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The prevailing narrative on this topic is "greedy investors only care about short-term profits". The spin is that visionary CEOs try to build long-term growth a

The prevailing narrative on this topic is "greedy investors only care about short-term profits". The spin is that visionary CEOs try to build long-term growth and innovation, but they're continuously stymied by Wall Street vultures. However the empirical evidence tells a very different story. Corporate managers have a demonstrated tendency towards wasteful ego-stroking empire building when not properly monitored. This is a classic principal-agent problem, where incentives drift away from shareholder interests. Regular quarterly targets are an important part of management discipline. The longer CEOs have before being expected to deliver results, the longer they have to empire-build without being held accountable. Similarly investors bias towards bottom-line profits and cash flow. Those metrics are much harder to fake or spin, compared to intangible stories about brand value, market dominance or skunkworks projects. When management does demonstrate credibility, Wall Street's usually more than happy to let them focus on long-term initiatives. Just look at Amazon, which is a darling of the investment community, trusted to steer nearly a trillion dollars in shareholder capital. Bezos has continuously poured huge resources into long-term speculative initiatives at the expense of quarterly earnings. And he's loved by shareholders for it, because he has a history of competence and putting company interests above personal ones. [1] https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaabf26d4c20d31a5.pdf https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaa...

awinder 7y ago
There's certainly a lot to unpack with some of the recent focus on "what is a company for", in all it's varied forms. I think you're correct to focus on some of the empire building, and you're right that there are lots of notable examples of companies that do have latitude to invest in the future (amazon, but this is also true of other big companies like apple, microsoft, google). And I think that what gives away the gambit with this LTSE is that the dual-class structure is protected -- THAT is for empire building and protection of the fiefdom, full-stop. That said, I like this Harvard piece a lot because the sidebars do point out that there is a pretty strong correlation between excess short-termism that came along with evolution of the shareholder preeminence theory. There's more than enough room here for everyone to be wrong in their own special, unique ways ;-).
loganfrederick 7y ago
I am glad someone brought this point up. It reminds me of the story of Drexel Burnham Lambert and Michael Milken. Connie Bruck's book on him and his company* provides good context for how and why Milken and his junk bond raiders and the Gordon Gekkos were able to upend corporate America in the 80s. It's because the prior couple decades had fat cat CEOs and middle management that coasted on empires founded by the prior generation. Gekko's speech about Teldar Paper's middle management was not an inaccurate metaphor. There is a trend now that executive tenures are getting shorter, no doubt in part because many are now held to higher standards than many in the 60s and 70s. There are founders who start companies with bad intentions of using the company as a financial vehicle to funnel money to themselves with as little work as possible, as opposed to founders who start companies to create external value for humanity. The first set of founders and CEOs should be constrained. All that said, I am still pro-Long Term Stock Exchange because there are issues with the quarterly cadence and high-frequency trading. Don't know if LTSE will be the solution but I support experimentation. * https://www.amazon.com/Predators-Ball-Burnham-JunkBond-Raiders/dp/0140120904/ https://www.amazon.com/Predators-Ball-Burnham-JunkBond-Raide... https://www.nytimes.com/2018/10/23/business/dealbook/ceo-tenure-kimberly-clark.html https://www.nytimes.com/2018/10/23/business/dealbook/ceo-ten...
- dumbfoundded 7y ago
  It seems to me that the problem with public markets isn't so much the timing but the presence of a profit motive. Trying to beat the S&P 500 over any period from 1 year to 50 years seems like a daunting task. Being in public markets forces a company to care about maximizing the return on capital. Different CEOs have different abilities to communicate the timeline investors should actually expect returns. Bezos seems exceptionally talented at extending the expected timelines of profitability when communicating to investors. The real benefit of private companies appears to be the secrecy and the freedom to do things without any hint of a profit motive. SpaceX stands as a shining example. Their goal is to get to Mars. They won't go public unless they already regularly go to Mars or maybe if they desperately need the money. Another example is Chick-fil-A, the third-largest fast-food chain in the US. They close their restaurants on Sundays due to religious reasons. This costs the company almost 15% of revenue. Whether or not you agree with the policy, it's hard to imagine it would last long if Chick-fil-A was public. The real value of staying private is not disclosing financials and getting to do whatever you want. The goal of your private company doesn't have to be maximizing returns if you don't want it to be. An LTSE seems to only offer value for CEOs who have trouble communicating the strategy and long term vision of the company. Amazon doesn't have any trouble with that communication. Neither does Alphabet. Maybe placing your company in an LTSE will providing useful signaling but I'm not sure about the real impact it'll make outside of the retail investment market.
nitwit005 7y ago
> Regular quarterly targets are an important part of management discipline. This boils down to "having goals is important", which is certainly true, but most of us have seen managers try to improve quarterly numbers at the expense of company health. The effect is pronounced enough that people time purchases to be near other companies end of quarter, knowing they'll get a better deal.
- jshaqaw 7y ago
  I accept that but ANY measured goals will be games as a fairly universal principle of human organization. If you shift accountability to annual the incentives to game increase because you have a whole year before you need to fess up.
  - roguecoder 7y ago
    This seems like it would be a good reason not to link CEO pay to outcomes at all: game theory says that as long as metrics have no impact on you personally, you don't have any incentive to game them.
    - jshaqaw 7y ago
      Management incentives will always have agent-principal issues. These things can’t be set by autopilot. That’s why corporate governance and a fiduciary voice for shareholders is so important. Of course the same CEOs who want annual reporting also want to neuter the capability of shareholders to enforce accountability.
    - mikeash 7y ago
      It also says you don’t have any incentive to improve them legitimately. The whole problem with metrics is that they can’t distinguish between gaming them and real improvement.
    - RhodesianHunter 7y ago
      I disagree. If you want good long term performance, link CEO pay to long term outcomes such as making a large portion of their compensation stock that vests over 10 years.
dragontamer 7y ago
