On Donald Trump, Elizabeth Warren, Corporate Short-Termism, and Populism

Here’s my favorite story about corporate short-termism: it’s the late 1990s, the Internet boom is in full swing and it’s the last day of the quarter. The CEO of one of the largest computer networking companies is standing on the company’s loading dock, supervising his men as they frantically load boxes of product onto trucks for delivery to customers. A friend of the CEO strolls past the loading dock and shouts over the noise to the CEO: “How is the quarter looking?” The CEO looks at his watch, which reads exactly noon. He shouts back to his colleague: 

“Too early to say. The quarter is only half over.”

I thought of that story when I read that in the same week, both President Trump and Senator Elizabeth Warren have attacked corporate short-termism as a big problem for the US economy and recommended somewhat similar remedies. I agree with them. Having worked in mid-level positions in three public technology companies, I too believe that short-termism is a big problem for the US economy. 

Trump Proposes Biannual Reporting 

President Trump has recommended that the corporate world consider replacing quarterly reporting with biannual reporting. This sounds to me like an excellent idea. In the companies where I worked, the rhythm of the year was defined by the quarterly cycle: the final month of each quarter was devoted to trying to meet the quarterly targets (either the “guidance” the company had given out or estimates that Wall Street analysts had decided upon themselves after private discussions with the CFO). Every department in the company was often called upon to engage in last-minute visits to wavering customers, far-fetched promises to customers on their pet projects, or other extraordinary efforts to get them to place the needed level of orders. Confidential price cuts were often granted in exchange for bringing orders forward into the quarter. Of course, long-term planning and product development did continue. But it was disrupted and deprived of resources and management attention by the quarterly fire drills of meeting the expectations and demands of individual customers in order to get that precious order. And important product development projects were deprived to create special short-term projects for favored customers. 

It’s not just me saying that companies are too short-termist. In a survey of executives, Duke University Professor Campbell Harvey found that 78% of chief financial officers (CFOs) said they would sacrifice long-term value to hit quarterly earnings targets. Quoted in the Wall Street Journal, Harvey said: “What’s really shocking is that 78% admitted destroying value to hit an earnings target. The real numbers could be higher.”

Cutting that huge drain on resources in half by reducing it to two times a year instead of four seems eminently sensible to me. Wall Street investors have naturally criticized the proposal, saying it deprives investors of “visibility.” This is nonsense. Earnings statements are so highly stage managed that a company’s earnings statement is generally a great indicator of one thing: a company’s skill at managing earnings statements. And smart professional investors want to invest in companies with proven skill at managing their earnings. This is why CFOs are often the second-highest paid individual at a Silicon Valley tech company. When professional investors “invest” in a company, it is usually because they have figured out a way to make money trading that stock, not because they conceive of it as a long-term holding. For most hedge funds the idea of a long-term holding makes no sense at all. And it is the large, frequent traders that determine stock prices, not the longer-term mutual funds or the small retail traders. 

Warren Proposes Five-Year Vesting for Senior Execs

Senator Warren’s proposals are much more detailed than Trump’s and go further. The part of her Accountable Capitalism Act I like best is the requirement that senior company executives cannot sell their stock for five years from the date they received the shares. I would rather see ten years, but five years is a good start. Most Silicon Valley executives are far too focused on their stock price. They want to drive it up to make millions on their shares before quitting and moving to their next triumph. They may already be rich, but often they don’t feel rich. They look at the big names, Larry Ellison with his huge yacht, or Larry Page with his personal Boeing 737, or they look at the $7 million price of the average home in Atherton, the prestige CEO address in Silicon Valley, and they figure you need liquid wealth of at least $20 million to start to break into that bracket. Even the ones who are already wealthy focus on the stock price, largely because in an industry where product features are so complex and hype is so endemic, stock prices are one easily understood measure of whether a company is succeeding at any moment. The level and momentum of the stock price often influences whether customers will buy your product and whether employees will leave other companies to come work for you. But the little-appreciated fact is that most tech companies’ stock price is set by some 200-300 people, the majority of them based in New York, investing in order to trade on a daily basis, and making investment decisions mainly on their expectation of the next quarter’s results, which is itself a reflection of two things: short-term business trends and earnings management skill.

It’s a crazy way to run a rodeo, and one that does not produce many long-term, enduring sustainable businesses. 

