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The myth of Corporate America's short-term thinking
AMERICAN companies, according to their critics, are so focused on making quick profits that they have abdicated building for the long term. That idea has captivated policy-makers, commentators and even some leading business executives.
The complaint has reached a fevered pitch amid news that companies are diverting much of their proceeds from the recent tax cut into buying back record amounts of their own shares. But there is little evidence to back up the idea that American businesses are overly focused on short-term boosts to profits and stock prices.
The easiest path for companies to goose earnings would be to cut back on investment. However, business investment has remained between 11 per cent and 15 per cent of gross domestic product (GDP) since 1970. Last year, corporate investment - which includes structures, equipment and the like - totalled 12.6 per cent of GDP.
Included in those investments is corporate spending on research and development - an undertaking with a long payback - which has reached its highest percentage of GDP and has become a more important part of overall investment.
I have spent three decades analysing, advising and investing in companies, and I believe American businesses are as willing to fund worthy projects as they have ever been. Investors are fully prepared to back companies focused on the long term. Far from penalising public companies building for the future, the stock market often rewards them.
Consider America's five largest public companies by market capitalisation: Apple, Amazon.com, Alphabet (Google), Microsoft and Facebook. All have been investing heavily, and all sport heady valuations.
Amazon, in particular, often appears almost disdainful of profits; last year, it earned just US$3 billion on its vast US$178 billion of revenues. With a stock market capitalisation of US$805 billion, that gives it a price to earnings ratio of 268. By comparison, the average S&P 500 company trades at 21 times earnings. On the smaller end, many biotech companies, which often have no revenues, let alone any profits, also trade at handsome (some would say absurd) valuations.
Away from the public markets, a towering wall of venture capital - hardly a short-term investment strategy - stands ready to fund pretty much any vaguely promising new idea.
That brings us back to the stock repurchases. Yes, they often bump up share prices. But they are really a consequence of the vast cash reserves - US$2.4 trillion and rising - held by American companies. When top executives don't see more attractive investment opportunities, at least not in the US, it can be a prudent use of that cash to buy back shares in their own companies.
As companies return capital to shareholders through buybacks or dividends, the money doesn't disappear. Its recipients typically reinvest it in other opportunities. That's not short-term thinking; that's efficiency.
INCENTIVES TO INVEST
Advocates of the recent tax legislation say it will provide more incentives for American companies to invest at home. I'd certainly welcome that. But taxes are only part of the equation. Businesses must also see the possibility of attractive returns, which are not always readily available in our relatively slow-growth economy.
That's why many American companies see greater opportunity to expand abroad. Between 2000 and 2015, American multinationals hired 4.3 million people in the US but added 6.2 million jobs overseas.
Meanwhile, spending on factories and equipment in the US has become a less important part of overall business investment, consistent with the decline in manufacturing's share as companies shift production to lower-cost countries.
Decrying "short-termism" is hardly a new phenomenon. A Harvard Business Review article pronounced that American business is "servicing existing markets rather than creating new ones" and is devoted to "short-term returns and management by the numbers". That was in 1980. Nine years later, Akio Morita, the co-founder of Sony, declared that "America looks 10 minutes ahead; Japan looks 10 years". Today, American technology firms are, of course, dominant, while Sony is a shadow of its former self.
Across the spectrum, companies in the US continue to lead the developed world, and profits are at record levels. If American business had been short-term focused since 1980, profits would be falling, not rising, and our companies would be faltering.
Recently, the Business Roundtable - corporate America's pre-eminent trade organisation - called for eliminating quarterly earnings guidance as a means of reducing short-termism. Such recommendations are, at best, a distraction. Only 28 per cent of major companies even provide quarterly guidance, and those forecasts help set investors' expectations and smooth market volatility.
The Business Roundtable should make it a higher priority to call for tighter corporate governance. While the "buddy system" of picking directors has subsided considerably, boards are often still too compliant. Executive compensation, which has grown exponentially faster than workers' pay, is out of control and should be more closely tied to long-term performance.
Shareholders should be able to nominate directors more easily. To better represent owners, the roles of chairman and chief executive officer should be split, as they are in many European companies.
But corporate executives recoil from those ideas. They prefer to complain about equity markets that often swiftly punish laggards. Isn't that what investors are supposed to do? NYTIMES
- The writer is a Wall Street executive and a NYT contributing opinion writer. He served as counselor to the Treasury Secretary in the Obama administration