In a speech today at NYU's Stern Business School, Hillary Clinton plans to finger what she considers a key impediment to long-term economic growth: "quarterly capitalism." It's a brand of excessively short-term thinking in which Wall Street considerations end up doing too much to drive Main Street business decisions.
It's an intriguing way to drive a conceptually left-wing message that many business executives actually agree with, and a demonstration that there's no necessary tension between a progressive economic approach focused on fairness and a more centrist one focused on growth.
It also reveals the deeply wonky side of Clinton. The supporting policy details that her campaign has hinted at thus far — a change to the tax code's definition of long-term capital gains, a new approach to sharing buyback transparency, and perhaps some limits on the things so-called "activist" investors are allowed to do — are not exactly candy for the masses. They're an effort to grapple with some deep and profound issues about the nature of the American economic system.
What is "quarterly capitalism"?
The term comes from McKinsey & Company managing director Dominic Barton and some ideas he laid out in a March 2011 Harvard Business Review article, but the basic concept is much older. It stems from the ritual through which publicly traded companies release a statement about revenue and spending every three months, known as the quarterly earning report.
These statements can have very large influences on share prices. For example, on the afternoon of July 23 Amazon released an earnings report that performed well above the consensus expectations of Wall Street analysts. That caused its shares to skyrocket in value — up 18 percent — within a matter of hours. And yet while the report was certainly good news for Amazon, it — like most quarterly earnings reports — didn't really tell us much of anything about the most profound issues facing Amazon (or any other company) in the long run.
The thesis of quarterly capitalism is that the link between short-term earnings and share prices, and the link between share prices and CEO pay, has created management practices that are excessively focused on living month to month.
"Lost in the frenzy," wrote Barton, "is the notion that long-term thinking is essential for long-term success."
How quarterly capitalism can hurt America
On some level, the idea that giant businesses — just like everyone else — sometimes have trouble focusing on the long term sounds like a bit of a platitude. But there's reason to believe that short-termism in corporate America can hurt the country's long-term economic prospects.
To see why, consider two companies deeply enmeshed in the technology industry and the mobile revolution — Google and Verizon.
One big difference between these companies is that Google's voting stock is utterly dominated by its two founders, Larry Page and Sergei Brin, who can steer the company in any which way they like. Verizon, by contrast, was essentially founded by nobody. It's a corporate descendant of Bell Atlantic, which was founded in 1983 after the government made AT&T break up. AT&T itself was founded way back in 1885. All of which is to say that Verizon is highly subject to the whims of the stock market, while Google essentially reflects the vision of two entrepreneurs.
Consequently, the companies behave very differently.
- Google is adventurous: It plows the profits from its web search into a shockingly wide range of ventures. It launched an email service and a calendar and an office productivity suite. It builds a free mobile operating system. But it also builds Chrome OS for laptops. It made some weird glasses. It is trying to build a self-driving car. It runs fiber-optic networks in eight cities.
- Verizon pays a lot of dividends: By contrast, Verizon does not really do exciting things. It does invest money in its infrastructure. But it does so relatively cautiously, rolling out new fiber-optic lines at a measured pace. It could build fiber faster, but doing so would be expensive. Instead Verizon prefers to spend about $8 billion a year on paying dividends to its shareholders, with billions on top of that spent on buying Verizon stock.
Verizon acts this way in large part because that's how Wall Street wants it to act. Spending billions on dividends and buybacks is better for the share price than spending billions on new infrastructure to compete with Comcast, AT&T, and others.
But it certainly seems like it would be better for America if telecommunications companies were investing more furiously in improving services and competing with each other.
Research says public companies invest less
Of course, anyone can tell anecdotes. But academic research appears to back up the idea that stock market pressures lead companies to invest less than they otherwise would. John Asker, Joan Farre-Mensa, and Alexander Ljungqvist did a study in which they compared publicly traded companies to otherwise similar companies that are privately owned. They found that "compared to private firms, public firms invest substantially less and are less responsive to changes in investment opportunities" and that this happens "especially in industries in which stock prices are most sensitive to earnings news."
Short-termism, in other words, leads to less investment.
A clever synthesis
As my colleague Jon Allen has written, Hillary Clinton is a fairly unimpressive public speaker on the stump, but she's an extremely skilled consensus builder and savvy candidate. The quarterly capitalism thesis is an example of that. On the one hand, it's a potent critique of mainstream financial capitalism as practiced in the United States and similar countries. It resonates deeply with the concerns of the American labor movement, and with critics of Wall Street's influence on the real economy. It reflects an academic research agenda that arose on the leftward margins of the debate and has gained in influence over the years.
At the same time, framing a campaign argument around a Harvard Business Review article by a McKinsey managing director is hardly a call for imminent revolution and the overthrow of capitalism.
In fact, this is a criticism that lots of CEOs and other rich businessmen agree with. They wish they were less slave to quarterly earnings reports and had more of the freedom of a Larry Page. These are left-wing themes, in other words, but while they'll certainly make Clinton some enemies among the activist investor class they don't do all that much to alienate donors or position her as anti-business.
Things will get harder the deeper she delves into policy specifics, but as a broad campaign theme it's a tour de force. By embracing the quarterly capitalism critique, Clinton offers a more radical criticism of the status quo than we've ever heard from Barack Obama while also showing herself to be more sensitive to the concrete concerns of American executives.