Posted by The Aspen Institute, on Tuesday,
December 20, 2016
Editor’s Note: This post is a policy statement
issued by the Aspen Institute’s American Prosperity Project, a
nonpartisan framework for policy action, and signed by thirty
signatories including CEOs, directors of large business
enterprises, and prominent legal and management advisors. Related
research from the Program on Corporate Governance includes The
Myth that Insulating Boards Serves Long-Term Value by Lucian
Bebchuk (discussed on the Forum here).
economic health depends on sustained, long-term investment to support
our families and communities and to reinvigorate the economic engine
that creates jobs and prosperity.
There is no viable model under which either business or government can
or should shoulder the responsibility for long-term investment alone;
both are required.
The time is right
for a national conversation about long-term investment in
infrastructure, basic science, education and training for workers who
feel the brunt of globalization and technology. We need to focus on
the critical levers for economic growth along with sources of revenue
to help pay for it, as well as ways to overcome the short-term
thinking currently baked into government policy and business
The ideas offered here have
been developed under the auspices of the Aspen Institute in consultation with a
non-partisan working group of experts in public policy formation, tax and
regulation, business, and corporate law and governance. While these ideas enjoy
support across party lines, breaking the log jam and taking action will require
a coalition of leaders across the private and public sectors who are committed
to the health of the commons and America’s prosperity.
The problem in
Decades of inadequate
investment in America’s infrastructure undermine our nation’s safety and
productivity. Once a global leader, the US now ranks 25th in infrastructure
quality per the National Association of Manufacturers.
Underinvestment in basic
science research—by business and government—threatens America’s leadership in
technological innovation. The OECD reports that, relative to GDP, the US
has fallen to 10th in R&D investment. At current rates, China will surpass
the US in total investment in basic science research by 2019.
CEOs and directors of our
public companies report persistent pressure for short-term financial
performance; a 2013 McKinsey survey reports that short-term pressures have
increased in recent years. The overwhelming majority of corporate leaders
believe a longer time horizon would positively affect corporate performance,
strengthen financial returns, and drive innovation.
Short-term pressures also
influence business investment. Despite record profitability, fixed capital
investment by American corporations is the lowest since 1952 and
employer-paid skills training declined 28% between 2001 and 2009.
Perverse incentives in our
corporate governance system undermine the health of capitalism itself.
Short-termism is baked into our tax system and is evident in the decisions,
regulations and rules that govern corporations and capital markets.
Changes to the rules of the game are a necessary step to rebuild the public’s
trust in our economic system
The issues involved are
complex. The work involved in identifying and adopting supportive policies is
formidable but by no means insurmountable—and, in this moment, there is both
challenge and opportunity.
America’s incentive system
for long-term investment is broken. It must be repaired to work effectively in a
globally competitive market and to address today’s most vexing “grand
challenges”—from economic opportunity to new forms of energy and the need to
rebuild America’s physical infrastructure. The goal is a better deal for
Americans working to support their families and communities—and the restoration
of public trust in capitalism itself as an economic system that works for all.
There are parts of this
proposal that each of us might not find ideal. As signatories, we do not endorse
every idea in the framework, but we do endorse the principles that inform it.
Long-term investment as a national priority transcends partisan divisions and
this framework merits consideration to serve the best interests of our society
as a whole, over the self-interests of a few. It is in that spirit that we
advance and support this comprehensive approach to stimulate long term
investment in our economy.
Prosperity Project Signatories
Chairman & CEO,
Chairman, Royal Dutch
CEO, The Aspen
Sonsini Goodrich & Rosati PC
Former CEO, Veridian
CEO, Levi Strauss &
Wachtell, Lipton, Rosen & Katz
Chairman of the Board
and CEO, Henry Schein, Inc.
Dean, Kellogg School
of Management, Northwestern University
CEO, General Dynamics
Founder and former
Partner, Gibson, Dunn,
& Crutcher LLP
Chairman, The Rodel
President and CEO, AON
Member, Bass Berry &
Senior Fellow, The
Thomas A. Cole
Partner and former
Chair of the Executive Committee, Sidley Austin LLP
Samuel A. Di
Sir Martin Sorrell
CEO, PwC International
Perkins Coie LLP
World Fuel Services Corp.
