Few ideas command such widespread support as the notion that companies should be induced to concentrate more on the long term. Unfortunately, while there are important ways in which corporate governance can be improved, the idea that a myopic market forces companies to forgo highly attractive investment opportunities is unsupported either by logic or evidence.

AD

AD

It is no surprise that the idea is attractive to many. Just as my students often suggest that the grading system forces them to study a particular syllabus rather than pursue their intellectual passions, managers prefer to avoid frequent accountability for results. The former chief executive of General Motors, Rick Wagoner, who presided over tens of billions of dollars of unsuccessful investment during the 2000s, was a leading voice against market-generated pressures for short-termism.

There is also an apparent worker interest in resisting cash payouts: Employees at existing companies naturally prefer them to retain cash and grow, while the potential new firms that could be financed out of payouts do not yet have workers to advocate this course.

But popularity is not the same thing as validity. A variety of facts about market behavior belie the systemic short-termism thesis.

AD

AD

First, there are large numbers of companies, of which Amazon (whose founder and chief executive, Jeffrey P. Bezos, owns The Post) is only the most prominent example, that trade at huge multiples to current profits because of credible long-term plans.

There are now hundreds of unicorns — private start-ups valued at more than $1 billion dollars — almost all of which have little or no profits. This suggests that investors are happy to buy into compelling long-run corporate visions.

Second, many studies have confirmed that companies where cash flows are highest relative to stock prices earn the highest returns. If, as the short-termism thesis suggests, these companies were overvalued, one would expect them to earn abnormally low returns, not unusually high ones.

AD

Third, private equity firms and venture capitalists expect the companies they own to report on a monthly basis. Capable chief executives set a similar standard for divisions within their companies. Otherwise, they fear that problems will fester without being addressed. If companies with a sole owner in possession of a professional staff are expected to report frequently, why should the same not be true for public companies?

AD

Fourth, companies differ greatly in management quality. It is natural that those with better management and more opportunities will reinvest more of their profits and earn higher returns over time. To infer — as many advocates of short-termism, including a 2017 McKinsey study, do — that this proves that all firms should invest more is to commit the obvious fallacy of confusing correlation with causation.

Reducing the frequency of corporate profit reporting would make major surprises and drastic market moves more likely. It would also allow managers to wait longer before they revealed major problems. Think of how much longer it would have taken for the issues at GE to become clear if the company had reported only every six months.

AD

Less-frequent reporting would also favor professional investors who are in constant touch with management over others whose information would be even more limited than it is today. In an age of big data and transparency, moving toward less information would be a very odd step.

AD

What, then, should be done? The rules limiting corporate activists’ ability to distort corporate behavior should be updated. More transparency on share accumulation would protect ordinary shareholders. At the same time, new restrictions should be imposed to prevent activists from voting stock in companies where they have divergent economic interests from other shareholders — because, for example, they used the options markets to hedge their risk.

Wise corporate leaders should give a sense of their long-term vision on at least an annual basis. Investors who insist on such information are only being reasonable.