How China Disciplines Its Tech Barons

Chinese internet giants have become compliant parts of the regime they promised to disrupt. For Tencent’s Pony Ma and other tycoons the future is fraught. In April 2022, a resurgence of Covid spread seemingly unchecked through the financial centre of Shanghai. The government imposed a strict lockdown, confining millions to their homes, triggering mass-testing on a scale unseen since the initial outbreak and outraging affluent urban residents who were increasingly sceptical about China’s Covid-zero policy.

In an attempt to control public opinion, the government told social media sites including WeChat – the super-app used by two-thirds of China’s population – to wipe and scrape posts deemed negative or critical of the policy. But the censorship backfired. There was an unprecedented public outcry, which became a virtual protest. A video documenting the dire fallout of lockdown began circulating online.

The six-minute clip known as Voices of April – a montage of audio recordings encompassing the cries of babies separated from parents during quarantine, residents demanding food and the pleas of a son seeking medical help for his critically ill father – resonated with the tens of millions in Shanghai and more across the country. The video was quickly marked as banned content and taken down from social media platforms in China. On the Twitter-equivalent Weibo, even the word “April” was temporarily restricted from search results.

Many deemed the video a neutral yet essential documentation of the human toll of Shanghai’s lockdown. A backlash ensued, as defiant users repeatedly shared the video in ways that could dodge web censors. Some posted the video upside down, others superimposed words or images or embedded other footage. WeChat censors tried to wipe posts sharing the video, but it was like a multi-headed hydra: no sooner did one get blocked, than another would pop up.

This seminal moment embodied the dynamics between the Chinese government and the country’s giant tech companies. On the frontline was Tencent, the entertainment and tech conglomerate that owns WeChat. For the better part of three decades, Beijing tolerated and even celebrated entrepreneurship. As the country leapfrogged into the digital age, China produced one company worth $1bn every 3.8 days in 2018, just a year after Tencent overtook Facebook to become the fifth largest company in the world.

The amount of money Chinese-focused venture and private equity funds raised grew nearly fourfold to $120bn. That bounty helped China transform from industrial backwater into one of the most dynamic and coveted markets on the planet. In addition to generating revenue, companies such as Tencent complied with government orders when it came to monitoring its citizens. For an authoritarian regime ruling over a population scattered across an area almost as large as the US, an app that dominates every facet of life proves enormously useful.

Some say WeChat should be called WeCheck, such is its capacity for mass surveillance. The early days of Chinese tech also saw the construction of the Great Firewall of China. One in five people on the planet using the internet access it through a filter that obscures Facebook, Twitter, Snap, Instagram, the New York Times and YouTube. In a sense, it’s a parallel universe, where nearly a billion people live and thrive – much to westerners’ surprise – on China’s equivalent of such mainstays. There’s Meituan for Deliveroo, Didi Chuxing for Uber, WeChat for WhatsApp and Facebook.

The services are often even better in terms of convenience and design. The Swiss army knife of a super-app, WeChat is the most deft at merging the functions of various western platforms, allowing people to chat, shop or order a takeaway. Domestically WeChat is known as Weixin, and the company has made a point of emphasising that it operates as two apps within and outside the mainland. China’s deficit of privacy controls means its companies and government have an edge when it comes to collecting the data that empowers the algorithms that screen, monitor, name-shame and, sometimes, imprison its citizens.

The dynamics between Chinese tech companies and the authorities are like no other. Before the pandemic I sat down once with an official and talked about the vicissitudes that startups and entrepreneurs endure. “No matter what kind of hotshot you are, we will always have a way of showing you who’s boss,” the person said, making an offhand remark about Tencent’s owner, Pony Ma. “Don’t think because you control a billion users and moved to Singapore or some overseas country that we can’t do anything about you.”

The official told me that when regulators felt Tencent needed to be taught a lesson, they would step up censorship efforts, block or shut down web services till the company got the message. The tactics were not always conspicuous. Given WeChat’s overseas ambitions at the time, they would sometimes disrupt its service for global users, delaying messages or transactions for just half a minute. “That small hold-up is more than enough to drive users crazy and make people ditch the app altogether,” the person said. “That’s how you show them some colour.”

The Wall no longer resides just within China. When Chinese people travel outside the country, the Wall follows them via their telecom providers. A person using a China Mobile sim card is barred from roaming on Google. Authoritarian nations in Africa, south-east Asia and Russia see the appeal of the model. They too want to create their own intranet. As the internet splits in two, aligning itself between the American and Chinese models, Tencent’s story offers a window into an alternative vision of what the global online sphere could become.

Tencent’s products are so convenient and intuitive; yet in the back of everyone’s minds is the knowledge that their every move, location and utterance is documented and potentially scrutinised. Nowhere is this contradiction more apparent than at Tencent’s headquarters, in the heart of southern Shenzhen’s hi-tech district.

Tencent’s office building took five years and more than half a billion dollars to construct. Ma handpicked NBBJ, the architect responsible for Amazon, Google and Samsung’s headquarters. But the billionaire wanted it to be more than a statement of financial largesse. With its twin gleaming towers of glass and steel, he turned the building into one of the world’s biggest laboratories for new internet services and connected devices. It features holographic tour guides, conference rooms that adjust temperatures based on attendance, and alerts for the best parking spots before commuters arrive.

