As the campaign for the 2016 presidential election gets underway, two-time Democratic candidate Hillary Clinton is making waves with economic policy proposals to mitigate short-termism, or in her words, “quarterly capitalism,” and encourage a more long-term thinking from corporate leaders and investors. Quarterly capitalism is new language describing what many see as an overly short-term orientation in business and investment.
Some conservative commentators have expressed a grudging admiration for Clinton’s strategy, while some liberals have been caught off guard by the novelty of Clinton’s tack.
To the public, short-termism is a new foil for economic reform. But the Aspen Institute Business & Society Program (Aspen BSP) has been digging deeply into the problem of short-termism and its solutions for close to 15 years. Here are 5 things every voter (and policy maker) should know about combatting capital markets short-termism.
1) Combatting short-termism is a bipartisan issue.
There is absolutely nothing inherently liberal or conservative about combatting short-termism. Want proof? Take a look at the signatories to Aspen BSP’s 2009 “Overcoming Short-Termism” policy recommendations. Short-termism concerns CEOs, investors, labor, corporate governance experts, and scholars. Aspen BSP’s policy recommendations are the result of collaborative dialogue between business, labor, and institutional investors. Combatting short-termism will challenge both political parties to abandon some sacred cows, but liberals and conservatives both have substantial solutions to contribute.
2) The primary cause of short-termism is likely human nature, not regulation, CEOs, investors, or the media.
Evolution has hardwired certain areas of the brain for short-termism of all kinds. Policies, rules, incentives, and organizational cultures can exacerbate these natural tendencies but short-termism is part of the human condition. The good news is two-fold:
- We can skip the blame game, we are all guilty of short-termism.
- Short-term thinking isn’t inherently bad.
The key for our economy is to develop a healthier balance between short-term indicators of progress with long-term strategy and long-term investment. The bad news is that combatting excessive short-termism is complicated. There are no black and white answers, only different recipes for balancing short- and long-term thinking.
3) Tax policy might be one lever for making a dent in the problem but it is not a comprehensive solution.
Tax policy might be used to mitigate short-term behavior by pricing short-term oriented choices in ways that reflect their true cost. But tax policy is also a blunt instrument that is difficult to tailor to every company or industry. Tax policy is also easy to game (as we’ve been told by an expert panel), so it must be supported with other approaches.
4) The way we pay CEOs matters greatly, and we have been inflaming short-termism with the way we pay them for several decades.
The current paradigm, paying CEOs in stock and linking the majority of CEO pay to financial outcomes, intensifies short-termism. A large body of research demonstrates that financial incentives are effective for physical, repetitive tasks that don’t involve independent judgment. But a CEO’s job requires complex mental judgments about the future — precisely the things for which financial incentives are poorly suited. Scaling back our reliance on paying CEOs and their top executives in stock (yes, pay them in salary instead) and breaking our addiction to measuring performance with short-term metrics can help curb short-termism.
5) A major contributor to corporate short-termism is our mindset about the purpose of the corporation.
Our modern default conception of corporate purpose — “maximizing shareholder value” — prioritizes overly narrow and short-term financial metrics of success and is reinforced through faulty incentive systems. It crowds out other important (and potentially longer-term) stakeholders like employees from oversight of corporate behavior, while placing exclusive oversight of corporate leaders in the hands of shareholders, who themselves operate in short-term environments and under short-term incentive systems. However, human beings developed a remarkable check on short-termism many millennia ago — the ability to create shared meaning with each other. Shared meaning is the foundation of collaboration, enabling people to accomplish more together than they are able to do individually; it helps us see beyond our individual short-term needs and plan for the future. This insight is critical for our corporate organizations as well. In business, a strong sense of purpose allows people to think longer-term, prioritize, and helps leaders throughout the company stay the course on a strategy against sometimes overwhelming short-term pressures. It helps attract people and boosts loyalty, productivity, collaboration, and innovation — a winning strategy for any business.
A comprehensive approach to mitigating short-termism will likely include a mix of regulatory levers, private incentives, and fundamental shifts in mindset. Conservatives may find appeal in scaling back certain government interventions that have exacerbated short-termism. Liberals may find comfortable footing in creating a smarter tax code and regulatory architecture for corporations. Both liberals and conservatives can advance better business practice by rethinking corporate purpose. One thing is clear: combatting short-termism is a remarkable opportunity for political cooperation for the benefit of business and society.
Miguel Padró is a senior program manager for the Aspen Institute Business & Society Program.
