A Sustainable Future: Prof. Mark J. Roe, Harvard Law School, on Why Stock Market Short-Termism Is Not the Problem

Jason Mitchell talks to Prof. Mark J. Roe about why market-driven short-termism isn’t the problem it’s purported to be.

Is market-driven short termism a convenient scapegoat? Jason Mitchell talks to Professor Mark J. Roe, Harvard Law School, about why short-termism may not be the problem it’s purported to be, how the narrative around short-termism has evolved over the past 30 years, and the potential policy solutions.

Recording date: 01 June 2022

Mark J. Roe

Mark J. Roe is a professor at Harvard Law School, where he teaches corporate law and corporate bankruptcy. He is the author of Missing the Target: Why Stock Market Short-Termism Is Not the Problem (Oxford, 2022), and one of the most prominent voices in the short-termism debate. He’s also author of Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, 1994), Political Determinants of Corporate Governance (Oxford, 2003) and Bankruptcy and Corporate Reorganization (Foundation, 2014).

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast. Professor Mark Roe, it's great to have you here and thank you so much for taking the time.

Mark Roe:

It's great to be here, Jason. Thanks to you and your listeners for being here to talk about things that I've been thinking about over the last few years.

Jason Mitchell:

Great, that's very kind. So Mark, we have a lot to chew on today, but I'd like to start with some level setting. What exactly is stock market short-termism? Why is it such a problematic term? And, I guess by extension, how should we distinguish its economy wide effects versus its local effects?

Mark Roe:

Yeah, it's good to start with what we mean by stock market driven short-termism. Because it's the kind of thing that everybody thinks we know exactly what we mean, but then when we press on it, it seems to mean different things in different settings. So, the core central sensibility is that the stock market just excessively prefers current profits, cash now, over long run returns. Now, as a matter of finance, that's just always true. A dollar today is worth more than a dollar tomorrow. But the core idea for stock market driven short-termism is that the stock market just way overdoes it.

Mark Roe:

It almost ignores some long term returns, just to get a few extra cents today. And the consequences, people who think it's a deep, deep problem, can be quite severe. Firms will not invest in equipment in machinery to the extent they should, do less research and development than they should, short change stakeholders for a quick buck right now. And give up bigger returns later on down the road.

Jason Mitchell:

I'm tempted to fast track our conversation into something that's obviously important to me, and important to the podcast. Which is what do you make of your book, and your work in the context of the rise of sustainable finance, and ESG investing? And how it's hardened to some degree, I would argue, the perceptions around stock market short-termism?

Mark Roe:

This is an absolutely essential question for the issues that face us today. So sustainable finance, climate catastrophe, do indeed harden the thinking about stock market short-termism. We overwhelmingly think that the stock market, because it's short term, short changes the possibility of climate catastrophe in 2050. Short changes environmental degradation that hits us over the next decade. Short changes stakeholders and employees by firms, just not taking care of stakeholders who will be more productive five years from now if they're treated better today.

Mark Roe:

The difficulty is for the most part, these kinds of issues, sustainability climate change, which are among the biggest we face on the planet today. They're not deeply time horizoned issues for the stock market. They're time horizoned, short term issues. The system is short term, but each individual company can be going along and be perfectly long term, and still pollute, and still contribute to climate change.

Mark Roe:

So, let me tell you a little bit more about what I mean. The mechanism that's leading to corporate contribution to less sustainable results, and more risk of climate catastrophe isn't that they're too short term. It's more a matter of corporate selfishness, in the economics vocabulary it's the corporation's capacity to push the costs of pollution and climate change outside the corporation. To externalize the costs, while keeping the profits for themselves and for their shareholders. It's not really a time horizon problem, it's an externalization problem. And the two problems call forth different measures to remedy them, but in the resulting confusion and conflation of the two, they don't call forth different solutions. Because we think if we can just make the corporation think more long term, we're going to get better results on climate change and corporate sustainability than we would otherwise.