What struck me was that within the halls of a building that serves as a towering paean to futurism and commerce, the Communist party’s influence is omnipresent. In its open-plan reading room, alongside books about the cosmos and the ancient Greek and Roman empires, Chinese President Xi Jinping’s book – tabulating his speeches and thoughts about how to govern – features on the most prominent shelves. QR codes in the gym bring up links to stories documenting battle victories during the Long March.

Even these demonstrations of loyalty are not enough. Common sense would suggest that the Communist party would be supportive of companies such as Tencent and encourage their expansion overseas. But Xi has chosen to make sure the aspirations of a rising class of immensely wealthy entrepreneurs are tamed before they turn political. It was only a matter of time before he went after these national champions.

A crackdown that started with the financial technology industry in 2020, has quickly expanded to engulf every sector from online education to gaming, and ride-hailing to food delivery. With footprints in all of these sectors via its investments in some 800 companies, Tencent has felt the pinch.

Despite Pony Ma’s reputation for being the most low-key and cautious of Chinese tech moguls, Tencent has not been spared. China halted its app rollouts for about a month in late 2021, has curtailed gaming time for those under 18, ordered an overhaul of its financial units, fined it for investment deal disclosure violations and suspended new game approvals this year.

The change in approach to the tech sector is underpinned by shifts in Xi’s priorities. It mirrors crackdowns in other sectors, including property. As China’s economy slows and Xi tries to increase the nation’s birthrate, the policies underscore the Communist party’s growing resolve to respond to mounting public dissatisfaction with hoarded wealth and narrowing avenues for advancement.

A phrase that has emerged in tandem with the crackdowns is “common prosperity”, which refers to China’s goal of becoming a modernised socialist society. The implications for China’s tech industry are far-reaching, and could shape the playbook for the next few decades.

There’s a Chinese saying “Li yu tiao long men” – “a carp leaping over the dragon’s gate”. Legend has it that if the carp manages to swim upstream and vault an arch atop a waterfall on the Yellow river, it transforms into an Oriental dragon, a snake-like creature symbolising imperial power. The story of China’s internet tycoons, like Pony Ma, for the past two decades is that of a generation of carp becoming dragons. The twist, though, is that these idealistic geeks, who ventured out to change the world, are now shackled and have become part of a system they wanted to change. Once self-made dragons have achieved the level of success they have in China, the more important question seems to be: when and how do they bow out unscathed?

Source: ‘We show hotshots who’s boss’: how China disciplines its tech barons | Internet | The Guardian

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How Social Platforms Are Responding To The Crisis In Ukraine

Russia’s invasion into Ukraine has caused global angst, putting the military super powers of the world at odds once again, and potentially forcing an intervention that could lead to one of the biggest conflicts in decades.

And unlike similar incidents in times past, this battle is playing out in the age of social media, with memes, misinformation campaigns and scams all adding to the growing maelstrom of information, which can confuse, contort and cloud what’s actually happening in the eastern European region.

Given this, and the role that social media now plays in the dissemination of information, the platforms need to work fast to limit any misuse of their networks for questionable purpose, and many have already enacted plans to mitigate certain elements of misuse and misinformation.

Here’s a look at what’s been announced thus far from the major social apps.


Facebook is at the center of the social media information flow within the conflict zone, with around 70 million users in Russia, and 24 million in Ukraine, approximately half of the total population of each respective nation.

Late last week, the Russian Government announced that it would restrict access to Facebook due to Meta’s refusal to remove misinformation warning labels on posts from state-affiliated media. Now, Meta has taken that action a step further, by also prohibiting ads from Russian state media, and demonetizing these accounts, severely limiting the capacity for Russian authorities to use Facebook as an information vector.

Russia, of course, does have its own social media platforms and messaging tools, so there are other ways for the Kremlin to communicate their activities and motivations to Russian citizens. But Meta has taken a strong stance, while it’s also restricted access to many accounts within Ukraine, including those belonging to Russian state media organizations.

In addition to this, Meta has also established a special operations center, staffed by native Russian and Ukrainian speakers, to monitor for harmful content trends, while it’s also added new warning labels when users go to share war-related images that its systems detect are over one year old.

Meta’s also outlined a range of safety features for users in Ukraine, “including the ability for people to lock their Facebook profile, removing the ability to view and search friends lists, and additional tools on Messenger”.

Thus far, Meta seems to be staying ahead of major misinformation trends in the conflict, though the amount of posts from spammers and scammers seeking to capitalize on the situation for engagement is significant.

UPDATE (2/28): Meta has also announced that it will restrict access to content from Russian state-affiliated media outlets RT and Sputnik in response to requests from EU officials.


At the request of the Ukrainian Government, Google-owned YouTube has announced that it’s restricting access to Russian state-owned media outlets for users in Ukraine, while it’s also suspending monetization for several Russian channels.

YouTube’s also removing Russian state-owned channels from recommendations, and limiting the reach of their uploads across the platform.

As per YouTube (via The Wall Street Journal):

“As always, our teams are continuing to monitor closely for news developments, including evaluating what any new sanctions and export controls may mean for YouTube.”

