June 28 2015. Never underestimate the power of corporate greed—especially where CEOs are concerned.

WHO WOULD HAVE THOUGHT INCENTIVES WOULD HAVE WORKED--

SO WELL FOR CEOS—AND SO DISASTROUSLY AS FAR AS THE U.S ECONOMY IS CONCERNED

AND WHO WOULD HAVE THOUGHT WE WOULD DO ABSOLUTELY NOTHING ABOUT IT—EVEN AFTER THE DAMAGE BECAME CLEAR!

The U.S. economy is currently in an economic death spiral which few people seem willing to recognize—even while the economic wellbeing of most Americans continues to decline.

To repeat myself (I’d be getting hoarse if I was speaking) the answers are out here—and many are working and well proven—but we seem singularly disinclined to look.

Anyway, just to illustrate the point, here are some practical suggestions to deal with that well-known plague, ‘CEO short-termism sickness.’

It’s worth catching because the neat thing about it is that the negative consequences are suffered by others. The patient gets rich.

The Nation declines.

 

In our new paper “More builders and fewer traders: a growth strategy for the American economy” we identify a handful of obscure but important shifts—in laws, regulations, and standard practices—which, taken together, have changed the incentive structure of leaders in American corporations. This set of incentives has led to short term behavior on the part of corporate leadership. These incentives are so powerful that once they became pervasive in the private sector, they began to have broad effects. No one set out to create this myopic system, which arose piecemeal over a period of decades. But taken together, these perverse new micro-incentives have created a macroeconomic problem.

There are four trends that constitute the architecture of modern short-termism: the proliferation of stock buybacks; the increase in non-cash compensation; the fixation on quarterly earnings; and the rise of activist investors. The effect of this system across the broad economy has been to reinforce short-term behavior on the part of corporate leaders. While cash distributed to shareholders as a share of cash flow has surged to a record high during the past decade, the share devoted to capital investment has fallen to a record low.

Unlike many of the broader developments that have contributed to our economic problems—these incentives can and must be changed. We recommend:

• Repealing SEC Rule 10-B-18 and the 25 percent exemption
• Improving disclosure practices
• Strengthening sustainability standards in 10-K reporting
• Toughening executive compensation rules
• Reforming the taxation of executive compensation

Changes such as the ones identified above will free funds for investments in employees as well as plant, equipment, and R&D. Thus a virtuous circle becomes possible: a more satisfied and productive workforce will boost growth, which in turn will permit CEOs and boards to raise wages while offering good returns on shareholder investment. For the first time in the 21st century, we could be growing together—not apart.

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  William A. Galston

  Senior Fellow, Governance Studies

  The Ezra K. Zilkha Chair in Governance Studies

  @BillGalston

  A former policy advisor to President Clinton and presidential candidates, Bill Galston is an expert on domestic policy, political campaigns, and elections. His current research focuses on designing a new social contract and the implications of political polarization.

  More Posts from Willia

Elaine Kamarck

Founding Director, Center for Effective Public Management

Senior Fellow, Governance Studies

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