> towards wasteful ego-stroking empire building when not properly monitored What is "ego-stroking empire building" exactly? I think I can imagine cartoon-characters who do this, but I'm having difficulty thinking of real world examples.
- walshemj 7y ago
  HP has a track record of buying companies and destroying them, 20 years ago the Concert JV between several big Telcos is another example.
roguecoder 7y ago
Managing to metrics because they are easy to measure instead of because they actually reflect the outcome you want is a very common mistake, but it seems like a particularly destructive problem to design our economy around that. It's probably why so many companies treat their employees like disposable punching bags: they can't easily measure the payoff from investing in employees so it must not be worth doing, right?
- dcolkitt 7y ago
  > It's probably why so many companies treat their employees like disposable punching bags Contrary to what you posit, the empirical evidence shows the opposite. The firms with the best management practices tend to have the highest rates of employee satisfaction [1]. And the surest way for a firm to wind up poorly managed, is for shareholders not to hold management accountable with tangible targets and transparent monitoring. [1] https://www.nber.org/papers/w17850.pdf https://www.nber.org/papers/w17850.pdf
  - roguecoder 7y ago
    Do you have a citation for the second part? It seems a huge leap from the first part, for which you have a citation, to "hedge fund activism makes companies treat employees better". Particularly given that good governance is linked to long-term outlooks (https://hbr.org/2017/05/managing-for-the-long-term https://hbr.org/2017/05/managing-for-the-long-term)
- lotsofpulp 7y ago
  There are many businesses with margins so low that treating employees better than your competitors mean you go out of business. In my opinion, the root cause of the economic divide in the US (and rest of the developed world) is the very fact that certain types of human labor are worth much less than in decades past, due to automation and cheaper labor in other countries. Computers allow one person to do the work of many, and they’re owned by capital, so the spoils go to the owners of capital. And the owners of capital now have a surplus of labor, and so can pay the labor less and whoever succeeds can offer the lowest prices and survive.
owens99 7y ago
> When management does demonstrate credibility, Wall Street's usually more than happy to let them focus on long-term initiatives. Just look at Amazon, which is a darling of the investment community, trusted to steer nearly a trillion dollars in shareholder capital. Bezos has continuously poured huge resources into long-term speculative initiatives at the expense of quarterly earnings. And he's loved by shareholders for it, because he has a history of competence and putting company interests above personal ones. I'm sure this perspective is not correct. You are pointing out something that exists, but your argument about why it exists is misguided. Bezos can do this because he is a Founding CEO. I recommend reading Andreessen Horowitz's primary thesis on why they invest in Founding CEOs (https://a16z.com/2010/04/28/why-we-prefer-founding-ceos/ https://a16z.com/2010/04/28/why-we-prefer-founding-ceos/). Founding CEOs, as opposed to Professional CEOs, have two things working for them: 1) Moral Authority 2) An Ability to Recognize New Product Cycles. 1) Moral Authority: It's not that shareholders trust Bezos more than anyone else. It's that he has Moral Authority to take risks because he founded the company. Per Ben Horowitz: "Often, true innovation requires throwing out many of the foundational assumptions of the company. If the company is significant, doing so may be extremely difficult for the professional CEO. The company’s core belief system is often entangled in those assumptions. Since the founding CEO made the assumptions in the first place, it is much easier for her. An excellent example of existing, invalid assumptions paralyzing a whole set of companies recently played out in the music industry." 2) Ability to Recognize New Product Cycles: This is a skill professional CEOs simply don't have. Again, per Ben Horowitz: "Founding CEOs naturally take a long view of their companies. The company is their life’s work. Their emotional commitment exceeds their equity stake. Their goal from the start is to build something significant. They instinctively know that big product cycles come from investment and that even the biggest product cycles will eventually fade. Professional CEOs, on the other hand, tend to be driven by relatively shorter-term goals. They are paid in terms of stock options that vest over 4 years and cash bonuses for quarterly and yearly performance." So in essence, what you are saying, that public companies have the ability to be like Bezos, is simply not true and never will be true. This is why something like the LTSE is a needed experiment.
- polishTar 7y ago
  If you object to the Amazon example because the CEO was also the founder, there are many other examples of extremely long-term focused companies where that isn't true. A really good example is Uber. Honestly, Uber is probably far too long-term focused and it'd be better if Wall St punished them more. It's pretty hard to accuse Wall St of being short-term focused on that one. That said, I totally agree with you that experimentation is good, and the LTSE is a valuable experiment. Maybe we can learn something from it, even if it's worse than what we already have.
momokoko 7y ago
I feel this would be spot on if it were not for the massive advancements in financial engineering that have occurred over the last few decades. Financial engineering almost always outperforms performance over the short term. Until eventually the problems it causes long term eventually catch up to the company and things go downhill.
- jrjdjdhhedh 7y ago
  You dont sound very credible. In fact you sound like you're spouting regurgitated bullshit without thought.
hakfoo 7y ago
I don't think it's a transparency issue. It's the conflicting goals that come from different investing timeframes. I'm buy-and-holding for retirement. I want my shares to peak in 2040. The next guy churns his portfolio every few months and wants prices to peak in November. Even if you communicate your vision and goals well, any type of long-term vision is saying to the short-term investors "we're going to give you smaller dividends and lower numbers for future promise." So the short-term investor can either hope that the communication is solid and long-term buyers are engaged by that messaging enough to keep the price high, or they can lean on boards to prioritize stuff like dividends and buybacks that provide a more direct boost. We can definitely see the latter approach in play. I worry that in pursuit of pricing efficiency, we've started underprice the future value of some business structures. The decline of conglomerates fits that sort of fear. You can shard a company like Honeywell/GE/Hyundai/Sony/Hitachi into 200 individually priced and tracked units, but then you lose the difficult-to-quantify magic of "predictable money-making businesses that can provide the financial resources and stability to support long-term bets and moon-shot R&D". I would be unsurprised to see this attitude in more monolithic firms too-- being open with your figures to investors will lead to pressures against anything that's not identifiable as a very low risk play with obvious payout.