In response, Russia’s state communications regulator has demanded that access to Russian media’s YouTube channels be restored on Ukrainian territory.

The situation is similar to Facebook, which could eventually see YouTube also face restrictions within Russia in response.


As it looks to help ensure optimal flow of information for users within the impacted region, Twitter has announced a temporary ban on all ads in Ukraine and Russia “to ensure critical public safety information is elevated and ads don’t detract from it”.

Twitter banned political ads, including those from state-affiliated media, back in 2019, so it’s already ahead of the curve in this respect. The ban on all ads will help to clarify information flow via tweets, while Twitter additionally notes that it’s proactively reviewing Tweets to detect platform manipulation, and taking enforcement action against synthetic and manipulated media that presents a false or misleading depiction of what’s happening.

UPDATE (2/28): Twitter is also adding labels to Tweets that share links to Russian state-affiliated media websites, while it’s also reducing the circulation of this content by removing it from recommendations, downranking it in algorithm-defined timelines and more.


A key platform to watch right now is TikTok, with reports that Russian-affiliated groups are using the app to spread ‘orchestrated disinformation’, while thousands of related videos are being uploaded to the platform, many fake, causing significant headaches for TikTok’s moderation teams.

The introduction of monetization incentives for popular clips has also added new motivation for bad actors to create fake streams and broadcasts in the app, in a bid to lure viewers, while on the other side, reports have also suggested that Ukrainian TikTok users are using the app to communicate Russian troop locations to Ukrainian fighters.

Thus far, TikTok has made no official comment on the conflict, nor how its platform is being used. And given that TikTok is owned by China-based Bytedance, and China has backed Russia’s action in the region (to some degree), it may not take a firm stance, officially.

But already, some are labeling this the ‘TikTok War’ given the way the platform is being used, which could force TikTok to take more definitive action, and it’ll be interesting to see if and how it does so in line with its links back to the CCP.

UPDATE (2/28): TikTok has now geo-blocked content from Russian state-affiliated media outlets for users in the EU. Those outside the EU can still access this content.

The conflict is a significant concern for all of the world, but most obviously for the Ukrainian people, and our thoughts are with those directly impacted by the conflict, and their families.

Hopefully, a peaceful resolution is still a possibility.

By: Content and Social Media Manager

Source: How Social Platforms Are Responding to the Crisis in Ukraine | Social Media Today

The Controversial Plan To Vacuum Carbon Out Of The Atmosphere

In its 2018 report, the U.N. Intergovernmental Panel on Climate Change said that our current efforts just to lower carbon emissions aren’t enough. To prevent the worst of climate change, the world needs to remove carbon from the atmosphere in large quantities.

The idea of removing it from the air at any kind of scale requires the proper technology, money, political cooperation, all of which pose unique—and seemingly insurmountable—challenges.

On Friday’s episode of What Next: TBD, I spoke with Clive Thompson, journalist and author of Coders: The Making of a New Tribe and the Remaking of the World, about the race to suck carbon out of the air. Our conversation has been edited and condensed for clarity.

Lizzie O’Leary: You recently wrote a story, which ran in Mother Jones, about direct air carbon capture, a new technology that might be helpful in addressing the climate crisis. What is DAC?

Clive Thompson: Direct air carbon capture is basically the art and science of extracting CO2 from the air. You create a machine that uses a chemical process to bind CO2 and turn it into something that you can then store somewhere. Maybe you shove it really deep in the ground so it’s gone, maybe you turn it into something else that you can use.

Who is actually making the DAC technology?

So at the high end, you have a company like Carbon Engineering, which is up in Canada. And the way it works is that they have a big machine that’s the size of a building, with a huge fan on top of it that sucks air in and blows it down into a pool of liquid sorbent.

Then it reacts. Once there’s lots of CO2 in the sorbent, they use a process that requires temperatures of hundreds and hundreds of degrees to turn it into CO2 that can be stored as a pressurized gas. The downside is that a lot of energy is needed to run that machine. That’s one model.

What’s the other model?

The other model is to have much smaller machines that you could tuck anywhere that use a lot less energy, which is great, but they also don’t suck quite as much CO2 out of the air. Klaus Lackner [a professor at Arizona State University] created a tree of these discs that stands 30 feet high, and the wind just blows air past it.

That reacts with the sorbent inside these discs, and then once every hour or so when the discs are full of CO2, it collapses down almost like an umbrella, and squeezes it out with a little bit of heat. They’re so low-energy that he imagines you might need tens of millions of them, but you could put them literally anywhere.

Direct air capture sounds very sci-fi. When we’re thinking about it in the public policy arena, it seems like there are two big questions: What would it take scientifically to do this at scale, and what would it take practically and politically?

What you’d need to really do this is an almost wartime mobilization of resources. And, there are lots and lots of choke points. You’d need tons of that sorbent chemical. You’d need to figure out a lot of issues: Where do you put all that carbon? What do you do with that stuff? But could you get it out of the sky, could you do that at scale? Yes. I think you could.

On a practical level, even saying there was the global will for this, it seems like there are three big structural hurdles: cost, transportation and storage. How much does it cost to do this?

