It will not be many times this election cycle where The Wall Street Journal praises a policy statement by Hillary Clinton. It happened, however, after Clinton's economic speech at NYU over the summer:
"Whatever one may think about her policy proposals, Hillary Clinton has put her finger on a real problem: Too many CEOs are making decisions based on short-term considerations, regardless of their impact on the long-run performance of their firms."
In order to steady their readers from the shock, the WSJ quickly seeks support for Clinton's ideas from more 'legitimate' sources:
"Don't take my word for it. Laurence Fink is the chairman of BlackRock, the world's largest investment fund, with $4.8 trillion under management. In a much-discussed letter to the Fortune 500 CEOs last year, Mr. Fink expressed his concern that 'in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,' choosing instead to reduce capital expenditures in favor of higher dividends and increased stock buybacks. Such decisions, Mr. Fink warned, can 'jeopardize a company's ability to generate sustainable long-term returns.'"
The practice of buybacks is a particularly good example of distorting market forces (i.e., inflating share prices) for self-interested gains (i.e., stock-option-based compensation):
"As recently as 1981, buybacks constituted only 2% of the total net income of the S&P 500. But when economist William Lazonick examined the 248 firms listed continuously in this index between 1984 and 2013, he found an inexorable rise in buybacks' share of net income: 25% in the 1984-1993 decade; 37% in 1994-2003; 47% in 2004-13. Between 2004 and 2013, some of America's best-known corporations returned more than 100% of their income to shareholders through buybacks and dividends."
While personal financial gain is one motivation that at least conforms to expected behavior, knowingly damaging the company in order to cover-up poor performance seems to be a whole new level of corruption:
"When given the chance to speak confidentially, moreover, company executives contradict the capital-redeployment story. … a 2005 survey of CEOs and CFOs in the Journal of Accounting and Economics found that to avoid missing their own quarterly earnings estimates, 80% were willing to forego research-and-development spending, and 55% were willing to delay promising long-term projects that met their firms' internal return-on-investment requirements. A recent McKinsey survey yielded similar results."
Even worse, such self-serving behavior appears to be combined with law breaking (e.g., insider trading):
"As stock options and awards have surged as a share of total executive compensation, studies have found links between the timing of repurchases and the vesting dates of stock-based compensation. One study even found that executives often appear to time the release of good news to maximize the value of their own noncash compensation."
So, well done to the WSJ for acknowledging Clinton's efforts to bring attention to these damaging practices. Where the article diverts from the arguments underpinning strategic CSR, it is in terms of the reasons for correcting this behavior. While the article asserts the need to reinstate "a formula for maximizing shareholder value," I would prefer firms to focus on creating value for their stakeholders, broadly defined.
Take care
David
David Chandler & Bill Werther
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Hillary Gets It Right on Short-Termism
By William A. Galston
July 29, 2015
The Wall Street Journal
Late Edition – Final
A11
