In 2014, companies in the S&P 500 spent $914 billion on share buybacks and dividends – or about 95 percent of their earnings, according to BloombergBusiness. At the same time, companies’ capital investments – in equipment, facilities and research – fell.
Such is the consequence of corporate “short-termism,” a phenomenon that Brookings Institution scholars Bill Galston and Elaine Kamarck argue in an important new report poses an increasing threat to long-term economic growth.
“There’s nothing wrong with paying investors handsome returns, and a vibrant stock market is something we should wish for,” Galston and Kamarck write. “But when the very few can move stock prices in the short term and reap handsome rewards, and when this cycle becomes standard operating procedure, crowding out investments that boost productivity and wage increases that boost consumption, the macro-economic consequences are debilitating.”
This short-termism, Galston and Kamarck say, distorts corporate behavior and the economy in a variety of destructive ways. For example:
Workers are getting short shrift.
Buybacks and dividends have consumed, on average, 85 percent of net earnings for all corporations since 1998 (excluding recession years 2001 and 2008), leaving just 14 percent for worker pay raises and investment.
Companies historically known for innovation are turning their backs on new investment.
Galston and Kamarck find that even bedrock firms such as IBM, Microsoft, Cisco, Intel, Hewlett-Packard, Pfizer, Pepsico, and Procter & Gamble are now cannibalizing almost all of or more than what they earn on buybacks and dividends. In fact, a survey of CEOs and CFOs found that 80 percent were “willing to forgo R&D spending and 55 percent to delay promising long-term projects” in order not to fall short of quarterly earnings estimates. “Among other consequences,” Galston and Kamarck say, “this decline has left companies with the oldest plant and equipment stock in six decades. The average age of their fixed assets is now 22 years, the highest since 1956.”
Executives are increasingly rewarding themselves with stock – and a lot of it.
Galston and Kamarck calculate that for the CEOs of the 200 public firms with market capitalization in excess of $1 billion, 72 percent of their compensation now comes in the form of stock awards and buybacks. Average total compensation in 2014: $22.6 million.
Shareholders are more and more emboldened to demand fast profits.
“Activist” investors – acting largely through hedge funds – are more frequently pressuring management to maximize short-term returns at the expense of a firm’s long-term health. In the words of BlackRock Chairman Laurence Fink, whom Galston and Kamarck cite, shareholders today are “renters, not owners, who are going to trade your stock as soon as they can pocket a quick gain.”
To reverse these trends, Galston and Kamarck propose a variety of changes in public policy toward corporate governance, including better disclosure and toughening rules for executive compensation. Among the more intriguing ideas is a proposal to lengthen the holding period for capital gains tax treatment while increasing taxes for gains made on short-term stock trades.
“We need more patient builders and fewer impatient traders, more Warren Buffetts and fewer Carl Icahns,” write Galston and Kamarck. “To get them, we cannot rely on cultural change or the collective conversion of CEOs and hedge fund leaders on the road to Damascus. Instead, we must change the laws and rules that shape corporate and investor behavior.”
At the same time, the authors acknowledge that reducing corporate short-termism will fix only one aspect of our increasingly short-termist society and politics. Congress, for example, has endured an increasing string of “wave” elections, making long-term legislating on such crucial matters as tax reform, entitlement reform and climate change all but impossible.
As Galston and Kamarck put it: “Collective myopia is the societal disease of our time. The impatient quest for quick gain overwhelms our better motives. And in the long run, we will all be worse off.”