awinder 7y ago

There's certainly a lot to unpack with some of the recent focus on "what is a company for", in all it's varied forms. I think you're correct to focus on some of the empire building, and you're right that there are lots of notable examples of companies that do have latitude to invest in the future (amazon, but this is also true of other big companies like apple, microsoft, google). And I think that what gives away the gambit with this LTSE is that the dual-class structure is protected -- THAT is for empire building and protection of the fiefdom, full-stop. That said, I like this Harvard piece a lot because the sidebars do point out that there is a pretty strong correlation between excess short-termism that came along with evolution of the shareholder preeminence theory. There's more than enough room here for everyone to be wrong in their own special, unique ways ;-).

loganfrederick 7y ago

I am glad someone brought this point up. It reminds me of the story of Drexel Burnham Lambert and Michael Milken. Connie Bruck's book on him and his company* provides good context for how and why Milken and his junk bond raiders and the Gordon Gekkos were able to upend corporate America in the 80s. It's because the prior couple decades had fat cat CEOs and middle management that coasted on empires founded by the prior generation. Gekko's speech about Teldar Paper's middle management was not an inaccurate metaphor. There is a trend now that executive tenures are getting shorter, no doubt in part because many are now held to higher standards than many in the 60s and 70s. There are founders who start companies with bad intentions of using the company as a financial vehicle to funnel money to themselves with as little work as possible, as opposed to founders who start companies to create external value for humanity. The first set of founders and CEOs should be constrained. All that said, I am still pro-Long Term Stock Exchange because there are issues with the quarterly cadence and high-frequency trading. Don't know if LTSE will be the solution but I support experimentation. * https://www.amazon.com/Predators-Ball-Burnham-JunkBond-Raiders/dp/0140120904/ https://www.amazon.com/Predators-Ball-Burnham-JunkBond-Raide... https://www.nytimes.com/2018/10/23/business/dealbook/ceo-tenure-kimberly-clark.html https://www.nytimes.com/2018/10/23/business/dealbook/ceo-ten...

