In 1970, £10 of every £100 of profit was distributed to shareholders. According to the BBC, that number today is at £70. The money is being flushed from long-term investments into the hands of the shareholder. It’s no wonder that the Financial Times is reporting that investment has dried to its lowest level since 1947. Business leaders, economists, politicians and even the British Royalty are calling for change.
Not only is investment being crushed, but workers’ wages are also being squeezed in broad terms and employee satisfaction is at a historic low.
Neither is this malign problem is going to get better any time soon. According to the Goldman Sachs, Standard & Poor’s 500 Index companies spent more than $500bn on share buybacks last year. This year they are poised to spend $600bn. To put that in proportion, 95% of their operating margins are spent on buying back their own shares or paying out dividends.
Andy Haldane, Chief Economist at the Bank of England, claims that “one of the main reasons why world growth has remained sub-par has been because businesses have not been investing sufficiently [due to short-termism]”. But this trend wasn’t just spawned out of the financial crises; it’s been a developing problem over the last several decades.
“To put that in proportion, 95% of their operating margins are spent on buying back their own shares or paying out dividends.”
He’s not alone in his thinking either. The criticism of quarterly capitalism is no longer just a thing for left leaning democrats or out-of-touch economists, but more recently, wealthy business leaders. Larry Fink, Chairman and Chief Executive Officer of BlackRock, claimed that “the effects of the short-termism phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy”.
Perhaps here lies the answer to the so called Productivity Puzzle that has caused economists great woe over the years. No wonder workers’ growth in efficiency is lacklustre when certain companies are subdued to appeasing shareholders.
“No wonder workers’ growth in efficiency is lacklustre when certain companies are subdued to appeasing shareholders.”
Flagship critic Hillary Clinton says that a move away from quarterly capitalism by incentivising long term investments would not only benefit the economy, but also its shareholders. And this can be seen with Apple. Steve Jobs famously once said, “the cure for Apple is to innovate its way out of its current predicament”. Apple’s share price has since risen by some 6870%. Long term successes can reap bumper dividends to shareholders.
And the Unilever CEO, Paul Polman, agrees with Clinton in this regard. The company have taken steps to invest heavily in R&D, abolished quarterly reporting and stopped providing forward guidance to investors. And as a result “the share price may have fallen on the day we announced an end to guidance but is now 35 percent higher” he said.
Quarterly Capitalism is a problem that needs solving. Do we trust that businesses, such as Unilever, should eventually acknowledge the benefits of focussing on their broad strategy? Or do we turn to regulation and the state, as proposed by Hillary Clinton? Either way, the growing issue of short-termism in business is a widely cited issue.
Image: Marc Nozell via Flickr