Your concern is only the tip of the iceberg. Any set of rules will be gamed. The only way I can think of (and it can probably be gamed) that would really put the long term into the executives mind is to have most of their compensation based on the value of the company a few years after they're done. But given the existence of options and shorting stocks and any number of ways to mitigate risk or make money that don't depend on positive outcome for the average investor, anything can be gamed.
With a shift to long term outcomes, one could do any number of things that are short term bad to line their pockets and claim the benefit is further down the road. The problem isn't really about short or long term goals - does Amazon or Tesla give a rats ass about profit next quarter? No, and IMHO one of those is a solid company while both have high valuations.
In some cases I think the answer is to strip investors of control. They are the ones allegedly pushing short term profits at the expense of the long term. But what is ownership if not a form of control?
Another thought I keep coming back to is dividends. A proper investment gives returns without having to sell your stake. Lets provide incentives for companies to share profit rather than pump stock prices, then everyone can get excited about the right things. This has its downside too in cases where growth may require reinvestment. Perhaps forcing dividend payments for all cash equivalents above some threshold? I dunno, there are a lot of ways to approach this and none of them are good for all companies.
> In some cases I think the answer is to strip investors of control. They are the ones allegedly pushing short term profits at the expense of the long term.
Hopefully this was a very fleeting thought; when it comes to ideas about changing corporate structure you couldn't really come up with a worse one. It is a complete violation of the skin-in-the-game principle that has so successfully propelled capitalist society for more than 200 years.
If management aren't accountable to the wishes of people who have proven they can preserve or grow piles of money, there will be economic waste on a colossal scale compared to what we have now. Corporate management would be overwhelmed by fast talking con men.
Turn your attention instead to the forces that are making short term decisions the better ones. I'm no expert, but if short-term thinking has been going on for a long-term time then something is more fundamentally wrong than "gee, people with money must just be stupid!". People don't seem to like accepting quite how rationally intelligent markets are - the only thing markets have been shown not to do well is make sacrifices for moral reasons.
> the only thing markets have been shown not to do well is make sacrifices for moral reasons.
Even reading this claim in the narrow context of the article it seems too broad. John Cassidy has written an insightful book “How markets fail“ that explains when markets do not generate optimal or desirable outcomes.
> People don't seem to like accepting quite how rationally intelligent markets are
Because it is wishful thinking?
Where would the rational intelligence of stock markets be right now without the trillions of dollars in shares bought up directly by central banks and sovereign wealth funds or by corporations using essentially free money provided by central banks?
Last time I checked none of the economic theories about optimal markets included massive state interventions to help markets find the optimal price.
Its is currently successfully propelling humanity over the edge, it got us all the beautiful places of the world- shortterm thinking is currently the modus operandi in Africa, the middle east, haiti- every hellhole on earth operation manual starts with "lets just figure this out short-term".
There is short-term thinking encoded into religion on this planet. Short term thinking in the end even extinguishes your beloved capitalism. If there is one thing we need less, its this. And if there is one thing, build to overcome short term thinking its abstract entity's like cooperation's and goverments. The individual is bound to fail here.
So yes, you have a valid point here, but instead of providing a solution, you just regress and suggest we go back to the drawing board and wing it while there?
It was a partly fleeting thought. Most people but into a company because they believe in what it is doing, it the people running it. Most investors do not try to exert control over companies. They buy in based on an opinion about what they're buying.
If i make good (short-term) decisions each quarter, then won't that just add up to be a good decision after 4 quarters? If it turns out that the 'good' decision last quarter turned out to be bad _this_ quarter, then you'd make a change to fix it for _this_ quarter_.
Rather than plan out a 10 year plan, which you can't possibly predict in advance what may happen.
Commodore is a wonderful example of how a number of "good" short term decisions turned into long term disasters.
E.g. one (of many) factor in Commodores decline and failure was that they at one point made a "brilliant" move of undercutting the competition in a way that drove massive sales while costing them dis-proportionally little in lost revenues from all of the hardware already in their channel.
Unfortunately it did that by cutting the feet under their dealer network by going mass market retailers and cutting the RRP in public, without giving retailers advance warning, and without giving their dealers rebates on product in their channel that had not yet been sold.
As a result their results looked good for a little while, but they bred so much resentment in their dealer network that it still haunted them years later when they suddenly badly needed that dealer network to push out the Amiga, which was released at a price point where the mass market discount retailers weren't suitable.
It took years for the total cost of that stunt to be visible, and even then it's hard to account for the total impact to the company even now, decades later.
Buying lots of nice things on a credit card and racking up debt is a wonderful short-term strategy. At some point the mistakes you make in the short-term cripple you in the long-term. That's what all these efforts are trying to address. How do we make things that are costly long-term costly in the short-term as well?
