In a Wall Street Journal oped out Thursday, JPMorgan CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett suggested earnings guidance should be eliminated. They reasoned the reports incentivize CEOs to think too short term in an effort to constantly beat Wall Street’s expectations.
“I’ve been on 20 boards of publicly owned companies, not counting Berkshire’s, and I have seen managements that I really think well of personally,” Buffett told CNBC Thursday. “I’d be glad if they married my daughter or were named as executors of my will or moved in next door. But they get tempted by the predictions that have been made. Their ego gets involved. And when they find they can’t make the numbers, sometimes they make up the numbers.”
How awful it must be for them. Being a CEO is hard, but it should be. They make a lot of money.
So let’s talk about solving this very real problem with short-term thinking another way — a way that makes more sense for shareholders interested in transparency and good corporate governance.
Instead of eliminating transparency, how about we reward CEOs for thinking long term? How about we teach people in business school that corporations are not just shareholders, but also employees and customers and communities? How about we change their payment packages to incentivize longer-term thinking?
How about we expect CEOs to act like stewards instead of treating them like infants with no self control?
Buffett and Dimon want to take away temptation, but what they’re proposing does nothing to solve our real, deep rooted problem with short-termism. That goes back to how CEOs are trained to think of companies from business school til the end of their careers — it has to do with who they think matters, and who they don’t think about at all.
Seriously, fire whoever came up with this
First things first: If you want CEOs to think long term, you should allocate stock-option awards around long-term performance and put some real clawbacks in place.
Some real consequences may have made JPMorgan more vigilant during one of its most recent scandals that had nothing whatsoever to do with guidance — the $6.2 billion loss the bank experienced in 2012 because of the rogue ‘London Whale’ trader. Dimon got a slap on the wrist for that foible. There were no real consequences, and it certainly hurt shareholders.
But I digress.
The relentless drive to beat guidance (and earnings) quarter after quarter is just a symptom of a greater problem with shareholder primacy. In the 1970s, thanks to economic scarcity and some imaginative economists in Chicago, Americans started telling themselves the most important part of a company was its shareholders — and basically, only its shareholders.
Noted economist Milton Friedman wrote in The New York Times Magazine in 1970 that a corporation’s only “social responsibility of business … [is] to increase its profits” for shareholders who “own” the corporation.
And that means the stock price has to stay up by any means necessary, no matter what it does to your employees, your community or your customers (see: Wells Fargo… or Facebook).
“The purpose of corporations used to be to innovate, creating universities, building railroads, designing self-driving cars, and looking into commercial space transport,” Lynn Stout, a professor at Cornell Law School and the author of “The Shareholder Value Myth,” said in an interview with Marketplace in 2016. “These are really big long-term projects … and what corporations are supposed to do.”
And they used to do that, and believed that they should. In the first half of the last century, two professors, Adolph Berle of Columbia University and Merrick Dodd of Harvard Law, duked it out over whether companies lived for shareholders. Berle took the side of shareholders, and Dodd took a more holistic approach.
“The business corporation,” Dodd said in a 1932 issue of the Harvard Law Review, is “an economic institution which has a social service as well as a profit-making function.”
In other words, Dodd argued that corporations are supposed to enrich the economy, provide workers with a decent wage and purchasing power, and create high-quality products. This was known as the “managerialist view,” and it basically won out through the 1960s. Even Berle eventually capitulated.
If you think of corporations that way — in a way that gives it a greater purpose in American society — you solve the problem Dimon and Buffett are talking about without sacrificing transparency. Stock price, you may be surprised to hear on a business publication, is just one metric by which we can judge a company.
If shareholders are not the most important thing in the world, you will spend money on longer-term projects that build your customer base or keep your employees healthy and happy. We should be teaching that at business schools, we should be talking about it on CNBC, and in the pages of the Wall Street Journal.
We should not be treating grown adults like babies.
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