Leo E. Strine, Jr.
Studies, The Brookings Institution
Senior Fellow, Harvard
Business School; Former CEO, Medtronic
Carlyle Group, Wendy’s, Dean Foods
Our framework for this national
conversation and for subsequent action has three goals:
investment on recognized drivers of long-term productivity growth and global
infrastructure, basic science research, private R&D, and skills training—in
order to close the decades-long investment shortfall in America’s future.
Building this foundation will support good jobs and new business formation,
support workers affected by globalization and technology, and better position
America to address the national debt through long-term economic growth.
Unlock business investment
by modernizing our corporate tax system
to achieve one that is simpler, fair to businesses across the spectrum of size
and industry, and supportive of both productivity growth and job creation.
Changes to the corporate tax system could reduce the federal corporate
statutory tax rate (at 35%, the highest in the world), broaden the base of
corporate tax payers, bring off-shore capital back to the US, and reward
long-term investment, and help provide revenues to assure that America’s
long-term goals can be met.
Align public policy and
corporate governance protocols to facilitate companies’ and investors’ focus
on long-term investment.
Complex layers of market pressures, governance regulations, and business norms
encourage short-term thinking in business and finance. The goal is a better
environment for long-term investing by business leaders and investors, and to
provide better outcomes for society.
Although these goals defy
seemingly intractable politics-as-usual, they are broadly shared across a wide
spectrum of leaders in both public and private sectors. The ideas outlined here
have many sources and they require more conversation, debate, and action to
reach the targeted outcomes of creating good jobs, encouraging innovation, and
combatting economic short-termism.
When it is resolved in a
course of action, the United States of America has the ability to do great
things and make the necessary and sometimes difficult choices. In this case,
national conversation and action on these ideas can give us ways to secure a
bright future for all Americans, rebuilding the American dream now and for
generations to come.
1 Rebuild the foundation for America’s global economic leadership: Invest in
widely-recognized drivers of productivity and economic growth
A nation’s infrastructure is
the foundation that secures its standard of living. America’s infrastructure was
once the envy of the world. Today, the National Association of Manufacturers
ranks the US 25th in the world on infrastructure quality; the American
Society of Civil Engineers (ASCE) grades America’s overall infrastructure at D+.
creates a better business environment: it enhances safety, productivity, and
quality of life for citizens; and it supports good jobs. Well-planned
investments generate robust returns for decades, whereas the consequences of
inadequate infrastructure take years, sometimes even decades, to be revealed. If
the decades-long underinvestment is not addressed, the ASCE claims by 2020 the
economy will “lose almost $1 trillion in business sales, resulting in a loss of
3.5 million jobs…” translating to a loss of $6,000 in disposable personal
income, per household, per year, from 2021 to 2040.
In 2016, with both the
Republican and Democratic Party platforms acknowledging the need to invest in
infrastructure, this investment transcends politics and offers America an
opportunity to unite in common cause for a better future. Further, in the
current environment of low interest rates and material costs, under-employment,
and promising technologies capable of enhancing the efficiency of new
infrastructure, the conditions for investment in infrastructure have rarely been
To restore America’s global
leadership in infrastructure requires integrated long-term planning and
substantial investment—with credible estimates calling for an additional $200 to
260 billion per year.
Financing such an investment
in a fiscally responsible way will require local, state, and federal government
involvement, as well as private sector contributions. A range of proposed
funding ideas worth serious consideration include user fees, federal grants, a
self-funding infrastructure bank, private investment through bonds and
public-private partnerships, and targeted taxes.
In addition to identifying
sources of funding, we also need to streamline project approvals to optimize
return on investment. Worker training programs, including enhanced
public-private partnerships, will need special attention to meet demand for new
jobs and to support those most affected by economic dislocation.