The estimate that I most often heard is that right now the cheapest they can do is about $500 per ton of CO2. Everyone who looks at this field basically says that that is way too much. That is way too expensive to be able to do what we need to do. Because the IPCC was talking about removing 10 gigatons a year, which is billions of tons. So at 500 per ton, you’re talking about trillions and trillions of dollars.

So, what price does it need to get to? No one really knows. But if it were around $100 per ton, then there starts to be a more of a market for this stuff. If you got it down to $50 or $10 a ton, then you’re really talking.

There’s another issue besides cost. How can you move the carbon dioxide once you’ve got it?

These machines could be anywhere. They could be in Boston, they could be out in the desert in Arizona, they could be all over the place, and you need to have a pipeline. And piping CO2 is really not easy because it is a highly pressurized gas.

If you have a leak, it’s really bad stuff. It erupts with high pressure, it is an asphyxiating gas so it would kill people, and worse of all it hangs low to the ground. It’s heavier than air if it’s in a dense quantity.

You’re not really selling direct air capture to me here.

Let me make it a little bit worse by pointing out that traditionally pipelines get run through Indigenous lands. So yeah, am I selling it? No. My goal with this story was to paint a very realistic picture of the enormous opportunity but the enormous challenge here.

I’m not saying it would be impossible to do that, and if it became like “we have no other option,” then I guess we would bite the bullet and figure it out. But it’s something you’d want to really think hard and plan for if you’re going to do it, which is a good reason to think about the problems now.

The other level of this story that takes it to another bananas head-scratching place is that it seems from your reporting that the only players who could afford to do this, who have a really vested interest in doing this, are Big Oil companies.

This is the issue that really alarms a lot of environmentalists about direct air capture. Nearly all of the projects that I’ve been telling you about here are all being developed hand in glove with oil and gas companies, fossil fuel companies. Why is that? Well, the people who understand how to build things at scale that have to do with energy and how to move gases around are the oil and gas companies. They’ve got decades of experience in this. So they’re the first obvious partners.

What do you do with that CO2 when you’ve captured it? We talked about shoving it in the ground to get rid of it. The problem is that in the short run—and by the short run I mean a decade or more—there’s really no one who’s planning to shove that in the ground. What all of these projects are doing is working with oil and gas companies to do something that creates a market for the reuse of that CO2.

There is a market right now for CO2, but it’s niche. There’s a company in Texas, for example, that uses it to get the last drops of oil and gas out of nearly empty wells.  It’s something other companies might adopt. And that brings us back to this question of environmentalists having to work with or rely on oil companies. Are some environmentalists able to say, “OK, this involves a deal with the devil but it gets us there”? Or is it just like, “No, that’s a nonstarter”?

Environmentalists are divided on this. Many of the environmentalists, I would say the majority of them, said to me, “We think this is a costly distraction. We think that all the money being put into developing direct air capture should just be put into scaling out renewables dramatically right now.

Innovating on that front. That is how we decarbonize. We do it by just rapidly throwing everything we can at this. And we seal the oil and gas companies out of this process because they are just bad news.” These environmentalists argue that oil and gas companies just want this tech to exist as a get-out-of-jail-free card.

Because it helps them reduce their net emissions?

Yeah. It would become this way of saying, “Hey, we’re net neutral! We’re creating lots more emissions by selling lots of oil and gas, but we’re also shoving it in the ground.” Or even worse, they’ll develop this technology a little bit, but never get serious enough about it. This is what’s known as the moral hazard argument.

If you start developing the technology, it takes the pressure off of society to decarbonize its energy production. If you think that there is a magic solution coming 10 or 20 years from now, then yeah, maybe it’s OK to keep burning oil and gas and maybe we don’t need to aggressively roll out solar and renewables.

The thing about direct air capture that is so fascinating is how complicated it is. Not in terms of the tech, but in terms of the moral and ethical equations around it.

Among other things, direct air capture would allow for a certain level of environmental and economic justice insofar as we’re now in a situation where parts of the Global South are rapidly trying to expand their economies, and to do that you need lots and lots of cheap energy right now.

Those societies want to do what we did, which is to burn lots of oil and gas to get themselves as prosperous as possible as quickly as possible. So the progressive argument is that maybe it’s up to the developed countries that made this mess to work on direct air capture and clean up the problem for the countries that we have trod all over in the last 50 or 100 years.

Would doing direct air capture on a global scale be an admission of defeat?

Yeah, absolutely. It would be a complete admission of defeat insofar as it would be us saying to ourselves, “We couldn’t change the way we lived.” For decades we were unwilling to do that. We knew in the ’90s that we needed to work on decarbonizing the economy as rapidly as possible and rolling out renewables and we didn’t do it.

We didn’t push for it. To the extent that a lot of citizens did push hard for it, they faced ferocious opposition from oil and gas companies and from many politicians who were absolutely in their pockets.

What do we know about how the oil companies are approaching these projects?

Several people said to me that one of the reasons why they are dubious of the motives of oil and gas companies is that none of them are really reorienting their spending habits around it. They’ve got R&D projects, but things only really change when you see what they do with their annual budgets. And with their annual budgets they’re still just drilling for oil.

