Back in the heyday of the long bull market in American stocks, one idea reigned supreme in corner offices and corporate boardrooms: CEOs could and should be measured by their ability to maximize “shareholder value.” The chief executive officer was to be paid largely in stock, and a company’s daily share price was a perpetual gauge of success or failure.
Lately, though, another view has been taking hold in some quarters: that corporations have focused so relentlessly on short-term performance that it is getting in the way of the economy’s long-term health – and even the health of businesses themselves. The latest person to take up this cause is a very prominent one: Hillary Clinton, the leading Democrat in the 2016 presidential race.
First came a speech this month in which she decried Wall Street’s focus on quarterly earnings reports, saying “short-termism” is getting in the way of long-term corporate investments that traditionally help the economy create new and better jobs.
This week, Mrs. Clinton is adding some detail to this portion of her economic campaign, unveiling a proposal to change the way investors’ capital gains are taxed, with new emphasis on rewarding long-term investors.
In part, this plank in her campaign platform is simply shrewd politics. Her theme has a populist ring that helps her fend off fellow Democrats campaigning to her left and saying that corporate America hasn’t been delivering hoped-for gains in jobs and incomes. It also positions her as a centrist who wants to help both firms and workers succeed.
But the idea isn’t just coming out of a political strategist’s playbook. It’s arising at a time when corporate profits are high, when CEO pay has skyrocketed even as that of workers has stagnated, and when companies are investing less in things such as research and new equipment than they did before the recession.
It’s not just politicians and left-leaning policy wonks, but also university researchers and some business leaders, who are saying short-termism is a serious problem that puts the vibrancy of America’s economy at risk.
“It’s an issue that will have real legs over the next couple of years,” as candidates of both parties might plausibly sell the theme to their political bases, says Robert Atkinson, an economist who heads the Information Technology and Innovation Foundation in Washington.
The time may be ripe partly because of a decade or more of disappointments for average Americans in wages, jobs, and investments. After the euphoria of a stock market boom in the late 1990s, when the quest for shareholder value seemed to be everyone’s friend, average workers have been through bear markets, recessions, job insecurity, stagnating wages – all amplifying concerns about the ability of the US economy to deliver broad-based prosperity in the new millennium.
Now, Mr. Atkinson says, a period of post-recession recovery and stabilization is giving way to questions of how to promote better long-term growth.
One of the answers may be to counter the focus on short-term share prices by coaxing corporations to invest more in things like buying equipment and training workers, rather than buying back their own stock shares. Clinton’s proposal for a shift in the capital-gains tax is based on the idea that patient investors should be rewarded with tax rates that decline over time. That in turn might influence CEO thinking.
Other options include ideas from Atkinson for stronger tax credits to encourage research, investment, and training or ideas from the Brookings scholars on altering rules that affect executive compensation.
But does America really have a short-termism problem? After all, other trends such as globalization and the decline of labor unions have been put forward to partially explain things like stagnating wages.
There are other trends, however, that suggest short-termism is a major issue. For example:
- To maximize shareholder value and align CEO interests with that of other investors, many corporate boards have turned to paying the executives largely in stock. Critics say the result is an incentive to game the stock price in the present – sidetracking CEOs from the ostensibly shareholder-friendly goal of building long-run value. The direct costs of soaring executive pay may be small as a share of the economy, “but the indirect effects of incentivizing managers on the basis of short-term stock performance have major implications for investment, innovation, and wage growth,” former Treasury Secretary Lawrence Summers and co-author Ed Balls write in a recent report for the Center for American Progress, a think tank aligned with Clinton’s centrist-Democrat brand.
- William Lazonick of the University of Massachusetts in Lowell has raised warning flags about a growing focus by companies on buying back shares of their own stock. In a charitable view, buybacks can make sense when a firm’s shares are undervalued by investors or when the firm lacks good alternatives for deploying profits. But overall, the buyback wave has coincided with a significant decline in investment by companies in activities that contribute to economic growth and productivity.
- Firms that emphasize shareholder concerns show “statistically significant decreases in customer-orientation, integrity and collaboration,” according to research by Jillian Popadak of Duke University, which is cited in a new Brookings Institution report.
Similarly, Atkinson cites a 2004 survey of more than 400 American executives, in which 80 percent said they would reduce spending on areas such as R&D, advertising, maintenance, and hiring in order to meet short-term earnings targets.
“That is so so damaging to economic growth,” he says. Especially when it goes beyond a few firms. “If they all have the same behavioral inclination because they have to keep their quarterly returns up, then everybody collectively is in an economic funk,” with less corporate investment than would otherwise occur.
Some say all this is part of a broader societal challenge. One example, cited in the Brookings Institution report, is the federal government’s penchant for fiscal policies oriented toward current consumption, to the detriment of long-term priorities.
“Collective myopia is the societal disease of our time,” authors William Galston and Elaine Kamarck write. “The impatient quest for quick gain overwhelms our better motives.”
Skeptics say much of the lament about short-termism is misguided. Yes, investors watch quarterly signals, but they still largely value stocks based on their sense of corporations’ “net present value,” factoring in future prospects for growth.
Jack Welch, who was viewed as one of the leading exemplars of building shareholder value during his years as CEO of General Electric, responded to concerns about short-termism in an interview back in 2009. He said that in his view, the shareholder focus was never meant to substitute for long-term strategy, and that any good chief executive needs to deliver both short- and long-term results.
Still, those who call for new policies say there’s clear evidence that the balance between short- and long-term thinking has gotten out of whack – to the detriment of the economy.
In one milestone moment in 2013, the founder of Dell Computer, Michael Dell, mounted a successful campaign to take the company from public ownership back under his personal control.
His description of the result, in one interview this year: “We're able to be bold, make investments, and focus 100 percent on customers."
There’s room for debate about how big the problem is and how to address it. But Clinton’s proposal marks an important moment.