By Barbara Hackman Franklin, David H. Langstaff and Charles O. Rossotti
Special to Roll Call
Sept. 10, 2009, Midnight
For months now we have witnessed, and even participated in, public debate about myriad complex causes of our present economic woes. Business and government actors of all kinds have been under the spotlight and have taken the heat for acting in the short-term interests of the few, at the expense of many. Important work in areas like aligning executive compensation with long-term results could help unwind the system that has produced the results that we have now. Yet, so far, public debate has failed to highlight a point that needs more discussion and action the relentless pressure for short-term results from some institutional shareholders, including mutual funds and hedge funds.
On Wednesday, a group of concerned Americans with deep experience in investment, business, academia and government released a statement that we hope will move the debate in the right direction. The group of 25-plus signatories includes Warren Buffett, Louis Gerstner, Peter Peterson, Felix Rohatyn, Richard Trumka and the three of us.
The statement, drafted as part of a process facilitated by the Aspen Institute Business and Society Programs Corporate Values Strategy Group, is a call to Congress and the administration to act now to overcome short-termism and the perverse incentives that encourage shareholders to think, and act, short too often.
The statement begins, We believe a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation. We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy. Restoring that faith critically requires restoring a long-term focus for boards, managers, and most particularly, shareholders if not voluntarily, then by appropriate regulation.
Why Is Short-Termism a Problem?
It is now widely recognized that executive compensation plans that tied pay to short-term performance metrics played an unhealthy role in tempting Wall Street executives to allow their firms to load up on risky investments in order to maximize their own pay. What is less well understood is that its not only corporate executives and directors who can succumb to short-term thinking, at the expense of sustainable long-term value creation. Shareholders can, too, for a variety of reasons.
Short-term thinking and acting can limit the ability of business to do what it does best create valuable goods and services, invest in innovation, take prudent risks, develop human capital, as well as address issues of social and environmental significance. A relentless emphasis on pumping up tomorrows stock price and meeting next quarters earnings target can drive the kind of dysfunctional, value-destroying behavior that we have witnessed since the fall of Enron and, on a much grander scale, in the current financial crisis.
Short-termism is not limited to the behavior of a few managers, investors or intermediaries. It is system-wide and system-driven. Corporate managers, boards, investment advisers, providers of capital and government have all played a role in contributing to short-term thinking because thats what existing laws and regulations permit and even encourage them to do.
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