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This article was first published in the March 2016 international edition of Accounting and Business magazine.

Hillary Clinton, the frontrunner for the Democratic presidential nomination, is the latest high-profile figure to set her sights on ‘quarterly capitalism’. Along with the likes of The Prince of Wales, former US vice president Al Gore and the Bank of England chief economist Andrew Haldane, the former senator believes that an obsession with short-term financial results is causing investors and companies to neglect longer term projects, research and development and even their staff and the environment. She has laid out a plan that she hopes will shift the attention of companies beyond the next quarterly release.

But some policy experts believe that the case against short-termism is not quite so clear cut and that some of Clinton’s proposals may end up doing as much harm as good. ‘Trying to cajole people into thinking long term through government regulation is not likely to be easy,’ says Mark Calabria, a fellow of the Cato Institute in Washington DC and a former Congressional aide. ‘You can always expect unintended consequences.’

Opponents of quarterly capitalism can marshal some impressive evidence to support their case. US investment is at its lowest level since 1947, while across the Atlantic, British companies now distribute about 70% of profits to shareholders, compared with just 10% in the 1970s – leaving far less over for spending on innovation and productivity enhancements.

Marshmallows now

‘At its simplest level this means that companies appear to be opting to eat their marshmallow now rather than getting two later,’ says Gary Hewitt, head of corporate governance at consultancy Sustainalytics – a reference to the 1960s experiment that offered children a greater reward for delaying gratification.

There are also some indications that the pressure to hit quarterly earnings targets contributes to the problem. A McKinsey survey of 400 CFOs found that 55% would turn down a profitable long-term project if this would cause the company to fall short of its quarterly estimates by even a modest margin.

‘Corporate chiefs can get a real thumping from the market if they miss earnings by a few cents, so it is not surprising that they are very eager to avoid this,’ says Alex Pollock, a fellow at R Street Institute, a Washington thinktank. ‘And share prices suffer even more if companies get a reputation for erratic earnings. By contrast, a reputation for increasing dividends and buybacks is highly prized.’

In data compiled by Barclays, companies that used the highest share of their cash on capital projects suffered weaker stock market performance than those who prioritised buybacks and dividends. That may be because investors seldom consider themselves long-term owners of a company, opponents of quarterly capitalism argue. The average holding period for shares in the US and UK has plunged from six years in 1950 to under six months today.

Clinton has singled out activist shareholders for particular criticism, alleging that many seek to pressure companies to hand out cash at the expense of multi-year projects. Private companies, by contrast, appear to be more forward looking; research by John Asker, Joan Farre-Mensa and Alexander Ljungqvist found that private firms, shielded from the short-termism of stock investors, invested at a far higher rate than their publicly traded counterparts. Meanwhile, The Prince of Wales – who set up Accounting for Sustainability in 2004 – has pointed to ‘mounting evidence from the likes of Harvard and London business schools that those companies that improve the way they tackle environmental and social challenges prove to be the ones that deliver long-term returns – so you can have your cake and eat it.’

There are naysayers, however. Calabria believes that criticisms of quarterly capitalism - while not totally without merit - are overblown. ‘It is sometimes hard to reconcile the idea that companies are skimping on investment with the evidence that we are in the midst of an accelerating technological revolution. Can we simultaneously be afraid that companies are not looking to the future and that more and more jobs are being displaced by robots and artificial intelligence?

‘Also can we really say that CEOs don’t care about the environment? Most companies have corporate responsibility programmes, which they are keen to talk about. That doesn’t suggest that CEOs are quite the myopic monsters they are sometimes painted to be. CEOs talk a huge amount about the planet; all the CEOs at Davos seem very keen on saving the planet.’ Ever more companies are adopting triple-bottom-line reporting and initiatives to reduce greenhouse gas emissions.

But even such sceptics would admit that the increasing myopia of many companies and investors can have harmful effects. The next question is whether government policy – including the plans proposed by Clinton – can help.

Her plans consist of several elements. First, investors would be rewarded with a lower capital gains tax for holding assets for longer, and penalised for selling early - accentuating an existing trait of the US tax code. She has promised a ‘full review’ into the regulation of shareholder activism, hinting at a clampdown. Second, she would force US companies to disclose share buybacks within a day, rather than in the following quarter as at present, in order to discourage their over use. Finally, Clinton would like to see a reform of executive compensation to ‘better align the interests of executives with the long-term value of their companies’.

Fan base

While the scheme has many fans, detractors point out possible drawbacks. Professor Phillip Swagel, a professor at the University of Maryland, and a former Treasury official in the administration of George W Bush, has pointed out that stigmatising short-term investors can be unfair. ‘The market needs both short-term and long-term investors,’ he argues. Short-term traders play an important role in adding liquidity, helping ensure that other investors can buy and sell swiftly and at lower costs. In addition, investors can have legitimate reasons for not holding a stock for many years. They may discover that the company is being poorly run or they may simply need the money to fix a leaking roof or broken car. ‘Is it really a good idea to try to lock in investors to an equity if it emerges that the company’s strategy is flawed?’ asks Pollock.

Clinton has not fully laid out a plan to curb shareholder activism but some policy experts argue that any limitations would be counterproductive. ‘It is true that there are cases when activists attempt to restrict investment in favour of higher dividends,’ says Hewitt. ‘Still, these cases are pretty rare. More often companies are hoarding cash on their balance sheet that they are not investing - which was the complaint legendary activist Carl Icahn levelled against Apple - or that they have assets that don’t fit well within their business and would be more valuable with another owner.’

Share buybacks are popular with shareholders, boosting earnings per share, so it is unclear how more rapid disclosure would discourage them.

On chief executive pay, there are many proponents of reform. Hewitt agrees that longer term performance targets - three to five years rather than annual - could improve incentives to take the long view. Companies like the US oil giant Exxon Mobil grant stock awards to their CEO that come with long vesting periods. Even here, however, Calabria questions the ability of the government to enact change. ‘The US has tried tinkering with the tax code and disclosure rules to improve the system of executive pay,’ he says. ‘But policymakers have never really achieved the effects they desired. I’m not sure that Hillary Clinton would succeed where others have failed.’

Such criticism of Clinton’s well-thought-out plan serve to illustrate how intractable the problem may be. ‘Other potential solutions don’t look much more promising either,’ says Hewitt. A popular suggestion to combat short termism is to adjust corporate governance rules to reward longer term investors or founders. One role model for this approach has been Google, where the share structure gives the company founders super voting rights - enabling them to control the firm without a majority economic interest. Proponents argue that this is why the company is able to invest in such visionary long-term projects, from self-driving cars to advanced robotics.

In a similar approach, the French government has championed rules that give double voting rights to long-term investors. ‘The trouble with such ideas is that anything that helps insulate companies from investor pressure for excessive dividends can also protect them from being held accountable for poor business decisions or extracting excessive compensation,’ says Hewitt.

With Clinton looking like the frontrunner for the Democratic nomination, quarterly capitalism is likely to get an increasing amount of air time. What remains more doubtful is that Clinton, if elected, would have much success in combating short-termism. ‘It’s hard enough to delay gratification yourself,’ says Hewitt. ‘Trying to convince investors to be patient is even tougher.’

Christopher Fitzgerald and Fernando Florez, journalists