Ironically, it’s not hard to identify what makes for a long-term, enduring business. For me, the first requirement in the technology industry is a company leader who is so self-confident and so convinced their vision is right that he or she has the confidence to say “Go F**k Yourself” to Wall Street. He (there have not been any she’s yet and I hope we get one soon) is confident that he can endure two, three or more down quarters in a row and not waver from his vision. In the last 20 years, you can count the number of GFY company leaders on the fingers of one hand and they include Bill Gates, Andy Grove, and Larry Ellison. 

I suspect Mark Zuckerberg is potentially another such great leader. The share structure of Facebook is already a giant GFY to Wall Street. Facebook is right now enmeshed in a huge political controversy. But I suspect Zuck (and the other tech companies) will solve that by agreeing they cannot sell advertising to anonymous foreign entities, and he will then resume building his social network. 

Back to Elizabeth Warren. Her proposals for putting employee representatives on corporate boards sound interesting. Such a system appears to work well in Germany. But I don’t think it would work for the tech industry. First of all, remember that tech outsourced and offshored all of its manufacturing in the 2000-2010 period, so there are no blue-collar workers to give representation to. Most of the employees are white-collar product development engineers. These people focus on their narrow engineering problems with a single-minded devotion. They tend to believe, even idolize, the CEOs who tell them their products will “disrupt” and “revolutionize” the world. So putting these fanboys and fangirls on the board won’t change the company and might make board meetings even worse, i.e. increase CEO domination.

In fact, the problem at most tech company boards is that the only way to check the power of the CEO is with detailed industry knowledge and most board members don’t have this. Nor is that by accident. Boards are supposed to represent the owners of the stock, but the owners are the Wall Street traders and they don’t care about what the company does so long as it creates a trading opportunity. The last thing they want is to have to attend board meetings for interminable discussion of whether the next chip should be nine or twelve nanometers linewidth. So the boards are packed with the CEO’s friends, plus a few venture capitalists who are mainly looking for opportunities to sell the company. 

If Elizabeth Warren wants to require tech companies to serve the interests of the American people, it might be more effective to put those specific interests in black and white. For example, why not provide a corporate tax incentive for companies that bring manufacturing back to the US? Or one for companies that hire semi-skilled and unskilled workers in the crucial $40,000-$80,000 a year bracket? These are the jobs the US has lost in the last 20 years. Last year, the median Facebook employee earned $240,000 a year and the figure for Google was $197,000. Management might even thank the government for shifting the focus to those lower on the pay scale! Another goal for these two companies could be to create moderate-priced housing in the San Francisco Bay Area. If they can track the browsing habits of millions of Americans and bombard them with ads all day long, perhaps they can be incentivized to turn their talents loose on some of America’s real problems. 

Populism and Shareholder Value

One final word on the coincidence of Donald Trump and Elizabeth Warren coming out with similar proposals in the same week. The two could not be more different. Trump is emotional, holds grudges, and says whatever he thinks. Warren is careful, serious, meticulous about what she says, and seems sadly lacking in humor. 

What these two vastly different individuals share is that both are populists. They are both now questioning the mainstream consensus views of the past half-century, and suggesting radical ideas which they argue might improve things, specifically for middle and working-class Americans. 

Both are questioning the received wisdom of “shareholder value” as the supreme goal of American business.  The mainstream, in other words the vast majority of educated opinion in America, has embraced the shareholder value ethos, not because they have looked at the alternatives but because other educated Americans have embraced it—in other words mob psychology, but of the educated, bien-pensant mob. It was pursuit of shareholder value that led several private equity funds to buy Toys R Us, load it up with debt, put it in bankruptcy, and then shut it down with the loss of 22,000 jobs. Plenty of shareholder value was created in that series of horrific transactions. But not much value for the employees, nor for toymakers like Mattel now deprived of a huge route to market, nor mothers who would like a competitive toy market. 

Populists are people who take positions unpopular with the liberal elite, either because they have always been ostracized by the liberal elite (Donald Trump) or because they have chosen that path (Elizabeth Warren).  They are not the representatives of the lower classes, but men and women who by education and background belong in the liberal elite but have chosen a different route. 

It’s a lonely path. But populists are often right. America’s original populist, William Jennings Bryan, became famous for denouncing the gold standard. Bankers denounced him as a crazy ignoramus, and indeed he did at times appear somewhat nuts. But he was right. Just 18 years after his famous speech, the US created the Federal Reserve, breaking the link forever between gold and the price level. Today there’s not a banker in America who would have the country go back on the gold standard.