Some people have said that the only way that we’re going to roll out million and millions of direct air capture machines and make it really cheap is if for the next 10 or 20 years we actually turn the CO2 back into liquid fuel and burn it again. When I say to them, “That sounds circular. Isn’t the point to get it out of the air and into the ground?” They’re like, “Well yes, but think of it this way.

What we’d be doing is decarbonizing the internal combustion engine.” So, the idea is we can keep on using all these trucks and all these planes and cars that have internal combustion engines, but we would actually have net zero emissions or as low as possible emissions. But, it’s a leap of faith.

Do you have any faith that this is going anywhere?

The only faith I have is the faith that comes from seeing things like solar succeed. One of the reasons why solar got so good is governments gave some subsidies and that took leadership, and that was good. And then that incentivized a marketplace of solar creators to go, “Hey, we can make money with this!”

I definitely feel gloomy all the time because of the lack of political urgency amongst the folks who run things. I also know that sometimes things can be working better than we imagine in different pockets of innovation and marketplaces and policies. But I don’t hold out great hope.


By: Lizzie O’Leary

Lizzie O’Leary is the host of What Next: TBD, Slate’s show about technology, power, and the future. Previously, she created and hosted Marketplace Weekend. She has reported for CNN, Bloomberg News, and the New York Times Magazine, among others. She is also a contributing writer at the Atlantic.

Source: Can carbon capture solve the climate crisis?


How America’s Richest People Can Access Billions Without Selling Their Stock

On Saturday, Elon Musk promised to sell 10% of his Tesla stake after 58% of people voted in a Twitter poll shared by the Tesla CEO. Yesterday, Musk began to follow through, exercising about 2.15 million Tesla stock options and selling shares to cover the taxes he owed as a result. Prior to this week, he has only ever sold Tesla shares twice—in 2010 and 2016—for pre-tax proceeds of $617 million ($593 million of that went to cover taxes he owed on options). Tesla’s stock has risen over 13,000% since his last sale, and Musk is now worth an estimated $281 billion (based on Wednesday’s closing price).

When the world’s richest man wants cash, he can simply borrow money by putting up—or pledging—some of his Tesla shares as collateral for lines of credit, instead of selling shares and paying capital gains taxes. These pledged shares serve as an evergreen credit facility, giving Musk access to cash when he needs it. Musk currently has pledged 88.3 million Tesla shares, nearly 36.2% of his overall stake (excluding options), as of Wednesday worth more than $94 billion.

Musk is one of 32 billionaires identified in the Forbes 400 list of richest Americans to be pledging public stock of companies listed on the NYSE or Nasdaq exchanges as collateral for current or potential lines of credit, as disclosed in company filings. Other pledgers include fellow mega-pledger Oracle chairman Larry Ellison, Walmart heir Jim Walton, and private equity’s richest person, Stephen Schwarzman. (Three others pledged shares of foreign companies are not included in this report.)

Across all companies listed on the NYSE and Nasdaq exchanges, there are 560 executive officers and directors and 5%+ shareholders currently pledging shares; the size of the average pledge is $427 million and the aggregate value of these pledged shares is $239 billion, according to a report from Audit Analytics, an independent provider of audit, regulatory and disclosure intelligence. Within this larger group, Forbes 400 members do most of the pledging—value wise, that is. Musk’s Tesla pledge alone is 47% of that aggregate pledged share value. Removing the extreme outlier Musk, the remaining 31 Forbes 400 members account for 56% of that figure. (Data for this report were calculated Nov. 5; Tesla shares are down nearly 13% since then).

“At current interest and tax rates, it is far cheaper to borrow against the value of one’s shares than to sell them and pay taxes on the gains.”

Information on companies’ pledging policies—found in annual proxy statements—-offer a window into the murky world of billionaire borrowing. The topic entered the national microscope in June after ProPublica’s report on leaked IRS data showed that several of the richest people paid nothing in federal income taxes in certain years. Last month, a proposed wealth tax from Senate Democrat Ron Wyden failed to win political support. That measure would have taxed unrealized capital gains of America’s richest individuals.

Most details on billionaire borrowing remain private. Individuals who own less than a 5% stake in a company, or who don’t work for that company, do not report stock ownership or pledging of shares to the SEC. Many of America’s wealthiest people—232 billionaires from this year’s Forbes 400 list, to be exact—hold their fortunes primarily in private companies. Any pledges against diversified baskets of stock or private assets are not reported in company filings. Disclosure requirements also do not include reporting whether, or how much, an individual has borrowed against their pledged shares. A few billionaires Forbes contacted said they don’t have outstanding debt against their pledges.

Most larger companies don’t allow pledging: Over two-thirds (68.4%) of S&P 500 companies ban all company employees and shareholders from pledging shares for debt, 22% prohibit pledging but with exemptions for certain individuals, and only 3.4% fully permit it, according to data provided by proxy advisory firm Institutional Investors Service (ISS). “When executives or directors have a significant percentage of their equity pledged, it creates a concern from the investor perspective,” says Jun Frank, an executive director for ISS’ corporate solutions group, which advises companies on corporate governance matters.

