In “Curbing Short-Termism in Corporate America: Focus on Executive Compensation,” Robert Pozen, nonresident fellow with the Brookings Institution, lecturer at Harvard Business School, and former vice chairman of Fidelity Investments, evaluates numerous policy approaches to reduce short-termism including: (1) altering the compensation arrangements of asset managers and corporate executives; (2) constraining the rapid trading of stocks by public investors; and (3) limiting the influence of institutional shareholders on corporate governance.
After examining such solutions, Pozen arrives at the following conclusions:
- The most effective way to curb short-termism would be to lengthen the time horizons in the compensation packages of asset managers and corporate executives;
- Other effective measures to curb short-termism would be to limit “empty voting” by investors not owning shares and to discourage companies from publically projecting their quarterly earnings;
- The proposals to constrain rapid trading, even if they reduced trading volume, would not significantly change the business plans of most corporations; and
- The benefits from most proposals to reduce the governance influence of institutional investors would be outweighed by the costs of undermining corporate accountability.
There have recently been a number of prominent voices in the financial sector speaking out against short- termism. These individuals believe that short-term trading is driving bad corporate investment decisions and that directors should have longer terms and that activist hedge funds are bad. Pozen’s paper, however, raises serious factual questions about the link between short-term trading and corporate decisions, and criticizes restrictions on hedge funds and longer terms for directors as inappropriate solutions to whatever the problems are. None of these critics suggest, as Pozen does, that the key solution is redesigning executive compensation – he suggests moving to a 3-year measurement period for bonuses or force executives to hold on to half of their shares from options or stock grants.