Center for American Progress

RELEASE: At Conference Focused on Shared Prosperity and Investment, CAP Releases Recommendations to Encourage Markets to Focus on the Long Term
Press Release

RELEASE: At Conference Focused on Shared Prosperity and Investment, CAP Releases Recommendations to Encourage Markets to Focus on the Long Term

Washington, D.C. — Today, as it hosts a conference focused on ways to combat short-term thinking and create long-term value in the private sector, the Center for American Progress released a new report outlining recommendations to improve U.S. financial markets and encourage corporate America to focus on the long term. With corporate profits robust but increasingly decoupled from investment and real median household income stagnant, CAP’s report asserts that excessive focus from corporate America on short-term profits instead of long-term value hurts shareholders and the middle class alike. Reversing this trend could help lead to more investment, which in turn can generate more jobs, higher productivity growth, higher wages, and greater innovation.

“An emphasis on short-term profits over long-term value may mean less of the critical investment needed to spur job creation—and fewer jobs means stagnant wages,” said Neera Tanden, President of the Center for American Progress. “The lack of investment is not just a problem for shareholders—it is a problem for the entire economy and the middle class. In the long run, investment makes the economy more productive, which is a necessary ingredient for middle-class income growth. There is growing agreement among policymakers, business leaders, and economists about the importance of public policies that encourage management and investors to focus on the long term.”

CAP’s report examines the evidence of short-termism among publicly traded firms and the role of three important players in modern equity markets—managers, short-term traders, and institutional investors—in the growth of short-termism. CAP points to anemic business investment growth—which is well below its historical trend despite low borrowing costs—as a direct aftereffect of the corporate trend toward short-termism. CAP lays out the economic theory that explains how markets can become overly focused on short-term profits and how these dynamics can steer companies away from making the long-term investments—such as innovation and other capital expenditures—that increase the value of their companies in the long run.

CAP’s report also proposes a series of policy recommendations that would help nudge financial markets toward a focus on the long term, benefiting managers, shareholders, and the middle class. Those recommendations, which include proposals on both the manager and investor sides, include:

Manager side:

  • Executive compensation: Congress should tweak the provision making performance compensation more than $1 million tax deductible in ways that motivate CEOs to focus on the long term, such as requiring that equity compensation take longer to vest.
  • Enforce existing laws on insider trading: Insider trading erodes public confidence in markets, reduces incentives for managers in innovative industries to make long-term investments, makes it more difficult for young firms to raise the capital they need from the public, and reduces economy-wide innovation. Greater efforts to both enforce existing laws and publicize enforcement actions would require no action from Congress, reduce the influence of asymmetric information, and improve the incentives for managers to make productive investments.
  • Repeal changes to rule 10b-18 of the Securities Exchange Act: One of the reasons for the explosion of share buybacks is a regulatory change—adjustments to rule 10b-18 of the Securities Exchange Act in 1982 gave firms a safe harbor protection from insider-trading charges when firms purchase stock on the open market. The U.S. Securities and Exchange Commission, or SEC, should repeal this rule as it gives managers an opaque way to manipulate stock prices. Firms would still be able to make tender offers to buy back shares at a certain price by a certain date, which is much less susceptible to manipulation.
  • More frequent and comprehensive reporting on share buybacks, including transacted prices relative to share prices at different time horizons: Since there is currently no detailed longer-term reporting on how buybacks occur, it is difficult for investors to tell when firms are buying shares in a way that transfers money from shareholders to management. Bringing more transparency to this process through SEC requirements would make buybacks a better deal for shareholders and less subject to insider manipulation.

Investor side:

  • Sliding capital gains tax: The tax code currently rewards investments by giving investors a preferred rate on capital gains when investors hold the asset for at least one year. The purpose of this tax code provision is to reward long-term investors, but one year is not nearly long enough. A sliding capital gains tax—a tax rate that falls the longer the asset is held—would provide greater rewards to long-term investment relative to short-term speculation.
  • The SEC should consider requiring the disclosure of pay slices: Large CEO pay slices—the share of compensation among the top five executives paid to the CEO—are associated with worse performance and lucky option grants for the CEO. Since the slice may reflect the economic rents—or excess compensation—that the CEO is extracting from the firm, the SEC should consider requiring its prominent disclosure, as well as benchmarking of similar firms to reduce monitoring costs for investors.
  • Steps to empower longer-term investors: Given that executives’ incentives push them so strongly toward focusing on the short term, companies should take affirmative steps to empower longer-term investors. One measure would be to give long-term shareholders proxy access, which would put independent, long-term focused nominees on equal footing to fill a vacancy on a company’s board of directors. Another proposal is to adopt minimum holding periods and time-based vesting of shareholder voting rights.

At CAP’s conference, “Creating Long-Term Value: Leading on Shared Prosperity, Innovation, and Investment,” participants will address how to create a more inclusive prosperity by encouraging long-term thinking in the private sector. Speakers and panelists include Treasury Secretary Jacob J. Lew, Commerce Secretary Penny Pritzker, former Treasury Secretary Lawrence H. Summers, Blackstone President Tony James, Centerview Co-Founder Blair Effron, Costco Founder and former CEO James Sinegal, former Council of Economic Advisers Chair Laura Tyson, Harvard Business School Senior Lecturer Kristin Mugford, Opportunity@Work Managing Director Byron Auguste, and Corvex Management Founder and Managing Partner Keith Meister. The Financial Times is serving as media partner for the conference, with chief U.S. commentator Ed Luce and U.S. economics editor Sam Fleming taking part in today’s discussion.

Click here to watch the livestream of the conference.

Click here to read “Long-Termism or Lemons: The Role of Public Policy in Promoting Long-Term Investments” by Marc Jarsulic, Brendan Duke, and Michael Madowitz.

Related resource: How to Foster Long-Term Innovation Investment by Neera Tanden and Blair Effron

For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.


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