Chappaqua, New York
Me, four days ago:
But I think the better explanation is our increasing deification of the stock market, our increasing investments in it, which creates a business climate in the relationship between corporate boards of directors and the corporations’ most prominent singular managerial employees, the CEO, being mindful of the outsized control that mutual funds have on the composition of boards of directors because they quasi-own so much of the stock. The goal is as much profit as possible over the short term; a CEO who engineers such policies will get paid very well, one who doesn’t is out the door. As it is, since the average Fortune 500 CEO tenure is not even five years, it’s not like any one CEO really cares about what happens when s/he is no longer CEO, and like I said, CEOs are high level managerial employees, nothing more. To net it all out, the high end American corporate world is driven by temporary players who are just looking to catch while catch can, they’re out the door and replaced by more people looking to catch while catch can.
MMcA has a piece at Bloomy today about HRC calling for a reverse stair stepped capital gains tax system; Ross Perot first proposed this in 1992. I think it’s a good idea, but MMcA has a more elegant explanation than mine above on why it won’t do much good by itself:
On the margin, it’s probably going to affect investment if you raise capital gains taxes by a lot — and nonetheless, this is not going to do much to shift the incentives toward longer-term thinking at companies. That’s because Clinton seems to fundamentally misunderstand the reason that public companies are so focused on short-term results that impact their stock price, rather than longer-term growth. To the extent that you think this phenomenon is real, and a problem, the issue is not that American investors, for reasons known only to themselves, have developed the attention spans of gnats. Instead, I’d argue that the problem is the massive shift toward institutional management of equity assets.
Here’s SEC Commissioner Luis Aguilar on this phenomenon in 2013: “The proportion of U.S. public equities managed by institutions has risen steadily over the past six decades, from about 7 or 8 percent of market capitalization in 1950, to about 67 percent in 2010.” Stocks used to be the province of affluent people who might hold them for decades — and might well take it into their head to show up at your shareholder meeting and delicately inquire why the chief executive officer is getting paid so much when quarterly results look pretty dismal. Now they’re the province of everyone — and everyone is in the hands of professional managers who don’t care how much the CEO is getting paid, would rather sell and buy something else than chivy the board into doing its job, and need to deliver price appreciation pretty regularly, lest their Morningstar profile become tarnished, or the regulators start asking the company to increase contributions.
Add to that the fact that you can now log in every day to see exactly how your 401(k) is doing, and you can see how short-termism might come to dominate executive offices.
Unless the short term reverse stair stepped time bracket has an extremely confiscatory rate, it won’t make this any better, and I even have my doubts that it would get much better even if the rate was 99.9%. Being an NRx, I can diagnose the fundamental problem is the same kind of democratization in the business world as democratization of government has negatively affected the quality of the public policy formation and enforcement process. Just as I think hereditary monarchy is generally the least problematic of types of governments, with some qualifications, hereditary monarchy is my beaux ideal of a business management paradigm. Either as a privately held business handed down from generation to generation, or as publicly traded corporations where one person must hold a simple majority of the stock expects to will it to a blood heir. Even then, there might be a necessity for some non-hereditary non-family publicly traded corporations to exist, but in the dark enlightenment, the king must hold them in close and permanent check.
Let me ask you this, St. Louisan: Did you like Anheuser-Busch better when it was essentially a hereditary monarchy, or as a pure publicly traded corporation?