The right campaign debate on how to fix ‘Wall Street’
Model of thought
Presidential candidates rail against the financial industry, but the best reform may be happening with moves by big firms toward ‘patient capitalism.’
Anger can be a self-destructive emotion, but that bit of wisdom has not stopped most presidential contenders, Democrats and Republicans, from playing to widespread voter anger at “Wall Street.” To be sure, the candidates offer different cures for what still ails the financial industry after all the reforms imposed on it since the Great Recession. John Kasich wants better business ethics. Bernie Sanders would tax and prosecute wealthy banks. Marco Rubio suggests banks hold more money in reserve. Hillary Clinton would better regulate risk-taking. Ted Cruz would not rescue big institutions in peril. Donald Trump simply rails against hedge fund managers.
The voter anger reflects a deeper fear and sadness over the most common complaints against many financial institutions. Greed. Fraud. Insider deals. Excessive pay. These are depicted, often in the extreme, in popular culture, such as the latest film “The Big Short.” Whether the next president can deliver on any better reforms than those now in place is far from clear. The next Congress could be as divided as the current one.
Yet if the candidates want to find common ground during the 2016 campaign, they should look at one complaint that many financial institutions themselves are addressing: The tendency for too many investors and executives to hold a short time horizon and favor quick profits over the long-term value of a company or an industry.
Given the recent decline in equity prices, this issue is worthy of calm political debate, especially to soothe the worries of those Americans with investments in retirement kitties. And the issue strikes at the heart of income inequality. Impatient profit-taking, at the expense of more worthwhile reasons for maintaining a financial industry, is a leading cause of inequality and low wages. And digital technologies, which allow split-second investment decisions, are driving a new form of quick-hit impulsivity.
The problem comes with different names, starting with “short-termism.” Another popular description is “quarterly capitalism,” or the pressure on chief executive officers to raise a company’s share value every three months. Sometimes CEOs are given pay incentives to quickly extract value from a company at the expense of long-term investments in employees, innovation research, or market reputation.
One antidote is “patient capitalism.” This does not mean simply waiting for a down market to go up. Nor does it rule out moving money to better opportunities when opportunities are obvious. Rather it is a patience that looks wisely at the factors that drive value over the long haul despite headwinds of change and competition.
One advocate of this approach is Larry Fink, the head of BlackRock Inc., one of the world’s biggest money managers. In a recent letter to corporate chiefs he asked that they better serve shareholders by investing more “in innovation, skilled workforces and essential capital expenditures necessary to sustain long-term growth.”
Much of what creates value in a company is not material or cannot be measured in financial data, much like patience itself. Yet on Jan. 21, a group of the world’s largest institutional investors launched a global stock index for investors that aims to reward companies that take the long view as well as measure what makes them effective over years.
The group includes six investing giants with a built-in mandate to seek returns for decades: Canada’s Pension Plan Investment Board, New Zealand’s Superannuation Fund, Singapore’s GIC, Ontario Teachers’ Pension Plan, Denmark’s ATP Group, and PGGM of the Netherlands. They worked with Standard & Poor’s to create the Long Term Value Creation Index, starting with an initial $2 billion into funds. The index includes 246 companies across more than 20 countries. These companies will be tracked on many levels, but especially on qualitative criteria such as sustainable use of resources, independence of boards, research funding, and long-term incentives for management.
One purpose: to help those company CEOs resist the trend toward short-termism, or to sacrifice what benefits the many over time in order to profit the few in haste.
Whether the index does well against other indices or spawns imitators remains to be seen. But at least its creation shows a self-correcting trend in the financial industry. And it should give American presidential candidates a concrete example of what “Wall Street” can do, a point to debate and support, not something to rail against in anger.