May 14, 2020

Short-Termism

Short-Termism

Corporate Short-Termism—In the Boardroom and in the Courtroom
     Mark J. Roe, 68(4): 977-1006 (August 2013)
A long-held view in corporate circles has been that furious rapid trading in stock markets has been increasing in recent decades, justifying more judicial measures that shield managers and boards from shareholder influence, so that boards and managers are more free to pursue sensible long-term strategies in their investment and management policies. In this piece, I evaluate the evidence in favor of that view and find it insufficient to justify insulating boards from markets further: several under-analyzed aspects of the American economy and corporate structure are in play, each of which alone could trump a prescription for more board autonomy. The American economy has alternative institutions that mitigate, or reverse, much of any short-term tendencies in public markets; the evidence that the stock market is, net, short-termist is inconclusive; inside-the-corporation labor market difficulties would be exacerbated by further judicial insulation of boards from markets; other institutions are better positioned to deal with any short-term horizons in business than corporate law courts; and the widely held view that short-term trading has increased dramatically in recent decades may over-interpret the data, as the holding duration for major stockholders, such as mutual funds like Fidelity and Vanguard, and major pension funds, does not seem to have shortened and there is unnoticed evidence that the pay duration of the CEO and other executives is shorter than the average stockholders’ duration, calling into question where the structural sources of potential short-termism lie. Overall, system-wide short-termism in public firms is something to watch, but not something that today should affect corporate lawmaking.

Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States
     Leo E. Strine, Jr., 71(4): 1081-1112 (Fall 2016)
These days it has become fashionable to talk about whether the incentive system for the governance of American corporations optimally encourages long-term investment, sustainable policies, and therefore creates the most long-term economic and social benefit for American workers and investors. Many have come to the conclusion that the answer to that question is no. As these commentators note, the investment horizon of the ultimate source of most equity capital—human beings who must give their money to institutional investors to save for retirement and college for their kids—is long. That horizon is much more aligned with what it takes to run a real business than that of the direct stockholders, who are money managers and are under strong pressure to deliver immediate returns at all times. Americans want corporations that are focused on sustainable wealth and job creation. But there is too little talk accompanied by a specific policy agenda to address that incentive system.

This Article proposes a genuine, realistic agenda that would better promote a sustainable, long-term commitment to economic growth in the United States. This agenda should not divide Americans along party lines. Indeed, most of the elements have substantial bipartisan support. Nor does this agenda involve freeing corporate managers from accountability to investors for delivering profitable returns. Rather, it makes all those who represent human investors more accountable, but for delivering on what most counts for ordinary investors, which is the creation of durable wealth by socially responsible means.

The fundamental elements of this strategy to promote long-term American competitiveness include: (i) tax policy that discourages counterproductive behavior and encourages investment and work; (ii) investment policies to revitalize our infrastructure, address climate change, create jobs, and close our deficit; (iii) reforming the incentives of and enhancing the fiduciary accountability of institutional investors; (iv) reducing the focus on quarterly earnings estimates and improving the quality of information provided to investors; and (v) an American commitment to an international level playing field to reduce incentives to offshore jobs, erode the social safety net, and pollute the planet.

A Case for Eliminating Quarterly Periodic Reporting: Addressing the Malady of Short-Termism in U.S. Markets with Real Medicine
     W. Randy Eaddy, 74(2) 387-416 (Spring 2019)
The author maintains that “short-termism” is a serious malady for which the only effective remedy is (1) elimination of quarterly periodic reporting on Form 10-Q, and the companion disclosure regime of quarterly earnings releases and conference calls, (2) conversion to annual-only periodic reporting on Form 10-K, coupled with a new annual earnings guidance requirement, and (3) retention of current interim disclosure of select material events on Form 8-K. The author reviews how the current quarterly disclosure regimes lead inevitably to short-termism behaviors, and are temptations to other problematic conduct, by corporate actors and market participants. The author contends that the proposed disclosure regime would reduce substantially such behavior and temptations, without compromising the quality of disclosures, protection of investors, or effectiveness of the capital markets system. The author argues that only such a fundamental change from the short-term timetable of the current disclosure regimes can curb short-termism, promote longer term and more strategic focus by corporate actors, and lead analysts, investors, and other market participants to focus on longer-term value propositions.

A Case for Eliminating Quarterly Periodic Reporting: Addressing the Malady of Short-Termism in U.S. Markets with Real Medicine
     W. Randy Eaddy, 74(2) 387-416 (Spring 2019)
The author maintains that “short-termism” is a serious malady for which the only effective remedy is (1) elimination of quarterly periodic reporting on Form 10-Q, and the companion disclosure regime of quarterly earnings releases and conference calls, (2) conversion to annual-only periodic reporting on Form 10-K, coupled with a new annual earnings guidance requirement, and (3) retention of current interim disclosure of select material events on Form 8-K. The author reviews how the current quarterly disclosure regimes lead inevitably to short-termism behaviors, and are temptations to other problematic conduct, by corporate actors and market participants. The author contends that the proposed disclosure regime would reduce substantially such behavior and temptations, without compromising the quality of disclosures, protection of investors, or effectiveness of the capital markets system. The author argues that only such a fundamental change from the short-term timetable of the current disclosure regimes can curb short-termism, promote longer term and more strategic focus by corporate actors, and lead analysts, investors, and other market participants to focus on longer-term value propositions.

Reconsidering Stockholder Primacy in an Era of Corporate Purpose
      David J. Berger, 74(3) 659-676 (Summer 2019)
Ideology matters. Since the 1980s stockholder primacy has been the dominant ideology shaping corporate law. As a result, case law, director conduct, and our understanding of “best governance practices” have all been viewed under a single prism: how do these rules impact stockholder value? Even the recent debate over corporate purpose has largely been limited to stockholders, directors, and (of course) academics. Excluded from the debate are the vast majority of the population that owns little or no stock, as well as other corporate stakeholders such as employees and communities. This article considers how the discussion of corporate purpose is limited by stockholder primacy, and how a true debate over corporate purpose may require a reconsideration of the dominant ideology over stockholder purpose.

Interview with Marty Lipton
      Jessica C. Pearlman; 75(2): 1709-1724 (Spring 2020)
In September of 2019, after wrapping up meetings of the Mergers and Acquisitions (“M&A”) Committee of the Business Law Section of the American Bar Association (“ABA”), I took the train from Washington, D.C. to New York City to meet with Marty Lipton—the well-known founder of Wachtell, Lipton, Rosen & Katz—in a conference room at his firm. It was perfect timing to have this conversation with Mr. Lipton, given recent developments relating to corporate views on the constituencies corporations may take into account in their decision-making.