Mark Roe:

An example could be ExxonMobil is one of the most long term organizations on the planet, with planning departments thinking about what the oil market will look like in 2050. It's not that it's short term that leads it to produce lots of hydrocarbons, it's profitability that leads it to produce lots of hydrocarbons. And not to fully internalized the cost of the hydrocarbons. The only analogy that I'd make is driving our car to work, we know that the automobile in the aggregate is one of the biggest contributors to carbon on the planet. Lots of us drive the car and burn some hydrocarbons, and still would like the planet not to face climate catastrophe.

Mark Roe:

But we do that not because we're particularly short term, as opposed to long term, we do that because our individual contribution to the problem is fairly small. The convenience of being able to get to work on time, or to go to the mall to do shopping is important. So, we each drive our car a few extra miles than we really should be driving our car. It's not time horizons that are leading us to do it. It's that most of the costs of our going forward are born by people other than ourselves. And it's the same thing for the corporation, most of the problems that are the focus of sustainable finance are things that are costs, that are born by people outside of the corporation.

Jason Mitchell:

Yeah. I like this point, this separation or distinction you make. In terms of time horizon, versus effectively who the comp\.

Jason Mitchell:

Any works for. I guess I'm wondering, to what degree the emphasis on short-termism distracts, in your opinion, from perhaps the more important focus on misdirected and selfish shareholder orientation? And even a lack of corporate conscience.

Mark Roe:

If we over emphasize time horizons and short-termism as the core, or one of the core foundations for weak corporate sustainability, we're going to miss what our real target is. So, let's just talk about climate change for the moment. Making firms think more long term and less short term, and we should address it sometime whether they really are excessively short term oriented. But making firms think more short term isn't going to solve the problem, if the fundamental problem is an externalization problem of putting costs on others. So one way to think about it is, if we had a choice for dealing with hydrocarbons between a carbon tax and making corporations think more about what's going to happen in 2030 and 2040, go for the carbon tax. The carbon tax is going to change corporate and individual incentives on how much carbon we put into the atmosphere.

Mark Roe:

If people have to pay more for a gallon of gasoline at the pump ,so much more that they rethink whether they really need to make this trip, or they should be buying an electric car or a car that pollutes less. That's going to have a much bigger and better effect on corporate sustainability and arresting climate change, than making firms think more about what's going to happen in 2030 or 2040. If the problem, to the extent the problem is an externalization problem, thinking about what happens in 2030 and 2040 just doesn't change the incentives enough for a firm to forego the things that are profitable over the next 10 or 20 years. If other people pay.

Jason Mitchell:

I want to back up a little bit, I want to backtrack and recognize that this debate has been going on for at least the last 30 years. So let's talk about the historical context around the notion of, some people have called it the tyranny of short-termism. Why does short-termism make for such a popular and convenient scapegoat? And, I mean that even in a cultural sense. For me, it seems to have gained valency at least academically in that late 1980s, early 1990s. Jeremy Stein's paper, where he talks about myopic corporate behavior. But then we see it quickly popularized in this incredible backdrop of buyout firms. I'm thinking the books like Barbarians at the Gates, Den of Thieves, and of course movies like Wall Street.

Mark Roe:

Yeah. So the historical context, we could make some judgments and some guesses. And I could extrapolate to what's popular culture in the United States. Being against capitalism, in and of itself in the United States, for a political player or for the average person commenting on things, is not a winning formula. So sometimes what's happening is people, observers, journalists, politicians just don't like the results of capitalism. Thinking about the takeovers, closing down a paper mill when what's happening is we're moving to more of a paperless office and we're writing on emails and reading on the internet. Closing down a paper mill is just not particularly popular, particularly for the people who get hurt when they're thrown out of work. Office paper products aren't valuable investments anymore, people get thrown out of work. And people just need to find a culprit. And the culprit can too easily be made to be Wall Street.

Mark Roe:

Wall Street is closing down the paper mill, Wall Street is creating more competition in the airline industry. Which is kind of at the base of the wall street movie. We don't like these disruptions. And even if we're not involved, if we're just observing, we sympathize with those who are thrown out of work, really through no fault of their own. They're just in the wrong place, in the wrong market, in the wrong company at the wrong time. It's somehow more comforting psychologically to find a bad guy. And the bad guy is not change, not technological adjustment, but it's Wall Street doing bad things to the company.

