon a prime target for FTC scrutiny.

The Biden administration has made it clear that the power these firms possess must be curtailed to promote competition. Amongst the recent changes, vertical mergers are now being scrutinized even more closely. Policies are being implemented requiring firms to obtain multiple approvals before confirming acquisitions with the FTC, having a right to question even after acquisitions close. It is evident that Lina Khan is here to challenge and change the status quo. Big Tech platforms, on the other hand, will not go down without a serious fight. Without serious congressional and legislative backing, Khan will find it hard putting to test her antitrust theories in a system dominated by capitalists, politicians, lobbyists, and the federal courts.