Last week, Jamie Dimon, the chief executive officer of JPMorgan Chase, and Warren Buffett, the well-known value investor and chairman of Berkshire Hathaway, penned an op-ed in the Wall Street Journal urging public companies to “consider moving away from providing quarterly earnings-per-share guidance.” The op-ed was written with the support of the Business Roundtable, a group which consists of the executives of 200 major American corporations, and of which Dimon is currently chairman.
Buffett and Dimon’s line of thinking is simple enough. The market’s almost frenzied focus on quarterly earnings numbers incentivizes publicly held companies to focus too much on meeting and beating quarterly earnings forecasts, and not enough on the kinds of long-term strategic planning and investment that’s typically required to build successful businesses.
“Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather,” Dimon and Buffett write.
Dimon and Buffett are joining a chorus of voices raising concerns about the effects of corporate “short-termism” on both the American economy and American workers. Some of those voices have come from the left; back in 2016, then-Vice President Joe Biden wrote an op-ed, also for the Journal, emphasizing the negative effects of short-termism on workers:
As these short-term pressures mount, most of the harm is borne by workers. As any economist will tell you, productivity is typically the most important driver of increasing wages. But productivity will never flourish without businesses investing in endeavors like on-the-job training, new equipment, and research and development. In short, business investment boosts productivity, which lifts wages.
A number of left-leaning think tanks have also raised alarms about the issue in recent years. Hillary Clinton proposed during the presidential campaign a number of policies designed to tackle the “tyranny” of short-termism. Elizabeth Warren’s written about it as well.
There’s plenty of data to support what these cohorts are saying. In a widely cited 2005 paper that surveyed over 400 business leaders, researchers found that the majority of managers would forgo investing in a project with an expected positive return to meet their quarterly earnings numbers. While such a tradeoff may seem foolhardy, other evidence suggests investors are increasingly focused on the short term as well. In a 2016 paper, economists Rachelle Sampson and Yuan Shui documented a marked shortening in investor time horizons.
The data also suggests these decisions have real consequences. In a recent working paper, Stephen J. Terry, an assistant professor of economics at Boston University, examined the effects of short-termism on investment in research and development. He found that companies that just meet their earnings forecasts exhibit lower R&D growth (suggesting that the firms may be holding off on R&D investment to make earnings numbers) in the short term. Terry estimates that this short-termism lowers the United States’ economic growth by 0.1 percent annually.
Meanwhile, stock buybacks—a maneuver in which corporations use profits to buy back their publicly held shares (instead of, say, investing the profits back into the business)—have surged in recent decades. A 2015 analysis by Reuters concluded that “[a]mong the 1,900 companies that have repurchased their shares since 2010, buybacks and dividends amounted to 113 percent of their capital spending, compared with 60 percent in 2000 and 38 percent in 1990.” Critics of buybacks have argued that these maneuvers are often initiated by executives with the primary goal of driving up stock prices in the short term (and thus, executive compensation). William Lazonick, an economist at the University of Massachusetts, argues that inappropriate stock buybacks are a key driver of inequality and a lack of shared prosperity in America today.
Economists point to a number of drivers behind increased short-termism. The rise in performance-based executive compensation, which is frequently tied to stock price, is one. A 1982 Securities and Exchange Commission rule change increasing protections for companies initiating stock buybacks is another. An increasing focus on shareholder value, and the rise of activist shareholders, is yet another. Dimon and Buffett’s op-ed and proposal won’t address all of these drivers, and some argue they’re targeting the wrong thing, but they’re right about the danger of short-termism.