Economic returns on
infrastructure investments are promising. A May 2014 report by Standard & Poor’s
cites that a $1.3 billion infrastructure investment in America would likely
add 29,000 jobs to the construction sector and beyond, boost economic growth by
$2 billion, and reduce the federal deficit by $200 million for the year. But
these returns may also be lost through poor coordination and cumbersome
bureaucracy among local, state, and federal agencies. Adequate funding,
streamlined approval processes, and integrated long-term planning are essential.
Investments in roads,
airports, public transit, communications and energy systems, waterways, and
schools will create jobs, increase productivity, and improve quality of life;
they create the physical conditions for shared economic prosperity.
research and development
Federal funding for basic
scientific research is an investment in Americans’ prosperity, security, and
quality of life. The OECD reports that the US is now 10th in R&D investment
relative to GDP, and that China is set to surpass the US in total investment in
basic science research by 2019. The Information Technology and Innovation
Foundation ranks the US 22nd out of 30 nations in levels of university research.
In September, 2016, more
than three dozen American CEOs called for federal funding of basic science for
greater “prosperity, security and well-being,” but lagging investment in R&D is
not just a public sector problem. The National Science Board (NSB) describes
industry support for in-house basic research as “fairly stagnant” and financing
of academic R&D has declined to a level “not seen in more than two decades.” An
increasing share of corporate R&D investment occurs outside the US, due in part
to our dated corporate tax code (see Goal #2.) Further, modern business R&D
investment is often aimed at new product development rather than basic research
needed for transformative innovation and breakthroughs—like the research once
conducted at Bell Labs and Xerox PARC, which enabled the growth of today’s
According to the NSB,
federal support for university R&D began to fall in 2005 and the National
Science Foundation reports that federal funding for higher education R&D
declined by over 11% from 2012 to 2014, the longest multiyear decline since
Investment in scientific
research is critical to the kinds of technological breakthroughs that increase
productivity, enhance national security, spawn entire new industries, and
enhance quality of life. Such breakthroughs typically emerge from a combination
of government-funded basic science research and robust private sector research;
many of today’s major scientific breakthroughs are outside the US. For example,
MIT reports that of the four major global scientific breakthroughs in 2014, none
were achieved in the US. In order to secure America’s long-term prosperity,
these trends must be reversed.
Hurdles for private
investment in research and development include short-term pressures from capital
markets and a tax code that discourages US multinational companies from
investing at home. The pressures on corporations to make payouts to shareholders
and meet quarterly financial expectations outweigh incentives to retain earnings
and invest in R&D. According to Barclays, 82% of business leaders believe short-termism
impedes their ability to think and plan for the long term, and among large
companies, R&D investment is viewed as “the biggest loser.”
The US federal government
has always been and must continue to be an essential source of funding for basic
science research. The American Academy of Arts and Sciences recommends an annual
growth rate of at least 4%15 in basic science research funding and the American
Physical Society has received bipartisan support for a $100 billion National
Research Bank. Experts also acknowledge the need for better and more efficient
collaboration between and among government, industry and academia in funding
basic science research.
Private investment is also
critical and increasing the US R&D tax credit to compete with other major world
economies is a place to start. Equally important is the need to shift market
incentives to encourage long term corporate investment in basic scientific
research. Creating a policy environment more conducive to long-term investment
can help business do what it does best: innovate and bring new products and
services to market that solve real problems, create jobs and provide for the
needs of consumers.
Modernize our corporate tax system: Level the playing field, simplify tax
collection, and promote long-term investment
The reforms and changes
proposed reward long-term investment and patient capital and provide revenues
for critical infrastructure and R&D. They also price externalities to leverage
market capital investment. The revenues proposed come from a variety of sources
and in each case will increase America’s competitiveness over the long term. We
acknowledge that new sources of revenue must be sufficient to cover
expenditures, but this initiative and these proposals do not attempt to offer a
plan for reducing the national deficit, per se.
The US corporate tax code
inhibits long-term investment. It must be changed to be both fair and globally
competitive and reduce the incentive to keep cash offshore. It must encourage
capital investment at home, level the playing field, and produce needed revenue.
