The debate on wealth is intensifying – family offices should take note

Nearly a hundred years ago, on 11 August 1919, Andrew Carnegie passed away, renowned as a wealthy industrialist, but later remembered for his remark: “The man who dies rich, dies disgraced.”

Carnegie made his fortune after emigrating from Dunfermline, Scotland, to the US in 1848.  His arrival coincided with a boom in the US economy, as the discovery of steel and electricity drove the development of US towns and railroads.

From small beginnings he built up the Carnegie Steel Company, selling it to JP Morgan for $303 million in 1901 (around $10 billion today). He went on to use 95% of his fortune to endow philanthropic and educational institutions.

A lobby group called the Patriotic Millionaires has sprung up, demanding a tax system which is fairer to those with a lot less and tougher on the wealthy

Carnegie and his wealthy peers, such as John D. Rockefeller and Cornelius Vanderbilt, earned renown as robber barons, accused of oppressing workforces and extracting favours from politicians. Author Mark Twain called the period a Gilded Age, because its golden sheen was only skin deep.

It lasted until the 1897 financial crisis, after which voters gave their blessing to a Progressive Era, which targeted several of capitalism’s worst excesses.

Family offices were in tune with the times, as they used their funds for social good. Rockefeller, for example, was a tough oil man but, over six generations, his endowment has lifted billions out of starvation through agricultural reform. The Vanderbilt family has backed universities and residential accommodation.

But what goes around, comes around. We have now entered a second Gilded Age, where US entrepreneurs have, once again, become excessively wealthy – this time through the application of technology and finance.  They have also profited from cheap loans, President Trump’s tax cuts, the bull market and (on the margin) access to smart people promoting hot IPOs.

This time around, philanthropy is in good health compared to the first Gilded Age, with a bit of help from tax relief and the generosity of family offices. It helps that people worth billions find it much easier to give away a chunk of change.

Warren Buffett, co-founder of Berkshire Hathaway – has agreed to pool his fortune with the charitable endowment run by Bill Gates, founder of Microsoft, and his wife.

In 2010, Bill Gates came up with a Giving Pledge, which asks multi-billionaires and millionaires to give half their wealth to philanthropic causes by death. In April, 190 people had agreed to participate. Former Citigroup chairman Sandy Weill once said he had done a “deal with God” to give his money away.

But an increasing number of people have become concerned about the financial gap that has opened up between rich and poor and hardship in the middle classes.

This is something the first Gilded Age never witnessed on such a broad front. According to Harvard Law School, CEO pay for S&P 500 companies has risen by an average of 50% since 2009.  Workers pay has only risen 20%. The wealthy are starting to worry that socialism may drive a new Progressive Era.

A lobby group called the Patriotic Millionaires has sprung up, demanding a tax system which is fairer to those with a lot less and tougher on the wealthy.

It wants to see minimum wages across the US and despairs at media reports which says workers at distribution hubs are sleeping in their cars, because they cannot afford a house.

Patriotic Millionaires vice chair Stephen Prince says the wealthy are running the US, as well as the White House, for their own benefit. He says the best way to boost the economy is to change the tax system to offer consumers a better deal.

In a recent essay, Ray Dalio, who runs hedge fund group Bridgewater called the wealth gap a “national emergency.” He notes the wealth of the top 1% of people in the US has become greater than the bottom 90%.

Patriotic Millionaires member, Abigail Disney, caused a sensation last month by slamming an 80% increase to $65.6 million in pay taken home by Bob Iger, chairman and chief executive of Disney Corporation, co-founded by her grandfather.

She called his package ‘insane’ and socially corrosive, although she said she liked him and was not involved in running the business. Disney said his pay was performance related. It had also agreed to pay its workers a minimum of $15 an hour.

Warren Buffett’s children, Peter, Susie and Howard, have now broken cover on Fox News to support Abigail Disney and rail against the system which produced Iger’s pay.

Howard Buffett has served on compensation boards: “I’ve seen CEOs that have gotten paid huge packages a year, while they are still employed and their stock has lost money and revenues are down.”

Lynn de Rothschild is the Founder and CEO of the Coalition for Inclusive Capitalism, devoted to broader economic and social inclusion. She has been the chief executive of E.L. Rothschild,  a private investment company, since June 2002.

Inclusive’s activities run alongside Environmental, Social and Governance initiatives, favoured by long-term investors. Its backers include the Ford Foundation.

In his April essay, Howard Marks, co-chairman of asset manager Oaktree Capital, warns the progressive left would undermine capitalism. But he adds: “Capitalism is the most dependable route to prosperity. And it has to be responsible capitalism.”

In a discussion hosted by CNBC, Buffett and Bill Gates each defended capitalism over socialism but backed reform of the tax system.

Steve Schwarzman, chief executive of private equity firm Blackstone has warned the middle classes are suffering in income ‘insufficiency” and need help. Jamie Dimon, chief executive of JP Morgan, has warned that US workers are falling behind.

Amazon has been criticised for its pay scales. Like Disney, Jeff Bezos has introduced a minimum wage of $15 an hour for his workers, challenging other retailers to do better. His own salary has been $81,840 since 1998, although his 16% stake in Amazon makes him worth more than $130 billion, according to Forbes.

Nice money, if you can get it.