Today, the U.S. Securities and Exchange Commission (SEC) will hold a roundtable discussion to address “short-termism”—the notion that “an undue focus on short-term results among companies may lead to inefficient allocation of capital, reduce long-term returns for Main Street investors, and encumber economic growth.”
Pardon me for being skeptical. I concur with the SEC’s desire for capital efficiency, solid investment returns, and economic growth, but I question whether dedicated bureaucrats in Washington can devise ways to enhance the efficiency and profitability of private corporations.
For the record, I am agnostic on the question of whether corporations should file financial statements more or less frequently than today’s current quarterly timetable. What’s indisputable is that multiple, ever-shifting challenges confront businesses on a daily basis, and coping with those challenges requires both short-term and long-term strategies. Only corporations themselves can work out the right balance between the two.
Some of the editorial comments about the pending hearings are strikingly sophomoric. One suggested that companies “focus on whether its leaders have invested well in the training of employees, research into new products and services, and activities that would help sustain society and the planet.” Well, duh! In today’s competitive global economy, any profit-seeking enterprise knows that it has to continually update its offerings and effectively train employees. As for the melodramatic “sustain society and the planet,” we’ve already shown, through our collective success at greatly reducing air and water pollution, that we’ll take prudent steps to modify private production to curb negative externalities.
The same editorial states that individuals investing for retirement “want to know if their money will produce steady income over decades.” Yes, of course. All investors wish they knew the future, but does anyone really think that SEC discussions will produce a crystal ball telling us which of today’s thriving companies will remain profitable years hence?
And then there’s the suggestion that companies “write a mission statement that defines a purpose beyond profits.” That’s obnoxiously condescending. Why not just ask CEOs to write on a chalkboard 50 times, “I promise we will be good corporate citizens”? The ideological critics of profit-seeking enterprises habitually overlook the fact that the primary purpose of a business enterprise is to supply something of value to others, and that only if that primary objective is fulfilled will profits ensue. Those critics remain stubbornly blind to how difficult earning profits is. Nor, typically, do they give credit to the many profitable enterprises that already go beyond their fiduciary responsibilities to their owners (shareholders) and employees by plowing profits into community enhancements.
The SEC hearing implies that corporations may be guilty of harmful short-term thinking. There’s more than a little irony in a government bureaucracy questioning whether private businesses are wrongly neglecting long-term considerations. Ever since the 20th-century British economist John Maynard Keynes dismissed concerns about the long run by flippantly quipping, “In the long run, we’re all dead,” U.S. politicians have fixated on the short term. Adopting a short-term perspective, Uncle Sam has run up more than $22 trillion of debt, spending money today and dumping debt onto future generations.
Show me a member of Congress who takes the long-term view about Social Security and Medicare. They all know these programs are on an unsustainable trajectory and that long-term planning is necessary to avert future wrenching adjustments; yet they forsake long-term prudence for short-term expediency, thinking only of getting re-elected in the next election.
Did corporations err by piling up a record total of corporate debt over recent years in order to buy back their own shares in the open market? Maybe. But ask yourself what induced them to take on so much debt. Was it not that they could borrow the money for historically minuscule interest rates? Uncle Sam took advantage of the Fed’s near-zero interest rate policy to incur record debt, so isn’t it hypocritical for government officials to criticize private enterprises for doing exactly the same thing?
It’s presumptuous for SEC bureaucrats, however well intentioned, to imply that they know better than the actual owners of capital how best to employ that capital. They don’t and can’t know as much as a corporation about the real-time conditions in a corporation’s markets—new products, pricing, and developments from domestic and foreign competition; the constellation of possible alternative plans going forward; new technologies; changes in tax laws, regulation, and central bank monetary policy; and most of all, the fickle, ever-shifting preferences and loyalties of those who ultimately decide if a business succeeds or fails—consumers.
Business leaders know that they have to keep an eye on the long term. But they absolutely have to survive in the short term in order to have a chance at long-term success. Entrepreneurs and managers must deal with the realities and pressures of today. If they succeed in correctly anticipating, preparing for, and serving consumer’s short-term needs, they’ll profit. Short-term profits are often indispensable for the prolongation of a venture into the future.
Again, it’s condescending for critics (who generally have little experience in running for-profit enterprises) to assume that CEOs are so obsessed with next quarter’s report that they won’t try to position themselves for future success, too. If there’s such a defective CEO, any responsible board of directors will secure a replacement.
I sincerely hope that the SEC’s roundtable about “short-termism” leads to some productive brainstorming. In fact, I would be delighted if they come up with a regulatory tweak that helps businesses. But I wouldn’t count on it. I’m only an economist, so I don’t know the future, but I will hazard two predictions: 1) Those hoping for something major to come out of this hearing will be disappointed; 2) the anti-capitalist commentariat will excoriate the SEC roundtable for not having done more to curb the freedom of corporations.
Mark Hendrickson, an economist, recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith and Freedom.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.