> Another thought I keep coming back to is dividends. A proper investment gives returns without having to sell your stake. Lets provide incentives for companies to share profit rather than pump stock prices, then everyone can get excited about the right things.
the psychology behind dividends is not on your side here. dividends are viewed by knowledgeable investors as a company admitting they have run out of good ideas to generate even more profit (aka growth). while dividends can be issued for a host of reasons, the common case is that dividends are issued when reinvestment in the company would generate diminishing returns. typically returns diminish when the company is no longer in a high growth phase, so the company gives the money back to investors to find better returns elsewhere for their risk.
this is why dividends are largely issued by larger, mature companies rather than growing ones. you just won't get most companies to issue dividends because it hurts their growth potential.
you have to change structural incentives to make people care about the long-term. one fundamental reason for this is that many people on wall street want to get rich quick, so there's enormous pressure for companies to be that vehicle, in exchange for which, the companies get rich quick too via their stock price (underlying fundamentals be damned).
why do people care so much to get rich quick? (rhetorical question) i personally don't respect such people, but apparently plenty enough do that my opinion simply doesn't matter as they seem to get the prestige and power they seek. if we all genuinely respected ingenuity, determination, and the ability to make things (not shuffle money around), we wouldn't use income & wealth as a proxy for those things and we wouldn't have perverse incentives that make companies seek short-term pops (high-minded, i know).
How many companies keep striving at things outside their actual core competency rather than issue dividends? For example, Facebook could have issued dividends rather than purchase Oculus Rift and I'm not sure that the company or the shareholders would have been worse off.
Facebook is in the business of eyeball monopolization. Any company at any chance of getting hold of a serious number of eyeballs is a threat if not purchased.
Interesting thought. It might be better for investors if companies like Facebook just did what they are good at instead of trying to "stay ahead of the curve" and eliminate all future competitors. They are always going to fail at that game eventually anyway, so not trying at all might be better for investors.
I read somewhere about splitting control and ownership, but really you can’t. You either own a thing or you don’t. Time shares notwithstanding.
I do like dividend paying stock, but is that not a form of short term thinking? “May me my dividend this quarter, I don’t care when happens next year!”
Dividends are the most reasonable way to get a return on investment. If you want to buy low and sell high, you're playing the greater fool game - why would anyone buy if you think it's time to sell. How should a company stock be priced? It's based on earnings, or in other words the ability to pay dividends. P/E ratio or price to earnings is a direct measure of the ability to pay dividends whether they pay them or not. At a PE of 20, the company could pay a 5 percent dividend. At a PE of 100 your stock purchase is misguided - you either expect the earnings to increase dramatically which would make the price more reasonable, or you expect someone else's investment decision to be more unreasonable than yours.
I don't think I've ever bought a dividend share (just for the dividend) that has resulted in me getting an excellent yield. I'm personally not a big fan of purchasing stocks that fluctuate 10-20% up and downwards over the years while paying out, say, a 4% dividend. I'd rather put that money in a growth stock then.
> I read somewhere about splitting control and ownership, but really you can’t. You either own a thing or you don’t.
In common law countries, trusts law means you can distinguish between who has controlling interest and who has beneficial ownership.
So you can own a thing but not own the thing.
If I own something on trust for you, I can control it, but only in your best interests. If you own it on trust for me, I can benefit from the ownership, but without a lot of other legal effects that would normally ride shotgun with a full and undivided ownership.
As usual: I am not a lawyer, this is not legal advice.
In this day and age, most dividend shares are often not worth holding just for the dividend. Growth shares tend to generate much better returns in most cases.
Buying a dividend share that can potentially go up however, is very nice though, such as when purchasing Apple several years ago.
What’s stopping long term investing being based on bonds? Ie the company sells bonds today for a $x pay out 10 years from now. Maybe it’s secured by a t-bill. Maybe the investor pays the cost for a 10 year tbill plus some. The company agrees to pay out some operational profit from the 10 th year or the return on the tbill. (Back of envelop logic here, ymwv) Maybe make it more of a pool/fractional banking type arrangement. A clearing house company sells bonds of a company backed by some portion of tbills (10 year bonds for 10 year tbills, etc). At the end of the period either people are paid out the tbills (only if the company went belly up) or a percent of their operating profit from that period.
With a shift to long term outcomes, one could do any number of things that are short term bad to line their pockets and claim the benefit is further down the road. The problem isn't really about short or long term goals - does Amazon or Tesla give a rats ass about profit next quarter? No, and IMHO one of those is a solid company while both have high valuations.
In some cases I think the answer is to strip investors of control. They are the ones allegedly pushing short term profits at the expense of the long term. But what is ownership if not a form of control?
Another thought I keep coming back to is dividends. A proper investment gives returns without having to sell your stake. Lets provide incentives for companies to share profit rather than pump stock prices, then everyone can get excited about the right things. This has its downside too in cases where growth may require reinvestment. Perhaps forcing dividend payments for all cash equivalents above some threshold? I dunno, there are a lot of ways to approach this and none of them are good for all companies.