Jason Mitchell:

Let's talk about this. Let's talk about the support for the case for short-termism. It seems like there's a wide consensus that believes in this short-termism effect. But what's the evidence that short-termism fosters risky, economically costly policies. In other words, do activists in stock trading really prevent firms from investing in the long run? What have you seen?

Mark Roe:

Okay. So there's a public consensus, yes. And there's a political consensus, yes. There really isn't an academic consensus. The studies are divided pretty much right down the middle, and the magnitude of the findings that do say there's short-termism in the financial markets are relatively modest. Thinking about the structure of the American stock market, you mentioned activists, kind of tells us why it's fairly hard for activists to relentlessly get a short term program implemented. So just imagine this case where the activist himself or herself is unremittingly short term oriented. "I only value cash now. I don't even value the dollar tomorrow, I want it right now." The typical activist only gets/buys 8 or 10% of their target company's stock. If that's all they did, most managements could just ignore the activist. 8% is something for the CEO to look at, but at the end of the day, an 8% shareholder can't vote. The CEO out of office can't put in new directors, can be ignored.

Mark Roe:

What's critical for the activist is to be able to convince other shareholders that their program, the activist program, is for the benefit of shareholders. And here's the problem for the short term activist today in 2022. A large portion of the institutional share holding market is relentlessly long term. So you might have dealt on one of your other podcasts with the new rise of index funds. The index funds buy the entire stock market, and they just don't sell individual stocks. The activist needs to get their votes to be able to be taken seriously by the CEO of their target company. And for an index fund, that's going to continue owning the stock. Because that's their business, to own every stock in an appropriate proportion in the stock market.

Mark Roe:

They can't afford to make a short term hit, because they are going to hold on to their stock. That's their business model. So somehow the activist who is relentlessly short term has to convince some portion of these long-term stockholders that their program, the activist program, is good for long term value inside the company. For the most part, it's not that the activist is against the long term. The activist wants to make money. And even the activist that's thinking just in the short term, is frequently going to be bringing about some long term benefit. Because frequently, even the short term benefit plays out to be something that's useful. I could give a couple of examples, but I think the concept is straightforward.

Jason Mitchell:

Let me jump to this point, which is clearer in your book, as well as the work of Alex Edmonds and a number of other academics. Why is the notion of short-termism so susceptible to poor evidence and causality arguments? It seems to me that the issue has been litigated for at least the past 25, 30 years, I'm going back to Kevin Laverty's piece 25 years ago. Is it because it's fundamentally unknowable? Really, there's no control group to properly test short-termism against long-termism. People often say, as the scene goes, the absence of evidence is not evidence of absence.

Mark Roe:

Yeah, it's true. When we get really down into the weeds of academic studies, it's really difficult to be so precise as to be able to rule out short-termism as a possibility. It's hard to do this in all kinds of financial research. But still, there are a whole bunch of the short-termist arguments that don't hold up. So we were talking about activists a moment ago, the best evidence is that activists produce value for stockholders over the long term. Maybe not for everybody else in the firm, maybe not for employees. But for stockholders, the best evidence is there's some long run value to activists. It's still good evidence. And some of the popular assertions, there are things that are widely believed, but they just don't turn out to be true. So there's a sense, for example, that short term stock buybacks are starving, particularly large American public firms for cash. Disabling them from making new investments, and treating their employees well.

Mark Roe:

Buybacks are indeed going up, but when you just look a little bit further, cash balances in the same public corporations are also going up. And they're growing faster than the economy is growing. What's happening? It looks like there are two big things that are happening, which lead buybacks not to be killing the cash balance. Firms are making a lot of money. They're buying stock back, but they still have money left over after they've applied profits to the buybacks. Second thing is since the financial crisis with interest rates at rock bottom, it's been more profitable for firms to use their capital structure with borrowing rather than with equity. If you don't have to pay more than a percent or two for borrowing, it's just a cheaper way to raise capital and have capital held inside the company. So a huge portion of the large firms in the United States have been buying back stock, but not shrinking the company. Buying back stock and using new borrowings to finance that repurchase consequence.

