This week, Business Insider has teamed up with public radio’s “Marketplace” for a series about the responsibility of a public company to its shareholders.
Earlier this year, we raised the issue with the presumptive Democratic presidential nominee Hillary Clinton.
She told us that corporate America has become enamoured with what she calls “quarterly capitalism.”
This idea broadly argues that American corporate executives have become more focused on seeking short-term gains in exchange for longer-term investments that will more broadly help the economy, but might not show the kind of immediate return to shareholders some investors now demand.
Said another way: American companies are no longer allowed by investors to look past their next quarterly earnings.
“I am deeply distressed about quarterly capitalism because I think it is causing businesses to make decisions that are not helping the long-term profitability of American corporations or the success of our economy,” Clinton said. “And I’m on record for that going back to the time when I was a senator. So I hear that, but the facts don’t bear it out.”
Clinton shared with Business Insider an anecdote from her recent economic-policy speeches:
The story goes that, in one survey, corporate executives were asked if they would invest in a five- to 10-year plan that would increase the profitability of their business in exchange for “a penny” off of their share price.
None of these executives said they’d do it, with Clinton adding that one exec told her they couldn’t trade long-term gains for shorter-term pain because the market wouldn’t allow it.
“The answer was, ‘I’d be killed,'” this exec told Clinton. “‘The market would kill me. Activist shareholders would kill me. So I would be spending all my time fending off this attack on me and the company I wouldn’t even get to doing the work that we want to do.'”
“That’s crazy,” Clinton said. “That to me is not wealth creation for the long term.”
And according to Clinton, the fix lies in the law and what acting in the best interests of shareholders really entails.
“So I think we’ve got to look at corporate law,” Clinton said.
Back in the day when I studied it there were different constituencies that were to be served, and I think there was a real wrong turn about 20 to 25 years ago when the theory began to be promoted that your highest duty, in fact some would argue, your only duty is to maximise shareholder return. I just don’t buy it.
In letters to CEOs of the S&P 500 — the benchmark stock index which houses America’s 500 largest publicly traded companies — over the last two years, BlackRock CEO Larry Fink has argued that the best path forward for their companies, the US economy, and the financial markets is to stop worrying about meeting short-term financial goals.
Fink’s most recent letter called for each CEO to “lay out for shareholders each year a strategic framework for long-term value creation” as a way to attract investors and fend off the activist investors Clinton thinks pressure companies into making decisions that ultimately hurt shareholders and the broader economy.
Or as Clinton said to Business Insider:
I think there’s a lot we could do that maybe would give a little more decision space to CEOs, to shareholders who want to hold for the long-term, to investors who want to be part of the long-term, that they would maybe have a little more room to withstand the pressure that is otherwise coming down on them.
“The Price of Profits,” our series with Marketplace, looks at what happens when profits become a company’s product. For more, visit priceofprofits.org.
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