The US has the highest statutory corporate tax rate in the OECD and yet collects
less revenue from corporate taxes relative to GDP than our OECD counterparts.
Despite clear needs for long-term business investment in good jobs,
infrastructure, and innovation, it is estimated that US companies have several
trillion dollars parked offshore. Further, a complex array of special purpose
tax credits, carve-outs, and loopholes have accumulated over time that benefit
and individual companies
pursuing their own competitive advantage. But the net effect is a weaker, less
fair, and less efficient business environment; America is poorer for it.
A modernized tax code can
broaden America’s corporate tax base and level the playing field for all
companies. Simplifying the code may also reduce costs of tax compliance and
collection. Debate is likely over whether corporate tax reform should be revenue
neutral or should generate new revenues for national priorities, but closing
loopholes and leveling the playing field have broad appeal.
A smarter, more productive
corporate tax system would:
Eliminate loopholes and
that allow some companies and industries to pay very little or no taxes while
others pay close to the top statutory rate.
Reward investment in
current system of allowing companies to defer taxes on foreign income until
repatriated encourages tax avoidance and discourages investments in America.
There are many ideas on the table for rationalizing the system and assuring
full participation and adequate revenue for needed infrastructure and
services. The ultimate solution must encourage business investment at home and
generate adequate revenue for investments in our future.
that support productivity growth, including tax incentives for evidence-based
drivers of long-term productivity.
Inevitably, any of the
changes listed will benefit some and reduce subsidies for others. These will
involve complicated policy choices but the end game is a more fair, less complex
and cumbersome competitive environment in pursuit of America’s long-term goals.
Fixing the tax system will redirect corporate resources toward productive
investment and value creation, over tax avoidance and value extraction.
Curb excessive speculation on corporate
securities without undermining beneficial trading with a Financial Transaction
Excessive securities trading
funnels capital away from productive long-term investment, undermines trust in
our capital markets, and introduces noise and unproductive volatility into the
economy. Most investors are best served by indexed “buy and hold” strategies
over active trading. Companies are well served by patient capital that allows
long term strategy and investments to pay off.
Today’s capital markets,
however, are marked by high frequency trading (HFT) that benefits neither
long-term savers nor operating companies in need of patient capital. It is
estimated that HFT conducted by computer algorithms accounts for more than 60%
of all US stock trades today. Frequent trading is immensely profitable for
financial middlemen who earn trading fees, and for those seeking a technological
speed advantage, at the expense of the financial system as a whole.
Regulation that prohibits
excessively speculative and high frequency trading would be extremely
complicated and difficult to enforce. However, a Financial Transactions Tax (FTT)
could curb these practices, support the shared long-term goals of average
investors and companies, and raise revenue to pay for long-term national
priorities. The key to success is the level of taxation envisioned by proponents
who favor a “fractional” tax—a fraction of 1% that is well below the sales tax
that consumers in almost all states take for granted for purchase of retail
goods—and that is thus likely to have little, if any, effect on long-term savers
A well-designed US trading
tax would curb excessive trading without undermining beneficial trading
that supports market liquidity and facilitates price discovery. Proponents of
a Financial Transaction Tax (“Tobin Tax”) believe taxing speculative trading can
reduce high speed arbitrage without complicated and expensive regulation.
Other major economies around the world are addressing this problem with a
“fractional” tax. For example, the EU is considering a 0.1% tax on stocks and
0.01% tax on derivatives. Britain, Hong Kong and Singapore have financial
Despite the experience of
the OECD, the concept of an FTT remains controversial in the US where some
members of the financial community argue that an FTT would impose costs on
average investors and hurt market liquidity.