Those concerns include margin calls: forced sales of pledged shares that can sink a company’s stock price, which risks cascading into a broader, panic-induced selloff. An example: Green Mountain Coffee Roaster’s founder Robert Stiller borrowed against his company shares to fund an increasingly extravagant lifestyle, rather than sell shares. That worked fine when the share price was rising but quickly unraveled after a short-seller called into question its accounting in May 2012. The former billionaire was forced to sell 5 million shares, worth $126 million, in one day to cover margin calls on pledged Green Mountain stock. He was then removed as Chairman of the Board.

Pledging can also create friction between directors and executive officers pledging shares and outside shareholders, says Frank: “If you no longer have certain claims to those underlying economic interests and you continue to have the voting right, that creates a mismatch between the control you can exercise over the company and the economic interest you have in the company.”

Sometimes what company founders want, in this case to pledge shares, is at odds with what board members and shareholders want, which is to disallow pledging. The software company Oracle, for example, adopted a rule in January 2018 prohibiting its directors and executive officers from pledging company shares, although one individual was exempt: Larry Ellison, Oracle’s cofounder and largest individual shareholder. But then, as now, Ellison was the only Oracle director to ever report pledging any company shares. Ellison, who boasts a fortune of over $100 billion, has been pledging shares since at least 2007, after the Securities and Exchange Commission began requiring it.

In other words, Oracle’s new pledging policy had no immediate impact on the pledging activity of its directors and executives—Ellison least of all. Since 2018, he has increased the number of his pledged Oracle shares to 317 million — worth about $28 billion — equivalent to roughly 27% of his stake and 11% of all outstanding Oracle stock. Ellison did not sell any Oracle shares between December 2010 and June 2020, a near-decade stretch of big spending for the eccentric billionaire, who splashed $300 million in 2012 to buy the Hawaiian island of Lanai and tens of millions of dollars on opulent mansions, growing a $1 billion real estate portfolio that includes at least ten  properties on Malibu’s glitzy Carbon Beach.

While Oracle does not disclose how much Ellison has borrowed against his shares, his penchant for borrowing was revealed in unsealed court documents from a shareholder lawsuit. Those documents, first reported by The San Francisco Chronicle in 2006, showed that Ellison had outstanding loans of more than $1.2 billion in 2001, and that his financial adviser had warned him, “We have a freight train going down a track hitting a debt wall.” (Oracle did not respond to Forbes’ questions about its pledging policy or Ellison’s borrowing.)

Other companies find more creative ways to exempt billionaire founders from pledging bans. Take the oil and gas firm Kinder Morgan, whose prohibition on pledging comes with a caveat: shares owned “in excess of the applicable minimum ownership guidelines” are able to be pledged. The minimum ownership requirement for directors—such as executive chairman and billionaire Richard Kinder—is three times the value of their “annual cash retainer.” Helpfully, Kinder’s annual salary is $1. That means the eponymous cofounder can effectively pledge as many shares as he likes.

Kinder, whose $7.2 billion fortune makes him the 128th wealthiest American, has pledged 40 million shares of his eponymous company — 15.6% of his overall stake, worth $679 million — for the sole purpose of buying more company stock, as described in the company’s proxy statement. To date, Kinder has purchased 10 million additional shares of Kinder Morgan, financed with debt taken out against his pledged Kinder Morgan shares. A representative for Kinder Morgan confirmed Forbes’ interpretation of its pledging rules but declined to comment further.

Some companies are upfront about their exemptions, but fail to make a convincing argument for them. The medical conglomerate Danaher simply states in its 2021 proxy statement that its sibling founders, Forbes 400 members Steven and Mitchell Rales, are exempt from its pledging ban “because [their] shares had been pledged for decades.” Each brother has pledged a significant portion of their Danaher shares, a potential red flag for margin calls: Steven Rales has pledged 78% of his equity stake (just over $10 billion), and Mitchell has pledged nearly 91% of his equity stake (slightly under $10 billion). Together, their pledges are 9.4% of all outstanding Danaher stock. (Danaher and the Rales brothers did not respond to requests for comment).

Of the Forbes 400 billionaires, oil mogul George Kaiser (net worth: $10.7 billion) has the highest ratio of pledged shares to the company’s total outstanding common stock — another red flag for margin calls. His pledge of 21 million shares of bank holding company BOK Financial Corporation (worth nearly $2.3 billion) is equal to nearly 31% of all outstanding stock. But Kaiser says he only occasionally borrows against those pledged shares. “They are just low cost, back-up lines, which we have had in place for a long time and infrequently use,” he told Forbes over email.

Tesla argues that pledging creates a kind of fiduciary relationship between pledgers and shareholders. In 2018 the electric carmaker introduced a 25% loan-to-value limit on borrowing against pledged shares, arguing that pledging gives “executive officers flexibility in financial planning without having to rely on large cash compensation or the sale of Company shares, thus keeping their interests well aligned with those of our stockholders, while also mitigating risk exposure to the Company” — a stance Tesla has reiterated in subsequent proxy filings.

