Understanding and Ending Short-Termism: New Papers From Roosevelt
November 6, 2015
By Mike Koczal
Today the Roosevelt Institute’s Financialization Project is releasing two new papers on short-termism:
Understanding Short-Termism: Questions and Consequences by J.W. Mason.
Ending Short-Termism: An Investment Agenda for Growth by Mike Konczal, J.W. Mason, and Amanda Page-Hoongrajok.
The first answers 12 common questions and complaints that are brought up when it comes to short-termism. It’s especially clear showing that investment in the most recent recovery is the weakest since the Great Depression, and that there’s no way to understand buybacks and dividends as representing funding for new businesses.
The second is our policy agenda, which goes beyond simply tackling short-termism by itself. Instead, it focuses on rebalancing power overall, limiting bad actors but also empowering good ones. This trend can only be combated by emboldening countervailing power in the marketplace while also emphasizing a new role for government.
I hope you check them out! Below is the Table of Content for policy agenda items and the questions about short-termism we answer in the two documents.
1. Direct Limits on Buybacks
2. Reform CEO Pay
3. Private Equity Reform
4. Limit Cash Release for Firms with Unfunded Pension Liabilities
Empower Countervailing Forces
5. Implement a Proxy Access Rule
6. Allow Alternative Share Approaches
7. Affirm Board Power
8. Establish Worker Representation
A New Role For Government
9. Use Taxes and the Rules of the Economy to Benefit Long-Term Growth
10. Expand Government Investment
1. Why are we worrying about businesses not investing enough? Hasn’t business spending on investment—and especially R&D—recovered strongly since the end of the recession?
2. Does the economy really need more spending now? Isn’t the Federal Reserve beginning to worry about the economy overheating?
3. Aren’t shareholder payouts just a way to move capital from established corporations to newer, faster-growing ones?
4. Don’t shareholder payouts help to reallocate capital to high-technology sectors in particular?
5. Are we missing the benefits of short-termism because money flowing out of large public firms is simply flowing into startups and small businesses not listed on the stock market?
6. If investors get more income from shares, doesn’t that mean they will invest more in new companies?
7. Payouts must go somewhere, so if they are not invested, where do they go?
8. Whether it is reinvested or consumed, the money from shareholder payouts has to go somewhere. So won’t it always boost demand one way or another?
9. Isn’t following market signals by focusing on the share price the best way to encourage innovation and growth in the long run?
10. If managers and shareholders don’t see any worthwhile investment projects, why should we second-guess them?
11. Since shareholders own the business, aren’t they entitled to higher payouts if that’s what they want?
12. Doesn’t the focus on share prices and high payouts benefit ordinary people, who also own shares?
Here is a high level summary of both papers together.
Short-termism is a real problem, and it’s damaging our economy. Put simply, short-termism—also known as “quarterly capitalism”—is the focus on short time horizons by both corporate managers and financial markets. It results in corporate funds being used for payouts to shareholders in the form of dividends and buybacks rather than investment in workers, R&D, infrastructure, and long-term success. This contributes to the economy continuing to operate below its full potential and makes the Federal Reserve’s efforts to boost growth by easing credit access less effective. Because most capital is owned by the wealthiest Americans, this is also directly connected to the rise of inequality and the fight to level the playing field while growing the economy, which has become a key issue in the 2016 election.
Shareholders aren’t the “owners” of a firm, and they aren’t reallocating money efficiently. The idea that shareholders have the only legitimate claim on corporate money gained traction with the “shareholder revolution” of the 1980s, but it was not widely accepted before then. In fact, there are many other relevant stakeholders, such as employees, customers, and suppliers. And shareholders have not been putting their increased returns to good use: Instead of reinvesting the money in innovative startups, they’re using it to fuel their own conspicuous consumption. $1.2 trillion is leaving firms through payouts, but at most $200 billion is going back in through IPOs and venture capital.
We have the ability to tackle short-termism directly and immediately. Our agenda calls for stricter limits on stock buybacks, which now soak up roughly 100 percent of corporate profits; reforms to discourage incentive-based CEO pay and the use of shareholder return as the primary performance metric, which encourage short-sighted and risky behavior; reforms to private equity to increase transparency and accountability, limit leverage, and forbid firms from taking on more debt to fund shareholder payouts; and limits on dividends and buybacks for firms with unfunded pension liabilities.
Ending short-termism also requires a long-term agenda. Even with the direct policy responses we outline, the forces that promote short-termism will continue to fester. With this in mind, we propose strengthening countervailing forces by increasing representation of long-term shareholders and workers on corporate boards, encouraging companies to experiment with loyalty shares and dual-class shares to further empower long-term stakeholders, and reaffirming the power of boards to make decisions for their firms. Many of these are simple changes that can be made by regulators.
Short-termism and its effects demand a government response. Government policy sets the rules that guide our economy and society. Our agenda calls for capital gains to be taxed as regular income so that passive generation of wealth is no longer privileged over work, and for the Federal Reserve to make full employment a priority again in order to empower workers and ensure that the gains of the recovery are shared more equally. Finally, our agenda calls on the government to step in as it did during the New Deal and fund the vital long-term investments in R&D and infrastructure that have fallen by the wayside as corporations chase quick returns.
The interest of a small group of wealthy shareholders in immediate payouts does not trump the interest of society at large in a productive corporate sector and in a rising standard of living over time. There are steps we can take to ensure that corporations once again serve as vehicles for organizing our collective productive activity rather than as ATMs for shareholders.