Mark Roe:

One, it's a long term strategy, not a short term strategy. It may not be a great strategy, in that firms are just a little bit more wobbly when they have lots of debt in their capital structure. But it's coming about not because they're only thinking about what happens today, but because debt is just cheaper over the last 10 or 15 years than it's ever been before. Or take R&D, there's a widespread sense that stock market short-termism is killing R&D in large American corporation. It turns out the raw numbers are just not consistent with that view. R&D spending is rising faster in public firms than the economy is growing. Maybe it should be rising even faster, and this is one of the kinds of things that's very hard to tease out in high quality academic work because we don't know for sure.

Mark Roe:

Maybe the fact that it's risen X percent, maybe it should have risen X plus 1%. But the direction is right, it's going up. And if we are worried about short-termism killing research and development, which is the future of the economy, the first place to look at least in the United States is not in corporate spending on R&D, but on government support for R&D. So government support for R&D over the last two decades has been dwindling, particularly since the financial crisis. Some of the Biden administration initiatives would reverse that dwindle, and I deeply hope that they will work. But if we're worried about stock market short-termism killing corporate R&D, we should be much more worried about something in government killing publicly funded R&D. Which has been a significant source of economic wellbeing in the United States over the last 40 or 50 years.

Jason Mitchell:

I don't want to sound naive in this question, but I'm just going to ask you. Why does the academic evidence in this debate often get so ignored? At the same time, why do studies and I'm thinking of the infamous McKenzie report, the case against corporate short-termism. Why do they get so much mind space? Why do they get believed at the expense of the academic arguments, that are more grounded and rigorous?

Mark Roe:

Well, we should keep in mind that there are interests who benefit from stock market short-termism being taken very seriously by corporate law policy makers. By the courts that make corporate law, by the security and exchange commission in the United States. So corporate and securities law rules can make it easier or harder for management to be autonomous from stockholders. So that they can just be autonomous. I like the autonomy of being a law professor, I don't see why executives shouldn't want to be autonomous from their stockholders.

Mark Roe:

And to get bigger pay packages. If lawmakers believe stock markets are driving too much short-termism, then lawmakers can sincerely believe that they're going to make things better for everybody by giving executives more autonomy from the stock market. So the McKinsey report, which had multiple substantial conceptual errors in it, McKinsey largely works for management. And it's not surprising that they see short-termism as a problem. They would like to be hired by firms to show firms how to be more long term oriented, rather than short term oriented. And telling management that short-term problems are big problems, "And you need to hire me to help you to get out of this short term rut." Does serve a little bit of McKinsey's self-interest. Maybe it was just a mistake, but we should keep in mind that there are interests involved in the short-termism debate.

Jason Mitchell:

Basically classic agency problems.

Mark Roe:

Yes, it's executives. And here it gets more complicated, in that it's executives who would like more autonomy. And if I'm an executive, because of the way I'm built, I don't want to be completely selfish. It feels a lot better to me to think I need autonomy. Not just because I want it for myself, but because I think the stock market is hurting my company and the economy. And the only way to defeat these difficulties, which I conclude are serious, is to give me more autonomy from the stock market.

Mark Roe:

And going back to the second question or where we started, some of this then gets conflated with sustainability issues and stakeholder issues. And the sensibility that it's short-termism that's creating these sustainability, and these climate degradation problems. So that then appeals to a wider audience of people who may not care particularly one way or the other between stockholders and executives in and of themselves. May be in fact a little bit anti-corporate in their own thinking. But then think if we make corporations more long term, and here are policy makers thinking, "Should we give executives more autonomy?" And these people who don't particularly care about executives or stockholders in and of themselves think, "Well, we want firms to be more long term so that we can make firms more respectful of the climate, of the planet, of the environment, of stakeholders, of employees.

