[Marxism] Short-Term Thinking Is Poisoning American Business
lnp3 at panix.com
Sun Dec 22 14:03:44 MST 2019
(This op-ed piece barely hints at what has been preoccupying me for
years. It advocates long-term investing perspectives typical of Warren
Buffett, for example. What I can't wrap my head around is the failure of
the capitalist class to understand that its long-term interests are
being undermined by its failure to create alternatives to fossil fuels.
You see more of a concern about this in Western Europe but even there
nothing that comes close to an ecologically sustainable footprint. I
always hearken back to Teddy Roosevelt's creation of a national park
system and public lands that are under assault today, as pointed out in
Christopher Ketcham's "This Land". Roosevelt's measures were so
forward-thinking that Lenin told his commissars to study and emulate them.)
NY Times Op-Ed, Dec. 22, 2019
Short-Term Thinking Is Poisoning American Business
Free-market capitalism won’t survive unless it makes structural changes
toward long-term investing.
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.
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
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
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.
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