ISS countered this argument in its recent proxy analysis of Tesla’s corporate governance principles. “If an executive who already owns 15 or 20 percent of a company’s outstanding shares…is not already motivated to act in the interests of shareholders, there is no credible argument that increasing that stake to 25 or 30 percent will suffice to accomplish that goal,” says the report. “Perhaps a more salient, though unspoken, factor is that at current interest and tax rates, it is far cheaper to borrow against the value of one’s shares than to sell them and pay taxes on the gains.”

So just how prevalent is pledging assets to borrow among the ultra rich? “Pretty high,” responds Jason Cain, a managing director and chief wealth strategist at advisory firm Boston Private, speaking about his firm’s highest bracket of clients: those with above $500 million in assets. (Cain declined to provide an exact percentage figure). “It’s not any different than families… who borrow for homes” and other life purchases, says Cain. “Most of these clients are aware of the uses of debt and with interest rates where they have been in the recent past, they understand the arbitrage opportunity.”

Ali Jamal, and ex-Julius Baer banker and founder of Azura, a boutique wealth management firm for billionaire entrepreneurs, says that during the stock market crash of March 2020, about 70% of Azura’s clients took on leverage — by pledging shares, but also artwork and car collections — to take on debt to buy more stock. And over the past year, about 40% of Azura clients have leveraged their way into special purpose acquisition corporations. “You can borrow at 40 basis points, max 50 basis points, to have someone very smart” identify an investment opportunity, says Jamal about the appeal of leveraging into SPACs, “and if you don’t like the opportunity, you can pull your money out.”

Borrowing against one’s shares has its risks, but for these billionaires, the rewards seem to outweigh them. “It’s perfectly legal, and it’s a little hard to say it’s immoral. Like, it’s immoral to own a growth stock? It’s immoral to borrow money?” says Edward McCaffrey, a tax law professor at USC Gould School of Law who coined the popular term “Buy, Borrow, Die” to describe how the ultra-wealthy borrow to avoid paying taxes. “So the question is, why would anybody not do it?

Follow me on Twitter or LinkedIn.

I am a New York-based journalist covering billionaires and wealth at Forbes. I studied history at Claremont McKenna College and I’m currently receiving my M.A. in business and

Source: How America’s Richest People Can Access Billions Without Selling Their Stock


Related Contents:

Savills and Wealth-X (2014). Around the World in Dollars and Cents (PDF). p. 2. Archived (PDF) from the original on 2014-05-14. Retrieved 2014-03-06.

What The New Outlook For Social Security Means For You

Whew! The pandemic had a smaller impact on the Social Security trust funds — that is, Social Security’s solvency — than many feared during the depths of the pandemic downturn.

According to the new 2021 annual report from the Social Security Trustees, the depletion date for the combined trust funds —retirement and disability — is 2033 without any changes to program benefits. That would be when today’s 54-year-olds reach Social Security’s Full Retirement Age. Still, that’s one year earlier than last year’s 2034 estimate.

Depletion date or insolvency doesn’t mean bankruptcy — far from it. Funding from payroll tax receipts will be enough to pay 78% of promised benefits after the combined Social Security trust funds depletion date is reached.

“The trust fund report should be seen as a strength,” says Eric Kingson, professor of social work and public administration at Syracuse University and co-author with Nancy Altman of “Social Security Works for Everyone: Protecting and Expanding the Insurance Americans Love and Count On.”

What the Social Security Trustees Said

The report, Kingson said, “provides information for Congress and the public on what needs to be done to maintain benefits.”

And Altman, president of Social Security Works, chair of the Strengthen Social Security Coalition and a rumored possible Biden appointee to run the Social Security Administration, said this when the Trustees report came out on Wednesday: “Today’s report shows that Social Security remains strong and continues to work well, despite a once-in-a-century pandemic. That this year’s projections are so similar to last year’s proves once again that our Social Security system is built to withstand times of crisis, providing a source of certainty in uncertain times.”

But the Social Security Trustees are strikingly cautious about their estimates involving the impact of the pandemic on the Social Security trust fund and its sister trust fund for Medicare, the federal health insurance program primarily for people 65 and older.

Despite the dry language of actuaries, the uncertainty is apparent.

Employment, earnings, interest rates and gross domestic product (GDP) dropped substantially in the second quarter of 2020, the worst economic period of the pandemic. As a result, the decline in payroll-tax receipts which pay for Social Security benefits eroded the trust funds, though the drop in payroll taxes was offset somewhat by higher mortality rates.

“Given the unprecedented level of uncertainty, the Trustees currently assume that the pandemic will have no net effect on the individual long range ultimate assumptions,” they write.

The Pandemic and Social Security Solvency

But, they add, “At this time, there is no consensus on what the lasting effects of the Covid-19 pandemic on the long-term experience might be, if any.”

The Trustees say they “will continue to monitor developments and modify the projections in later reports.”

Translation: the status quo remains and the forecast for the pandemic’s effect on Social Security’s solvency is cloudy.

Odds are the coming Social Security financing shortfall won’t get sustained attention from either the Biden administration or Congress despite the need to take action before 2034.

The Trustees aren’t too happy about that.

Their report says: “The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits… With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”

The Political Outlook for Social Security Reforms

But the Biden administration and its Congressional allies are instead focused on threading the political needle for an ambitious $3.5 trillion infrastructure spending package, while also dealing with the fallout from the chaotic withdrawal from Afghanistan.