Jason Mitchell:

I want to go back to one thing that you talked about in terms of the low rates, to what degree are the effects of the global financial crisis, namely a low rates environment for the last 10 12 years a major factor in all this debate? In other words, is there an argument to say that low rates have allowed corporates to have their cake and eat it too? In terms of reinvesting and doing short term share buybacks. And tilting that question forward, do you see the regime change towards a more inflationary environment changing all this?

Mark Roe:

Yeah, that's a good question. I mean, there's an oddity about long term rates being so low. In that long term rates being so low should make the whole economy actually more long term rather than more short term. Because the cost of getting out of financing something for the long term, now is only a couple of percent instead of whatever, 5%. But as your question embeds, there's an interaction between extremely low interest rates and the kinds of things that people are worried about in terms of short-termism.

Mark Roe:

So with interest rates so low, we mentioned before, maybe we don't have to mention again. But with interest rates so low, it's frequently cheaper for firms to buy back their equity and replace it with debt that they only have to pay a couple of percent for. So with that in mind, we're getting more stock buybacks than we would otherwise because interest rates are so low. And as interest rates start to rise, the prediction would be other things being equal, buybacks should start to subside. Because the interest rate benefit of borrowing and substituting long term debt for equity, will end up subsiding. I wish in this format, I could show you a graphic of corporate long term borrowing increasing with sharp jagged increases, and laying that next to the increases and decreases in buybacks. The graphs almost fit hand in glove.

Jason Mitchell:

We can certainly include it when we post the podcast. What do you think it will take for practitioners, policy makers in the public to change their minds?

Mark Roe:

More podcasts like these. Keep plugging away, and going for the specifics. Asking, is corporate America really doing less research and development? Well, no. Is there less public spending on big R&D? Yes. Is cash disappearing from the public corporation? No. Is corporate disregard for climate change due to short-termism, or due to selfishness and externalization? As more academics show more research, as more journalists get to the bottom of the specifics, minds will we can hope change. Opinions will improve, and policy makers will see what really counts for dealing with sustainability, say a carbon tax. And what doesn't count particularly much, making corporations think more long term.

Jason Mitchell:

As I read it, your book demonstrates that short-termism is far less widespread than often thought. At the same time, you're not claiming that there's no short-termism anywhere. What are the biggest drivers of the little short-termism that's out there? What are the best ways to remedy them? It seems like de-emphasizing buybacks are an easy ask in this process.

Mark Roe:

Sure. One of the reasons not to spend too much time thinking about stock market short-termism, once we conclude it's a minor problem, is that curing a problem costs something. And there are so many problems that we have that are big. Let's not spend big resources, maybe not even small resources, on curing what really is a small problem. Or another version would be, we don't want to take a mega medicine for the common cold. And short-termism is up there, when you really look at the data, with the common cold. Real, but not something to be as worried about as we have been worried about. If we had to, if it was just absolutely politically and socially necessary to do something about short-termism before we could get to the big problems, lengthening executive compensation could be real and useful.

Mark Roe:

It already is, has been lengthening over the last decade or two. Probably could lengthen even more. More block holders, stockholders who own a significant portion of the company. 5%, 8%, 10% over the foreseeable future, who are more likely to question management of, "what's this going to mean for us 10 years down the road?" If we really have to do something about short-termism, those are the kinds of things that we could focus on. But as I say, cures cost something. Even if they're just changing the attention of lawmakers and policymakers, and dragging their attention away from the more important things.

Jason Mitchell:

If you're looking at corporate disclosures specifically, does withholding information or slowing reporting, producing more efficient or less efficient market. What's the answer to financial disclosures where many investors tend to follow that maxim. At least in my experience, the long term is a series of short-terms to recalibrate their investment thesis. Which are obviously weighed against this, tied against pushing for less frequent financial disclosures. Basically it's that question about quarterly versus annual reporting. Do we need quarterly reporting? Does it create noise, or does it provide efficiency?

