The speed of business
Hyperactive, yet passive
Worries about corporate myopia miss the point. Even in America, business is not dynamic enough
Dec 5th 2015 | From the print edition
IT IS easy to make the case that modern business is too frenetic. This week 10 billion shares of America's 500 largest listed firms will have changed hands in frenzied trading. Their bosses will have been swamped by 750,000 incoming e-mails and a torrent of instant data about customers. In five days these firms will have bought $11 billion of their own shares, not far off what they invested in their businesses. With one eye on their smartphones and the other on their share prices, bosses seem to be the bug-eyed captains of a hyperactive capitalism.
Many bemoan the accelerating pace of business life. Long-term thinking is a luxury, say these critics of capitalism. When managers are not striving to satisfy investors whose allegiance to firms is measured in weeks, they are pumping up share prices in order to maximise their own pay. Executives feel harried, too. Competition is becoming ever more ferocious: if Google or Apple are not plotting your downfall, a startup surely is. Yet such perceptions do not bear close scrutiny. Short-termism is not the menace it seems . And the problem with competition is that it is not fierce enough.
Myopia: the long view
Start with short-termism. The fear that capitalism is too myopic has a long history. John Maynard Keynes observed that most investors wanted “to beat the gun”. For over 50 years Warren Buffett has made money on the premise that other investors behave like headless chickens. But this drum has seldom been banged more loudly than today. If she wins the White House, Hillary Clinton wants to end the “tyranny” of short-termism. The Bank of England and McKinsey & Co, a consultancy trusted in boardrooms, worry investors cannot see past their noses. The French have legislated to give more voting rights to longer-lasting shareholders. Economists fret that firms' reluctance to invest their profits hurts growth.
Since the 1990s the clock of business has whirred faster in some ways. Silicon Valley upstarts have unsettled some mature industries. Computers buy and dump shares in the stockmarket within milliseconds. Yet even in America Inc, the home of hyperactive capitalism, “short-termist” is the wrong label.
Since the crisis of 2008-09 firms' horizons have in fact lengthened. New corporate bonds have an average maturity of 17 years, double the length they had in the 1990s. In 2014 departing chief executives of S&P 500 firms had served for an average of a decade——longer than at any point since 2002 (and longer than most presidents). The average holding period of an S&P 500 share is a pitiful 200 days, but that is double the level of 2009. Constant trading masks the rise of index funds whose holding period, like Mr Buffett's, is “for ever”. Larry Fink, the boss of BlackRock, the world's biggest asset manager, asks firms to draw up five-year plans.
Nor are firms investing less. The same system that is accused of myopia has just financed the $500 billion shale-energy revolution, a boom in experimental biotech companies and the electric-car ambitions of Elon Musk, a maverick entrepreneur. Relative to assets, sales and GDP, American firms' investment has held steady. The mix has shifted from plant and machines to things like software and research and development (R&D), but that is to be expected as equipment costs fall.
Economists grumble that listed firms are not investing their record profits, particularly since low interest rates mean that the cost of capital is cheap. But were companies to reinvest the cash they spend on buy-backs, their capital spending and R&D costs would rise to 15% of sales, way above the 25-year average of 9%. Few bosses would opt for such a splurge just because rates are low, especially if they are low as a result of economic worries. It is natural for mature firms to return cash to investors through dividends and buy-backs. And firms can invest too much as well as too little. China's idle factories and steel mills, absolved of duty to make a profit, are nothing to emulate.
That still leaves American businesses, and many of their rich-world peers, with a problem. If firms are sitting on cash, it can lead to a deficit in overall demand in the economy. Even if they return their surplus profits to shareholders, that may not boost demand if those shareholders are already rich and lengthenedthe extra money. Macroeconomic policies to boost demand will help. But competition can also make a difference by reducing outsize profits and spurring firms to invest more. Here there is cause to fret.
The boom in Silicon Valley gives an impression of a golden age of dynamism―in some industries, such as taxis, startups are indeed causing revolutions. Overall, however, American capitalism is more sluggish than it was. Small firms are being started at the slowest rate since the 1970s. Young firms' weight has shrunk, measured by their number and share of employment. The labour market has become less dynamic.
Most industries are getting cosier. Of the 13 sectors in America (excluding farming), ten were more concentrated in 2007 than in 1997. Since Lehman Brothers folded in 2008, American firms have done $11 trillion of deals——worth 46% of their market value——whose main aim has been to increase market share and pricing power. Airlines, cable TV, telecoms, food and health care have all become less competitive. Giant tech firms with high market shares are making huge profits——tech firms together have 41% of all the cash held by non-financial firms.
The answer is twofold. First, remove the barriers to the creation of small firms. Nearly 30% of American occupations now require licences——tourist guides in Nevada need 733 days of training, for example. Some 22% of small firms complain that red tape is their biggest problem; many have trouble getting credit. Both issues loom even larger in Europe. Second, be vigilant about oligopolies: so far America's antitrust regulator has blocked only a handful of the large deals proposed since 2008, although it is now scrutinising combinations such as Office Depot and Staples. Rather than trying to stipulate the horizon over which investors and firms should think, governments should promote competition. That is the best way to harness capitalism's hyperactive energy in the service of growth.