“America’s incentive system for long-term investment is broken,” the report argues.
Data bears this out. The average holding time for stocks has fallen from eight years in 1960 to eight months in 2016. Almost 80 percent of chief financial officers at 400 of America’s largest public companies say they would sacrifice a firm’s economic value to meet the quarter’s earnings expectations. And companies are spending more and more on purchasing their own shares to drive stock prices up, rather than investing in equipment or employees.
Polman, who has been the CEO since 2009, told me that he sees business leaders managing spending from quarter to quarter, and pushing sales at the end of quarterly reporting periods if numbers are off. (This dynamic backfired at Wells Fargo, where employees pressured to meet quarterly targets opened accounts without customers’ permission.) Companies engage in “financial manipulation,” he said, to post better quarterly profits, and don’t spend money on costly investments that might make their businesses do better in the long term. Business leaders, afraid that shareholders will oust them if quarterly profits dip, aim for earnings at the expense of anything else. (For an in-depth look at one company that slashed research at the demands of investors, read my story on DuPont.)
“The strategy ends up being focused on the shareholders versus other stakeholders,” he told me. “If ultimately the purpose of a company is maximizing shareholder return, we risk ending up with many decisions that are not in the interest of society.”
There are a few reasons why short-termism has become more prevalent in America. There’s a growing culture of analysts and traders obsessing over a company’s quarterly performance, and panicking if a company posts poor quarterly results. This culture has been enabled by the availability of information about companies on the Internet and television, but it has also arisen because traders’ compensation is tied to how their holdings perform every year. The recession amplified this culture—so many funds lost money during that time period that they, too, began encouraging the people who manage their money to try and make it up in the short term. Often shareholders advocate against leaders of companies that may post a year of poor profits, even if that company could perform very well over a five-year period. CEOs and other executives often have their pay tied to annual performance, meaning they personally benefit from short-term profits too.
The Aspen Institute and its signatories have come out with a framework that they hope will discourage this kind of short-term thinking. Short-term thinking is bad for America, they say, because the country’s economic health depends on long-term investments that will pay out over time. What’s more, they argue, short-term thinking shouldn’t be paramount for the majority of investors; most equity is held by pension funds and other institutional investors who need their assets to perform well over the long haul. Large institutions hold nearly 70 percent of all equity issued in public markets today, up from 8 percent held by such institutions in 1950.