Thinking Is Poisoning American Business
Free-market capitalism won’t
survive unless it makes structural changes toward long-term investing.
The spread of technology-enabled high
speed trading and the rise of activist hedge funds looking for
short-term profits is discouraging long term investing.
Timothy A. Clary/Agence France-Presse — Getty Images
By Ryan Beck and Amit Seru
Mr. Beck is a recent graduate of the Stanford
Graduate School of Business, where Mr. Seru is a professor of finance.
Dec. 21, 2019
James Rogers did the unthinkable. As chief executive of Duke Energy, one of the
largest coal-powered utilities in the country,
he lobbied for the passage
of aggressive cap-and-trade legislation. The bill, if passed, would
have imposed billions of dollars in costs on his business, and it was vigorously
opposed by the coal industry’s primary lobbyist.
Rogers, who died in 2018, was no masochist; he was a visionary who understood
something fundamental about the relationship between time and profits: Over the
long run, the profitable thing and the right thing are usually the same.
in an economy increasingly at odds with this truth. Short-term business
practices are polluting our environment and harming our health and well-being
for the sake of quick payouts.
evidence of a growing short-term orientation among American public companies
isn’t hard to find.
Boeing’s corner-cutting on
the Max 737, Wells Fargo’s
fraudulent customer accounts
Johnson & Johnson’s opioid
scandal are all examples of short-term behavior with disastrous
causes are most likely structural. In 1950, a typical share of stock in United
States public markets was held for eight years. Since 2006, the average share of
stock has been held for less than a year. This shift is largely because of the
spread of technology-enabled trading and the rise of activist hedge funds
looking for short-term profits. And it may be changing how the most important
companies in America are managed. A 2006 study conducted by economists at Duke
University found that 78 percent of executives at public companies said that
they would sacrifice long-term economic value for a short-term lift in share
under intense pressure to do so. In 2018, the median tenure for chief executives
fell to a historic low of five years. Wall Street analysts dissect corporate
quarterly earnings scorecards like never before, leading executives to focus
more of their efforts on hitting near-term targets. This means executives may be
increasingly unable, not just unwilling, to pursue long-term value-creating
activities like investing in research or training for their employees.
they are being evaluated by investors on their ability to produce immediate
financial value, almost always in the form of value-extracting activities
such as cost-cutting, price increases, share buybacks or other forms of
financial engineering. This behavior is at least partly to blame for the
unethical business practices that have dominated recent news.
Unfortunately, the problem of short-termism isn’t confined to public companies
whose share prices are at the mercy of the stock markets. A willingness to
gamble long-term reputation and growth for a short-term valuation bump is now a
hallmark of private companies in Silicon Valley as well. The ethos of move fast
and break things, which has defined a generation of start-ups, is not the mantra
of long-term investors. It is the clarion call of speculators, who fully expect
to get out before any of their own things can get broken.
causes of short-term behavior in private markets mirror the story in public
markets. Ownership of America’s privately held companies has shifted away from
long-term operators, like family-owned businesses, to third-party investors —
venture capital and private equity firms like SoftBank and TPG. Since mid-2009
investors have allocated $5.8 trillion to global private equity alone.
“exit-seeking” nature of virtually all of these institutional funds means
investors seek to sell the businesses they acquire, and make a profitable exit,
within five to 10 years. There is, as a result, a growing mismatch between the
horizons of investors who control more of our private companies and the horizons
of the employees, customers and suppliers who depend on them.
the problem of short-termism will require difficult structural change that goes
well beyond high-minded public statements. There are signs that this is starting
to happen. This year, the Securities and Exchange Commission granted permission
Long-Term Stock Exchange
to begin building a novel alternative to traditional public markets. Among the
proposals put forward by this new exchange is a tenure-based voting system that
would make corporate voting a function of how many shares you own and how long
you have held them.
private markets, BlackRock now offers a fund that intends to invest in
businesses “up to forever.” It is driven by the idea that, over time, financial
value and stakeholder values converge. With no requirement to sell the
businesses they own, such funds create a powerful alignment between owners,
employees and customers.
Friedman, who popularized the notion of shareholder primacy and pursuit of
profit, once lamented that business leaders are often “incredibly shortsighted
and muddle-headed in matters that are outside their businesses but affect the
possible survival of business in general.”
was right. The modern economy is not working for too many people, who have begun
to equate short-term thinking with free-market capitalism and have had enough of
both. The survival of business in general demands that we take the long view.
is a recent graduate of the Stanford Graduate School of Business. Amit Seru is a
professor of finance at the Stanford Graduate School of Business and a senior
fellow at the Hoover Institution.
A version of
this article appears in print on Dec. 22, 2019, Section SR [Sunday Review], Page
9 of the New York edition with the headline: Capitalism’s Long-Term Solution.
© 2019 The
New York Times Company