Larry Fink, CEO of Blackrock, recently shared his perspective on “short-termism” as a key threat to prosperity; and suggested solutions to turn-the-tide. Below, I expand upon Larry’s remarks posted April 2015 on McKinsey’s Insight blog.
Long-Term Goals for Prosperity
The basis of Larry’s argument is the United States has not realized, or has under-realized, certain long-term economic goals that are beneficial for enduring prosperity. Essentially, the United States is leaving bigger opportunities on the table while myopically focused on a short-term outcomes. In Larry’s perspective, key long-term goals for enduring prosperity include:
1. Educational opportunities
2. A reasonable level of healthcare
3. Secure retirement
4. Full employment
5. Competitive, innovative commercial sector
6. Conservation of natural resources
7. Reliable infrastructure and transit
Larry claims several key factors have created a culture of “short-termism” in the United States, including:
1. A “gambling culture” that has transcended Wall Street, Main Street, Government, and Households. The economic behaviors associated with “gambling culture” are generally manifested as (a) greed and (b) immediate gratification.
2. Misalignment of incentives in the United States tax code.
3. Misalignment of rewards.
4. Priority given to returning cash to shareholders, over corporate investment.
5. Emphasis on corporate quarterly results, instead of longer-run outcomes.
6. Media’s use of shock news to compete for the scarce attention of their audience(s).
Discussion & Analysis
Blackrock’s Unique Vantage Point
Larry sees the issue of short-termism from two meaningful perspectives:
1. The CEO of a publicly traded U.S. corporation; and
2. The head of the world’s largest asset manager which invests in public corporations. Blackrock has more than $4.5 trillion AUM (USD). As a result, Blackrock directly sees the choices CEOs and Boards must confront as stewards of capital, the trade-offs associated with those decisions, and the consequences.
Greed vs. Wealth Creation
For the benefit of Larry’s argument, it is important to differentiate (a) greed and (b) wealth creation. Greed is frequently associated with the pursuit of unbridled excess as a maladaptive behavior – and is known as one of the Seven Deadly Sins in popular rhetoric. Alternatively, wealth creation tends to be viewed as a financially responsible endeavor that is beneficial to society. But make no mistake: wealth is nothing more than the accumulation of excess savings. Excess is the operative word in both definitions.
An intertwined relationship exists between wealth creation and greed:
1. Greed can be a powerful influence in wealth management decisions. As the amount of capital grows, arguably, wealth creation is more susceptible to the short-term influences of greed. Why? Simply put, the risks are greater – there’s more on the table to lose.
2. Wealth creation can be a powerful force to combat short-sighted influences of greed. How? When stewards of capital apply responsible, objective principles to wealth creation endeavors (investing and venturing), the governance context in making decisions is broader, more insightful, wiser. In an effective governance model, both short-term and long-term consequences (and possible outcomes) are weighed based on situational criteria for the capital at hand. The result: capital can be allocated in balanced fashion that does not simply sacrifice long-term goals for short-term interests. This effectively keeps the short-termism and long-termism biases in-check.
Wealth creation and greed are not mutually exclusive. Greed can taint wealth management decisions. Alternatively, principled wealth creation can be a positive force for balancing the allocation of capital.
Where is the high road?
Wealth creation is absolutely necessary for economic prosperity in a democratic, capitalist society. The creation of wealth is not evil. It is good when aligned with:
(a) All material stakeholders, not solely shareholders
(b) Socially responsible outcomes
(c) Time-based objectives that are not arbitrarily short (e.g. quarterly)
(d) Enduring prosperity for the organization (business) and society
The high road is rarely the easier path. That wisdom holds true in this case. It takes critical thinking, extra effort, more negotiation, and a boat load of persistence. To say it another way, it takes more alignment and whole lotta patience. Even then, the gravity of the lower path can quickly pull the best stewards down. But the battle against short-termism is 100% worth the possible outcome.
How short is short-term? How long is long-term?
There is no right answer. But there is a logical way to frame the context for the sake comparison.
Whether a capital allocation decision is (a) short-term or (b) long-term is defined by the relative amount of time between two or more alternatives. That allows latitude for a wide range of varying scenarios in days, months, years, decades, and perhaps centuries.
Did we create a short-term / long-term growth paradox?
Yes. In essence, the system – equity market, tax code, executive compensation, regulatory authorities, and media – is motivating us to starve our own future. We (and and our “forefathers” and “foremothers”) created the system, decided how to govern the system, and now we’re smart enough to “game” the system – to our detriment. It’s our own fault, and we’ll have to accountability to solve it. Tough trade-offs ahead.
Could the opposite of “Gambling Culture”, call it “Risk Aversion Culture”, also be contributing factor to Short-termism?
I believe so.
And I believe while short-term risk-taking is alive and well, residual fear from the Great Recession is still motivating corporations to hoard cash. It’s a double-edged sword of “Short-Term Risk Taking / Cash Conservatism”. This is the heart of the creative tension between risk-taking and risk aversion; and we have witnessed increasingly volatile swings in equity market valuation since 1999. For the sake of economic development, corporate growth, and enduring prosperity – more impetus for long-term risk-taking and cash deployment is vitally necessary.
What role does a secure retirement play in long-term prosperity?
A secure retirement has a dual, circular relationship with prosperity. It contributes to prosperity; and is an outcome of prosperity. Without a secure retirement – consumption, standard of living, and health will inevitably decline for an entire society. In many respects, the threats posed to prosperity by an insufficient retirement are greater than low standards of health care.
What are possible solutions to break the paradox?
1. Graduated long term capital gains tax, where taxes go zero over a long-period of time (10 years, for example).
2. Re-program media to compete for delayed gratification (long-term rewards), not just short-term gratification.
3. Change the structure of investment products to reward long-term equity ownership behaviors.
4. Selectively choose sustainable companies for long-term investments.
5. Foster open, engaged , constructive Board-to-Investor dialogue.
6. Incent Boards to adopt governance frameworks that balance long-term investments and short-term interests.
Our Gambling Culture, McKinsey Insights & Publications (April 2015) – http://www.mckinsey.com/insights/strategy/our_gambling_culture