Mark Roe:

Okay. A couple of things. One, if we eliminated quarterly reporting and knocked it down to semi-annual or annual reporting, you got to question whether this is going to be something important for the long term. In that when most people think about the long term, we're thinking about five years, 10 years. The real long term for the planet is 20 years. So we're still going to get a reaction to financial results every six months, or every year. And to the extent we get a reaction to financial results that we don't like, we're still going to get that reaction more frequently than every five or 10 years. So we shouldn't be too optimistic that moving from quarterly to semi-annual, or annual reporting is really going to push us to the longer term.

Jason Mitchell:

How do you think the increasing prevalence of ESG data changes this situation? The ESG crowd has always said that ESG data has been backwards looking, it tends to be obviously a bit slower, tends to be sort of annually disclosed relative to financial data which is quarterly. With the regulatory pressures, and the disclosure pressures, that's suddenly changing. So you're getting greater and a higher degree of frequency around ESG data. I would've thought, intuitively, that is driving a higher degree of short-termism. If in fact that ESG data proves to be material.

Mark Roe:

If an investor is getting financial information quarterly, and now is getting ESG information quarterly, and something's out of sync. The company is just spewing more carbon this quarter, or less carbon this quarter. The role of management is to show the investor that their longer term program is not really reflected in their short term results. So an ESG result that doesn't look good this quarter, should be something if management really thinks they're on a long term glide to reducing say carbon emissions from the company. It requires them then to explain to their investors, "This is a one quarter spike, but our long term trend is less carbon." Similar to the way management has to do that now. If they've got a bad result financially, is to explain to financial investors, "We've got a bad result this quarter, but don't pay too much attention to it because our longer term results are going to show that this was just the result of closing this one factory. And you're not going to see the same result in the next quarter."

Jason Mitchell:

That makes sense.

Mark Roe:

Communication.

Jason Mitchell:

Right. I've heard you talk before about how demand utilization is an important figure to bear in mind. Companies aren't going to invest over the long term if utilization is running low, that makes complete sense. How do you think political polarization plays into this? Because I weigh markets versus politics in this equation. Is there an argument to say that policy and politics play a much greater role in this debate than is recognized? As an example, in the U.S. the EPA went one direction under Obama via the clean power plan, reversed under Trump, and has now re reversed under the Biden administration. And so I guess what I'm wondering is how do companies manage to make long-term investments with that regulatory volatility?

Mark Roe:

Two things in your question, both important. One important, and probably we're done with it. And one really important then it's going to continue. So the one that's important then we're probably done with, is utilization of capacity in the United States. So after the financial crisis, there was a lot of complaint that American firms were not investing enough, because of short-termism. But it turns out when you look at the aggregate utilization of factories, plants, machineries in the United States in 2010, 2012, 2013, they were at near historical lows.

Mark Roe:

So if a company has current technologies, but they're not using it completely, it doesn't make sense for the firm to invest anew in that factory. We've passed that, in that this was an explanation for lower investment back then. Now we've recovered from the financial crisis, and that was an explanation for the 2010's, they're not an explanation for what's going on in the 2020's.

Mark Roe:

Second part of your question was about policy uncertainty. Is how can a firm plan if the Obama administration has a clean power plan, and firms adjust. And then the Trump administration comes in and reverses that plan, and then the Biden administration comes in four years later and re reverses that plan. This is really important. So yeah, a perfect government can get us perfect results. But we're not going to have that perfect government anytime soon, and really never. And nowadays, we're testing the bounds of government imperfection. But this puts the finger on something that often gets confused with stock market driven short-termism. It's policy uncertainty.

Mark Roe:

Some long term investments have become too uncertain. And there are two related reasons why they've become too uncertain. There's always the economics, "If I invest in this factory that has a life of 20 years, what if people don't want to buy the product 10 years from now?" Management always has to make that assessment. But nowadays management also has to make an assessment about political uncertainty. Political results and rules were always in play, but more than ever, there's uncertainty about whether the rules we're playing with today in 2022 will be the same rules that we play with in 2025.