dumbfoundded 7y ago
It seems to me that the problem with public markets isn't so much the timing but the presence of a profit motive. Trying to beat the S&P 500 over any period from 1 year to 50 years seems like a daunting task. Being in public markets forces a company to care about maximizing the return on capital. Different CEOs have different abilities to communicate the timeline investors should actually expect returns. Bezos seems exceptionally talented at extending the expected timelines of profitability when communicating to investors. The real benefit of private companies appears to be the secrecy and the freedom to do things without any hint of a profit motive. SpaceX stands as a shining example. Their goal is to get to Mars. They won't go public unless they already regularly go to Mars or maybe if they desperately need the money. Another example is Chick-fil-A, the third-largest fast-food chain in the US. They close their restaurants on Sundays due to religious reasons. This costs the company almost 15% of revenue. Whether or not you agree with the policy, it's hard to imagine it would last long if Chick-fil-A was public. The real value of staying private is not disclosing financials and getting to do whatever you want. The goal of your private company doesn't have to be maximizing returns if you don't want it to be. An LTSE seems to only offer value for CEOs who have trouble communicating the strategy and long term vision of the company. Amazon doesn't have any trouble with that communication. Neither does Alphabet. Maybe placing your company in an LTSE will providing useful signaling but I'm not sure about the real impact it'll make outside of the retail investment market.

nitwit005 7y ago

> Regular quarterly targets are an important part of management discipline. This boils down to "having goals is important", which is certainly true, but most of us have seen managers try to improve quarterly numbers at the expense of company health. The effect is pronounced enough that people time purchases to be near other companies end of quarter, knowing they'll get a better deal.

jshaqaw 7y ago
I accept that but ANY measured goals will be games as a fairly universal principle of human organization. If you shift accountability to annual the incentives to game increase because you have a whole year before you need to fess up.
- roguecoder 7y ago
  This seems like it would be a good reason not to link CEO pay to outcomes at all: game theory says that as long as metrics have no impact on you personally, you don't have any incentive to game them.
  - jshaqaw 7y ago
    Management incentives will always have agent-principal issues. These things can’t be set by autopilot. That’s why corporate governance and a fiduciary voice for shareholders is so important. Of course the same CEOs who want annual reporting also want to neuter the capability of shareholders to enforce accountability.
  - mikeash 7y ago
    It also says you don’t have any incentive to improve them legitimately. The whole problem with metrics is that they can’t distinguish between gaming them and real improvement.
  - RhodesianHunter 7y ago
    I disagree. If you want good long term performance, link CEO pay to long term outcomes such as making a large portion of their compensation stock that vests over 10 years.

dragontamer 7y ago

> towards wasteful ego-stroking empire building when not properly monitored What is "ego-stroking empire building" exactly? I think I can imagine cartoon-characters who do this, but I'm having difficulty thinking of real world examples.

walshemj 7y ago
HP has a track record of buying companies and destroying them, 20 years ago the Concert JV between several big Telcos is another example.

roguecoder 7y ago

Managing to metrics because they are easy to measure instead of because they actually reflect the outcome you want is a very common mistake, but it seems like a particularly destructive problem to design our economy around that. It's probably why so many companies treat their employees like disposable punching bags: they can't easily measure the payoff from investing in employees so it must not be worth doing, right?

dcolkitt 7y ago
> It's probably why so many companies treat their employees like disposable punching bags Contrary to what you posit, the empirical evidence shows the opposite. The firms with the best management practices tend to have the highest rates of employee satisfaction [1]. And the surest way for a firm to wind up poorly managed, is for shareholders not to hold management accountable with tangible targets and transparent monitoring. [1] https://www.nber.org/papers/w17850.pdf https://www.nber.org/papers/w17850.pdf
- roguecoder 7y ago
  Do you have a citation for the second part? It seems a huge leap from the first part, for which you have a citation, to "hedge fund activism makes companies treat employees better". Particularly given that good governance is linked to long-term outlooks (https://hbr.org/2017/05/managing-for-the-long-term https://hbr.org/2017/05/managing-for-the-long-term)
lotsofpulp 7y ago
There are many businesses with margins so low that treating employees better than your competitors mean you go out of business. In my opinion, the root cause of the economic divide in the US (and rest of the developed world) is the very fact that certain types of human labor are worth much less than in decades past, due to automation and cheaper labor in other countries. Computers allow one person to do the work of many, and they’re owned by capital, so the spoils go to the owners of capital. And the owners of capital now have a surplus of labor, and so can pay the labor less and whoever succeeds can offer the lowest prices and survive.

