From The New Yorker (!): pressure to focus on the short term doesn’t come from “Wall Street” or investors, but from poorly designed CEO compensation packages.
Excerpt from The Short-Termism Myth
[There are] two common but ultimately questionable assumptions. The first is that corporate decision-makers care only about the short term. The second is that it’s the stock market that makes them think this way. These assumptions are widely shared and long-standing, in both business and academe. … Yet when you actually look at the numbers the story gets more complicated. There is reason to think that some companies are investing too little in the future. As a whole, though, corporate spending on R. & D. has risen steadily over the years, and has stayed relatively constant as a share of G.D.P. and as a share of sales…
A 2011 Deutsche Bank study of more than a thousand companies found that those which spent significantly more on R. & D. than their competitors were more highly valued by investors. And a 2014 study of companies that cut R. & D. spending in order to meet short-term earnings goals found that their stocks underperformed after earnings had been announced—hardly what you’d expect if the market cared only about the short term.
Of course, there’s no shortage of investors who are myopic. But the market, for the most part, isn’t. That’s why companies like Amazon and Tesla and Netflix, whose profits in the present have typically been a tiny fraction of their market caps, have been able to command colossal valuations. It’s why there’s a steady flow of I.P.O.s for companies with small revenues and nonexistent earnings. And it’s why the biotech industry is now valued at more than a trillion dollars, even though many of the firms have yet to bring a single drug to market. None of these things are what you’d expect from a market dominated by short-term considerations.
To the extent that companies are underinvesting in the future, the blame lies not with investors but with executives. The pay of many C.E.O.s is tied to factors like short-term earnings, rather than to longer-term metrics, which naturally fosters myopia. That 2014 study of companies that cut R. & D. spending found that the executives responsible saw their pay rise sharply, even though the stock didn’t. If Clinton really wants to deal with short-termism, she’d be better off targeting the way executive compensation works, instead of the way capital gains are taxed. Ultimately, the solution to short-termism isn’t on Wall Street. It’s in the executive suite.