Why Hillary Clinton Is Focused On The Short-Term Culture Of Corporate America

Democratic presidential candidate Hillary Clinton CREDIT: AP PHOTO/CHARLIE RIEDEL
Democratic presidential candidate Hillary Clinton CREDIT: AP PHOTO/CHARLIE RIEDEL

Last week, Democratic presidential candidate Hillary Clinton laid out a profit-sharing proposal that would give companies a 15 percent tax credit for sharing some of those earnings with employees. Then this week, she is expected to propose changing taxes on capital gains, which are currently subject to a 23.8 percent rate that is lower than the rate for most ordinary income, so that rates would be higher for short-term investments and lower for longer ones.

Both of these proposals share something in common: They are aimed at a corporate culture that has fixated on the short term over longer-term investments in things like employee compensation.

And there is a good deal of evidence to suggest that this is a real problem for the economy, one that is only getting worse. American companies are spending more and more of their profits on stock buybacks and dividends, which both serve to inflate their stock prices and hand more money back to their shareholders. These payouts have kept hitting record highs this year, and shareholders can expect $1 trillion in dividends and buybacks in 2015. That comes after they spent $914 billion on shareholders in 2014, or about 95 percent of their earnings.

But they have also been growing for some time. Between 2003 and 2012, buybacks consumed 54 percent of the earnings for S&P; 500 companies and dividends ate up another 37 percent. That left just 9 percent to spend on everything else. Going back further, over the last 30 years buybacks and dividends nearly doubled, according to a paper from the Roosevelt Institute. In the 1960s and ’70s, each additional dollar a company saw through either earnings or borrowing corresponded with a 40 cent increase in investment, which can go toward things like new equipment or higher employee compensation. Since the 1980s, however, each dollar resulted in less than 10 cents getting invested.

A big part of this shift has been the increasing move to tie executive compensation to the short-term performance of a company’s stock price. Eleven of the 15 biggest American companies outside of the finance industry that spent the most on buybacks last year base part of the CEO’s pay on either stock or shareholder returns or both, according to an analysis by Bloomberg, both of which are inflated when they spend money on shareholders. But this kind of compensation doesn’t guarantee positive company performance, particularly if a focus on the short term eclipses some long-term investments companies may need to make for future growth. Of the 10 companies that spent the most on buybacks between 2003 and 2012, only three outperformed the S&P; 500 benchmark index despite rewarding CEOs with an average of $168 million, 58 percent of which was stock-based.

One of the investments that’s being sacrificed for shareholder payouts is worker pay. Wages are growing 2 percent year over year, despite the unemployment rate steadily falling and jobs being added to the economy. That’s the slowest rate since the 1960s. But Americans in the bottom 60 percent of the income distribution have experienced flat or falling wages for a decade. At least part of this is because big companies are choosing to reward shareholders over employees. Target announced it was laying off 1,700 workers in March to save $2 billion at the same time that it said it would spend $2 billion on stock buybacks. An analysis of Walmart’s finances found that it could have used the $7.6 billion it spent in 2012 on stock buybacks to instead raise all workers’ compensation to at least $25,000 a year.

Besides Clinton’s proposals, there have been other recent attempts to curb these practices. In April, Sen. Tammy Baldwin (D-WI) sent a letter to the head of the Securities and Exchange Commission about this growing trend and a rule it issued in 1982 that loosened the way it regulates stock price manipulation and therefore stock buybacks. Another way to get at the problem is to give workers more influence over what companies do with profits: In Germany, companies are required to let workers, rather than just shareholders, get a vote on half of the board seats, and they often end up putting many of their own on the board, giving workers more access to and influence over financial decisions.