Commissioner Stein Discusses "Short-Termism" and Boards of Directors' Composition (with Lofchie Comment)
SEC Commissioner Kara Stein discussed "short-termism" and the composition of boards of directors at a "Corporate Women in Finance Symposium" sponsored by the U.S. Treasury Department.
Commissioner Stein identified "short-termism" as one obstacle to capital formation. She explained that "short-termism" occurs when companies, compelled by pressures driven by certain investors or markets, look and act narrowly on short term considerations. These companies become overly focused on meeting quarterly earnings, and cut back on capital expenditures, research and development, and workforce training. Commissioner Stein commented that these cutbacks can reduce "innovation, higher productivity, and future growth."
Commissioner Stein stated that "short-termism" can manifest itself in stock buybacks, where companies use their cash resources to buy shares back at record numbers. She argued that buybacks come at the expense of investing in long-term projects. While Commissioner Stein noted that buybacks have the "mechanical effect" of increasing a company's earnings-per-share, she cautioned that this comes at the expense of companies "mortgaging their futures - and the futures of their employees and other stakeholders - just to meet short-term quarterly earnings-per-share targets."
Commissioner Stein also discussed ways to strengthen public companies by increasing the diversity and changing the composition of boards of directors. She explained that diverse boards appear to help avoid "groupthink," which she noted is a priority when corporate success depends heavily on risk management. Furthermore, Commissioner Stein raised the question of whether increased shareholder engagement could contribute to changing board composition. She advocated for a universal proxy ballot, which according to Commissioner Stein, could "provide better choice for all shareholders, and might even result in a more diverse board."
Lofchie Comment: If the academic studies cited as to diversity in board composition are accurate and persuasive, then investors in the private sector are likely to be persuaded by them, and no additional mandate from the government would be required.
It is appropriate to be skeptical as to whether the government can or should provide a model for long-term thinking to the private sector. A hallmark of a free society is that such decision-making is best left in the hands of private individuals.
Rather than contemplating additional rules, particularly in the aftermath of Dodd-Frank which requires so many new rules that it remains years away from being fully implemented, it might be better to consider whether less is more; i.e., whether government would be able to achieve goals of innovation, higher productivity and future growth by imposing fewer rules.