Leading Republican legislators have called for so-called entitlement reform (think Social Security benefit cuts), but that’s a tough sell in the current Democratically controlled Congress.

“Does the report mean the timetable argues for real concrete action on [addressing solvency issues of] Social Security? Probably not. Will it revive the rhetoric that the sky is falling? Sure,” says Robert Blancato, national coordinator of the Elder Justice Coalition advocacy group, president of Matz Blancato and Associates and a 2016 Next Avenue Influencer in Aging.

The issue over how best to restore financial solvency to Social Security isn’t going away. That’s because the program is fundamental to the economic security of retired Americans. Social Security currently pays benefits to 49 million retired workers and dependents of retired workers (as well as survivor benefits to six million younger people and 10 million disabled people).

However, the tenor of the longer-term solvency discussion has significantly changed in recent years.

To be sure, a number of leading Republicans still want to cut Social Security retirement benefits to reduce the impending shortfall. Their latest maneuver is what’s known as The TRUST Act, sponsored by Utah Sen. Mitt Romney.

It calls for closed-door meetings of congressionally appointed bipartisan committees to come up with legislation to restore solvency by June 1 of the following year. The TRUST act would also limit Congress to voting yes or no on the proposals. No amendments allowed.

What’s Different About Future Social Security Changes

AARP, responding to the Trustees report news, came out vehemently against The TRUST Act’s closed-door reform plan. “All members of Congress should be held accountable for any action on Social Security and Medicare,” AARP CEO Jo Ann Jenkins said.

“The concern seems to be they would look to cuts first, versus a more comprehensive approach,” says Blancato. A more comprehensive approach could include tax increases for the wealthy and technical changes to the Social Security system.

Something else that’s different is that liberals are no longer trying to simply stave off benefit cuts and preserve the program exactly as it is — the main tactic since Republican Newt Gingrich was House Majority Leader in the mid-1990s. That have bigger and bolder ideas.

Most Democratic members of Congress have co-sponsored legislation to expand Social Security or voted in support of incremental increases in benefits, such as providing more for the oldest old and a new minimum Social Security benefit equal to at least 125% of the poverty level (that translates to $16,100 for a household of one).

Addressing Social Security’s shortfall and paying for the new benefits, with the Democrats’ plans, would come from tax hikes, ranging from gradually raising the 6.2% payroll tax rate to hiking or eliminating the $142,800 limit on annual earnings subject to Social Security taxes to some combination of these.

But Social Security benefit cuts are off the negotiating table for the Democrats.

“Biden has made a commitment not to cut and to make modest improvements in benefits,” says Kingson. “He won’t back off that.”

The President has pushed for raising the Social Security payroll tax cap so people earning incomes over $400,000 would owe taxes on that money, too. He has also backed raising the minimum Social Security benefit to 125% of the poverty level.

The Good News for Social Security Beneficiaries

One more piece of Social Security news to keep in mind: Social Security recipients are likely to get a sizable cost-of-living adjustment (COLA) to their benefits in 2022. The exact amount will be announced in October and estimates vary widely, from 3% to as high as 6%. A 6% increase would be the highest in 40 years.

But there’s a catch: Medicare Part B premiums for physician and outpatient services — a significant portion of Medicare’s funding —will also go up due to inflation. And those premium payments usually come right out of monthly Social Security checks.

The Trustees report says the estimated standard monthly Medicare Part B premium in 2022 will be $158.50, up about 7% from $148.50 in 2021 and a 9.6% total increase since 2020. (Monthly premiums are based on income, though, and can exceed $500 for high earners.)

The Trustees report says Medicare’s Hospital Insurance Trust Fund (HITF) has enough funds to pay scheduled benefits until 2026, unchanged from last year. Medicare’s finances stayed stable during the pandemic, with people over 65 largely avoiding elective care. The pandemic “is not expected to have a large effect on the financial status of the [Medicare] trust funds after 2024,” the Trustees report noted.

Like Social Security, the trust fund behind Medicare Part A (which pays for hospitals, nursing facilities, home health and hospice care) is primarily funded by payroll taxes. There will be enough tax income coming in to cover an estimated 91% of total scheduled benefits once the trust fund is insolvent.

Medicare Part D, which covers prescription drugs, is mostly funded by federal income taxes, premiums and state payments.

But the political story about Medicare is less about its projected 2026 shortfall and more about momentum toward expanding the program. The Biden administration has proposed adding hearing, visual and dental care to Medicare benefits, something also being pushed by Sen. Bernie Sanders (I-Vt.) At this time, it’s unclear how those new benefits would be paid for, though they wouldn’t affect the trust fund.

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Next Avenue is public media’s first and only national journalism service for America’s booming older population. Our daily content delivers vital ideas, context and perspectives on issues that matter most as we age.

Source: What The New Outlook For Social Security Means For You


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Payments Resulting from Disability Insurance Actions Processed Via Manual Adjustment

Analysis of the Social Security System: Hearings Before a Subcommittee of the Committee on Ways and Means, House of Representatives

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Social Security: Who Is Covered Under the Program

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