Long term capitalism builds long term incentives into the governing structures of companies.
Over the past forty years, public markets have become increasingly short-term oriented. This is a natural consequence of tying incentives to short-term objectives. If companies simply incentivized over longer time horizons, we’d see better social outcomes.
What are the current trends in relating to long term capitalism? What interventions might companies or policy makers utilize to shift incentives? Who is doing the most exciting work in this space?
Together with our deep dives on capitalism and inequality and stakeholder capitalism, this deep dive gives us a sense of where mainstream economic thinking is today.
Long Term Capitalism Essentials:
The number of public companies in the US has declined dramatically since the mid 90s, from 7,300 in 1996 to 3,600 in 2016. Companies are also going public later in their life cycles, which leaves less room for the general public to benefit from the earlier stages of a company's growth.
Public market trends related to long term thinking:
“A company should take a long-term strategic view, as though the company were private, and explain clearly to shareholders how material decisions and actions are consistent with that view.”
“A company should not feel obligated to provide quarterly earnings guidance – and should determine whether providing quarterly earnings guidance for the company’s shareholders does more harm than good.”
“We are encouraging all public companies to consider moving away from providing quarterly earnings-per-share guidance. In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability.”
Stock buybacks are an impediment to long term incentives:
Stock buybacks: when a company buys its own outstanding shares to reduce the number of shares available on the open market.
- In 2018, companies in the S&P500 spent more on buybacks than R&D.
- Buybacks are often funded by debt, increasing corporate fragility.
- In 2018, buybacks accounted for 68% of the net income of S&P500 companies, with dividends absorbing another 41%
Policy options to address buyback incentive issues (via Yale Journal on Regulation):
- Banning them outright
- Limiting them (e.g. x% of shares)
- Taxing them
- Disclosing them as deductions in earnings per share reporting
- Require board/shareholder/stakeholder approval
- Restrictions on directors and corporate executives selling their shares following a buyback (Elizabeth Warren’s Accountable Capitalism Act proposes a 3 year restriction).
- Condition repurchases on other corporate attributes, such as imposing a ceiling on executive compensation, achieving a wage dispersion threshold, and falling within a debt limit.
Buybacks signal that corporate tax rates are too low -- that corporations are earning much more money than they can wisely invest or save.
- The Tax Cuts and Jobs Act of 2017 cut corp tax rates from 35% to 21%
- Corporate tax revenues declined $92B from $297B in 2017 to $205B in 2018
Incentives for long term capitalism include:
- Time phased voting: differentiates voting rights for shares held and committed to hold over a longer term (Long-Term Shareholders and Time-Phased Voting (2015) outlines the theory and evidence around time phased voting)
- Discounts on stock issuance for long term shareholders
- Preferred access to future share issuances
- Differential information rights
- Differential dividend payouts
Long Term Stock Exchange (LTSE)
A stock exchange where companies commit to long term principles and develop policies in accordance with those principles.
- Companies can list on LTSE as a secondary exchange
- Long-term focused companies should consider a broader group of stakeholders and the critical role they play in one another’s success.
- Long-term focused companies should measure success in years and decades and prioritize long-term decision-making.
- Long-term focused companies should align executive compensation and board compensation with long-term performance.
- Boards of directors of long-term focused companies should be engaged in and have explicit oversight of long-term strategy.
- Long-term focused companies should engage with their long-term shareholders.
Companies must publish policies that focus on long term value creation in accordance with the five principles. Specific areas that need to be included in the stakeholder and long term strategy principles are:
- Which stakeholder groups the company considers critical to long-term success
- Impact on the environment and its community
- Approach to diversity and inclusion
- Approach to investing in its employees
- Approach to rewarding its employees and other stakeholders for contributing to the company’s long-term success.
- What time horizon the company considers long-term
- How this time horizon relates to the company’s strategic plans
- How the company aligns success metrics with its long-term time horizon
- How the company implements long-term prioritization throughout the organization
The LTSE must approve a company for the exchange based on its policies, so there’s a check against obfuscating rhetoric (i.e., green washing)