Redefining the future for capitalism
Federal regulators plan a forum on ways to prevent short-term focus on profits in order to deal with long-term problems such as climate change and an aging society.
This summer, the federal agency that regulates Wall Street will take a farsighted move. It will hold a public “roundtable” to gather ideas on how to deal with short-term thinking in capital markets. Too many companies, says the U.S. Securities and Exchange Commission, need to “foster a longer-term” perspective.
The SEC is hardly alone in its concern. Donald Trump and Joe Biden, the two front-runners in the presidential contest, have each argued that something must be done about “short-termism.” That term describes a tendency among transient investors to demand profits each quarter from companies, a practice that treats the stock market like a casino or a get-rich-quick lottery.
While financial experts differ on whether short-termism is getting worse, it is clear that many of today’s problems, from climate change to global migration to aging societies, are so big and difficult that they require companies to resist investor pressure to give short shrift to the long view.
Over the centuries, capitalism has contributed much to the universal welfare. The SEC now wonders if new regulations to discourage short-term thinking might improve that record. Specifically, the agency might allow companies to provide financial data only every six months instead of the current three months. It might encourage a company not to predict profits for the coming quarter. And the SEC might look at ways to encourage executive compensation that rewards results based on decadeslong goals. A company could focus on whether its leaders have invested well in employee training, research of new products and services, and activities that help sustain society and the planet.
The demand for a change is certainly there. According to SEC Chairman Jay Clayton, Americans who are building a retirement kitty in 401(k)s and IRAs want to know if their money will produce steady income over decades. “An undue focus on short-term results among companies may lead to inefficient allocation of capital, reduce long-term returns for Main Street investors, and encumber economic growth,” Mr. Clayton says.
One tactic used by many companies is to write a mission statement that defines a purpose beyond profits. This recognizes that a firm must give back to society, which provides the order and market for a company to provide value to shareholders. This summer’s SEC roundtable will be an excellent forum to discover better ways to bring foresight and patience into American companies.