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Business scholars' view of "Capitalism’s Long-Term Solution"


The views below were published as the lead editorial in the Sunday Review section of December 22, 2019 print edition of The New York Times with the title "Capitalism’s Long-Term Solution."


Source: The New York Times, December 21, 2019 commentary


Short-Term 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

In 2007, 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.

Mr. 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.

We live 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.

The 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 and Johnson & Johnson’s opioid scandal are all examples of short-term behavior with disastrous long-term consequences.

The 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 price.

They are 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.

Instead, 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.

The 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.

The “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.

Solving 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 for the 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.

In 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.

Milton 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.”

Friedman 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.

Ryan Beck 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



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