owens99 7y ago

> When management does demonstrate credibility, Wall Street's usually more than happy to let them focus on long-term initiatives. Just look at Amazon, which is a darling of the investment community, trusted to steer nearly a trillion dollars in shareholder capital. Bezos has continuously poured huge resources into long-term speculative initiatives at the expense of quarterly earnings. And he's loved by shareholders for it, because he has a history of competence and putting company interests above personal ones. I'm sure this perspective is not correct. You are pointing out something that exists, but your argument about why it exists is misguided. Bezos can do this because he is a Founding CEO. I recommend reading Andreessen Horowitz's primary thesis on why they invest in Founding CEOs (https://a16z.com/2010/04/28/why-we-prefer-founding-ceos/ https://a16z.com/2010/04/28/why-we-prefer-founding-ceos/). Founding CEOs, as opposed to Professional CEOs, have two things working for them: 1) Moral Authority 2) An Ability to Recognize New Product Cycles. 1) Moral Authority: It's not that shareholders trust Bezos more than anyone else. It's that he has Moral Authority to take risks because he founded the company. Per Ben Horowitz: "Often, true innovation requires throwing out many of the foundational assumptions of the company. If the company is significant, doing so may be extremely difficult for the professional CEO. The company’s core belief system is often entangled in those assumptions. Since the founding CEO made the assumptions in the first place, it is much easier for her. An excellent example of existing, invalid assumptions paralyzing a whole set of companies recently played out in the music industry." 2) Ability to Recognize New Product Cycles: This is a skill professional CEOs simply don't have. Again, per Ben Horowitz: "Founding CEOs naturally take a long view of their companies. The company is their life’s work. Their emotional commitment exceeds their equity stake. Their goal from the start is to build something significant. They instinctively know that big product cycles come from investment and that even the biggest product cycles will eventually fade. Professional CEOs, on the other hand, tend to be driven by relatively shorter-term goals. They are paid in terms of stock options that vest over 4 years and cash bonuses for quarterly and yearly performance." So in essence, what you are saying, that public companies have the ability to be like Bezos, is simply not true and never will be true. This is why something like the LTSE is a needed experiment.

polishTar 7y ago
If you object to the Amazon example because the CEO was also the founder, there are many other examples of extremely long-term focused companies where that isn't true. A really good example is Uber. Honestly, Uber is probably far too long-term focused and it'd be better if Wall St punished them more. It's pretty hard to accuse Wall St of being short-term focused on that one. That said, I totally agree with you that experimentation is good, and the LTSE is a valuable experiment. Maybe we can learn something from it, even if it's worse than what we already have.

momokoko 7y ago

I feel this would be spot on if it were not for the massive advancements in financial engineering that have occurred over the last few decades. Financial engineering almost always outperforms performance over the short term. Until eventually the problems it causes long term eventually catch up to the company and things go downhill.

jrjdjdhhedh 7y ago
You dont sound very credible. In fact you sound like you're spouting regurgitated bullshit without thought.

hakfoo 7y ago

I don't think it's a transparency issue. It's the conflicting goals that come from different investing timeframes. I'm buy-and-holding for retirement. I want my shares to peak in 2040. The next guy churns his portfolio every few months and wants prices to peak in November. Even if you communicate your vision and goals well, any type of long-term vision is saying to the short-term investors "we're going to give you smaller dividends and lower numbers for future promise." So the short-term investor can either hope that the communication is solid and long-term buyers are engaged by that messaging enough to keep the price high, or they can lean on boards to prioritize stuff like dividends and buybacks that provide a more direct boost. We can definitely see the latter approach in play. I worry that in pursuit of pricing efficiency, we've started underprice the future value of some business structures. The decline of conglomerates fits that sort of fear. You can shard a company like Honeywell/GE/Hyundai/Sony/Hitachi into 200 individually priced and tracked units, but then you lose the difficult-to-quantify magic of "predictable money-making businesses that can provide the financial resources and stability to support long-term bets and moon-shot R&D". I would be unsurprised to see this attitude in more monolithic firms too-- being open with your figures to investors will lead to pressures against anything that's not identifiable as a very low risk play with obvious payout.