In 2009, the Aspen
Institute’s Corporate Values Strategy Group and two dozen prominent signatories
recommended such a policy. In 2011 the Joint Tax Committee estimated that
a 0.03% trading tax would raise $352 billion over 9 years (2013 to 2021). A
2016 study by the nonpartisan Tax Policy Center found that an FTT could raise a
maximum of 0.4 percent of GDP ($75 billion in 2017) in the US. At these
levels, an FTT would be internationally competitive, raise revenue to help fund
infrastructure and basic science research, and could tilt the system towards
real investment and away from speculation and arbitrage.
capital gains tax to reward longer term holdings
There is considerable
evidence that humans naturally overvalue the short term and undervalue the long
term. This phenomenon is not limited to Wall Street or corporate boardrooms,
however our current capital gains tax structure exacerbates a natural
tendency towards short-termism in business and capital markets. The IRS
paradoxically treats a one-year investment horizon as “long term.” Assets held
for less than one year are taxed as ordinary income; holdings of just one year
(and more) are treated as “long term” and taxed at the much lower rate of 15%.
As a starting point, we need
to update the IRS definition of long-term holdings. Five years is an appropriate
target, although a range of thoughtful approaches advocate for slightly shorter
and longer periods. Research suggests that markets do respond to preferential
rates, so utilizing the capital gains structure to encourage patient capital is
a natural step to influence behavior.
A more ambitious (and also
more complex) approach would be to institute a gradual scale for capital gains
taxes that assigns higher rates for short-term holdings and lower rates for
long-term investment. This has broad appeal. Investors, corporate executives,
labor leaders, and corporate governance experts proposed a sliding capital gains
tax rate in the 2009 Aspen Institute policy recommendations. BlackRock
CEO, Larry Fink, has also advocated for a sliding scale.
to simplify regulation and stimulate investment
Carbon emissions are a
textbook example of a negative externality—a cost imposed on society that is not
fully priced in the sale of a good or service. Costs of carbon emissions are
widespread and well documented, ranging from health effects to negative impacts
on food prices, insurance, and disaster relief from extreme weather. These costs
are rarely borne immediately, and are typically passed on to individuals and
A predictable carbon price
for all companies creates greater market certainty and incentives for companies
to invest in innovation. The American Conservative states, “The best policy to
address greenhouse gas emissions, while adhering to conservative principles, is
a carbon tax combined with tax and regulatory reform.” The least-intrusive, most
predictable and most effective incentive to address the problem is a direct tax
on carbon emissions, dubbed “the Reagan Way” by President Reagan’s Secretary of
State, George Schultz.
Scientists and economists
support a phased in carbon tax or fee as a best first step to reduce emissions.
The nonpartisan Citizen’s Climate Lobby argues that “phased-in carbon fees on
greenhouse gas emissions (1) are the most efficient, transparent, and
enforceable mechanism to drive an effective and fair transition to a
domestic-energy economy, (2) will stimulate investment in alternative-energy
technologies, and (3) give all businesses powerful incentives to increase their
energy-efficiency and reduce their carbon footprints in order to remain
Business executives from
resource intensive industries, among others, already calculate a carbon tax in
their internal budgets and scenario planning and US CEOs in a growing number of
companies support internal carbon pricing to prepare for that likelihood of
public policy. A number of global oil companies support a carbon tax on the
grounds that it would create a transparent, level playing field for free market
Beyond mitigating the costs
described above, shifting incentives away from a carbon-intense economy to one
that is cleaner, more durable, and independent of foreign sources of energy,
will spur technological innovation, new industries, and jobs. It can also be a
source of funding for regions and workers facing the greatest dislocations from
reduction in the use of fossil fuels. A carbon tax can be a source of
significant revenue. In 2011, the CBO estimated that a price of $20 per
metric ton on greenhouse gas emissions in the United States in 2012, raised 5.6
percent per year thereafter, would yield a total of $1.2 trillion in revenues
from 2012 to 2021. Others have implemented or advocate pricing at $25 to 40/
Even at the low end of this
range, a carbon tax creates market incentives to reduce carbon emissions and
invest in new technologies. A carbon tax enables companies innovating around
low-carbon products, services, and business models to compete in the
Carbon tax programs already
exist in developed economies. An effective carbon tax must be well-priced,
phased in over an appropriate period of time, and predictable—while applying to
the entire economy and stringently avoiding loopholes.
Make it easier for business and capital markets to focus on the long-term: Align
policy, regulation and business protocols
The majority of American
investors are saving for long-term goals like retirement and college tuition.
Meanwhile, companies need patient capital to invest in workers, innovation, and
productive assets. Aligning the long-term interests of average investors, and
the companies who need capital, is a critical lever for securing our long-term
prosperity. The ideas and recommendations in this section are designed to align
private incentives and regulations with the public good.
Update fiduciary duties and disclosures for financial
intermediaries and investing institutions
Institutions that manage
other people’s money occupy a privileged position in our economy. Most American
adults invest in the stock market, primarily through pension funds, mutual funds
and private investment (or “hedge”) funds. They are saving for long-term goals
such as retirement and a child’s college tuition. Thanks to the influx of these
average investors, large institutions now hold nearly 70% of all equity issued
in US public markets on behalf of these average investors—a nine-fold increase
from 8% in 1950.28 But too often, the long-term orientation of average investors
gets lost in the layers of intermediation between these investors and the
companies that seek their capital.
Institutional investors are
the linchpin that ensures that Americans save for the future while assuring
companies have access to capital for their long-term growth. These investing
institutions, however, increasingly depend on the services of other
intermediaries to make investing decisions and to manage corporate governance
responsibilities. Federal policy should adapt to this reality in order to secure
the strength and vibrancy of our economy and protect the financial assets of
American households. What is required to better serve the long-term interests of
What would be required to
better serve the long-term interests of average investors?
The fiduciary duties of
financial intermediaries are outlined in the Investment Advisers Act of 1940 and
ERISA, the 1974 federal law that governs private pension plans. While the
principles that underpin these policies are sound, rapid changes and the
complexity of modern capital markets require us to ensure that all
intermediaries remain faithful to the needs and time horizons of the ultimate
investors and savers. The following recommendations reflect the work of scholars
and practitioners of corporate governance:
Ensure that the standards
of the 1940 Act and ERISA, which govern private pension plans, apply to all
intermediaries who substantially advise or influence ERISA fiduciaries or
invest retirement savings that are under the care of ERISA fiduciaries.
investor disclosure standards-a “nutrition label on accountability-” on
relevant compensation, incentives, trading practices and policies on proxy
voting and other indicators of compatibility with the goals of long term
Require more immediate
disclosure from investors who acquire a significant stake of a company’s stock
so that all investors can make informed investment decisions based on this
material information. (Currently, investors have ten days to disclose they
have reached a 5% ownership threshold. This is outdated and undermines
transparency for other investors.)
Ensure that the
shareholder litigation brought by ERISA fiduciaries is in the interest of plan
easier for public companies to act long term
A sound long-term policy
agenda should help relieve corporate leaders from short-term distractions that
are endemic to governance protocols and market demands. We can expect better
long-term corporate decisions by dampening the drumbeat of quarterly
expectations and amplifying the voice of the long-term holders of capital.
Critical points of intervention include the following:
earnings guidance and encourage more transparency on drivers of long-term
corporate value, by requiring companies who offer guidance to do so within the
context of the company’s long-term strategy.
Consider the most
appropriate interval between shareholder votes on executive pay. The SEC
requires a “say on pay” vote at least every 3 years; companies that
establish a 3 year cycle enable investors to evaluate executive performance
over a longer timeframe.
capital through enhanced shareholder voting rights and/or dividends that vest
We believe that American
families, government, and businesses can unite in common cause to secure our
long-term global economic leadership.
undermines economic growth and prosperity. Short-termism is prevalent in human
nature—but also inflamed by the decision rules, incentives, and norms that
structure our economic system. To secure a long-term view and plan we need to
address the incentives for long-term investment. Properly structured, these
incentives will generate revenues needed to rebuild America’s capacity for
critical investment in research, transportation, and education for the 21st
The changes offered here, as
a catalyst to a national conversation, are an investment in securing the future
for our children and grandchildren. The time is ripe for change.
* * *
The complete publication,
including footnotes, is available
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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