Mark Roe:

Hence, management has to think twice about building a 10 year factory, or making a 10 year investment because the whole policy world could change substantially in the next three or four years. In a way that makes the investment less valuable than it would otherwise be. And closely related is technology. Technology is changing faster than ever. You look at some basic technologies, and look at how long it took them to gain half of the American households being invested in the technology. Whether it's electricity, the telephone, the washing machine, the cell phone. And what you see for each one of these technologies, the rapidity by which it spreads through the economy has been shrinking substantially. It's just a sharp downward trend.

Mark Roe:

And this applies to technologies that companies are going to use. So you put together a state of the art technology this year, that's going to be you think good for 10 years, and then somewhere in the middle something just changes to make that technology obsolete. Blockbuster builds this great system of video cassette rentals all through the United States, and then the DVD comes in and makes it obsolete. Because the DVD can be sent in the mail, and you don't have to go to the mall anymore. And then a few years later, the DVD business is nearly obsolete because everything can be streamed, and you don't even have to get the DVD in the mail. When business after business faces technological uncertainty, when business after business faces political and policy uncertainty. And all of this is just much more than the old fashioned, "Will people still want to buy my product 10 years from now?" It starts to make sense for companies to shorten their time horizon. Not because they are short-term oriented, or excessively short term oriented, but because the world is changing much too fast.

Jason Mitchell:

I wanted to close off with a final question. How has your own thinking evolved over the last five to 10 years in this area? What refinements have you made to that initial thinking? I'm also wondering how successful, looking back, has it been in trying to reframe short-termism as "flexibility" and "adaptability"?

Mark Roe:

In terms of reframing, we're still working on it. It's a long term proposition to get the reframing done, built, and attended to. So over the last couple of decades, has my thinking evolved? During the takeover era of the 1980s, the short-termism idea came up regularly. But the division of opinion, among journalists and observers had a lot of people dismissing it as exaggerated. It seemed to be special interest pleading from the lawyers, for executives who were the targets of takeovers. And it had only a modest effect on corporate policy making, some but not much. It wasn't an issue that attracted huge public attention. Some, but not huge public attention.

Mark Roe:

About a decade ago, it seemed to become a more widespread issue, and that's when I began to wonder why. And one of the reasons to wonder why is when you think about short-termism, it's really a question about capitalization costs for the large public company. And this is just not the kind of thing that the public is generally engaged in. It's the kind of thing that's on the second or third page of the business section of the newspaper. Not something that engages the average person, it's just too technical an issue. Is the public firm's cost of capital being handled correctly?

Mark Roe:

We had a academic practitioner conference at my home institution, I was one of the two principal organizers. And in preparation for the conference, I took a box with all of the academic evidence on short-termism to the Cape Cod when we were having a family vacation. And each afternoon, I spent a couple of hours reading through the material and came away with the conclusion that the evidence that the stock market is short term, is modest and indicative of it being a modest, small problem. Not a big problem that should engage the public. And that it's actually counterbalanced and significant measure by corporations, sometimes being excessively long term. Sticking to an investment that's no longer worthwhile, long past its expiration date.

Mark Roe:

And that's what got me to wondering why is this kind of issue, which is otherwise a technical thing, that may not even make it to the second or third page of the business section of the newspaper. Interest rates and capitalization rates, one of the few issues that burst out from corporate specialists and corporate practitioners to be one that gets general attention, the intention of senators and national politicians. And why had it become a mantra for one of the major things wrong with America? My thinking became that the stock market short-termism story helped politicians on the center, and maybe politicians even a little bit to the left to make sense of the world. So politicians in the middle left, I have Joe Biden in mind but not just the president, can more readily blame stock market short-termism for instability of employment. It becomes a good target for the average voter.

Mark Roe:

It also allows us to sometimes avoid dealing with the underlying problem. So in terms of the sustainability debate, the real thing that maybe we have to do is put a significant tax on carbon, a tax on gasoline. But the sensibility is, "Well, if we stack stock trading and make firms more long term, everything will be okay. Or at least better." And I've come to the conclusion that it's one of the ways that people avoid dealing with the hard problem. So on gasoline tax, a proposal from a Senator to seriously tax gasoline is the same thing as the Senator announcing that he or she is going to retire and not run for reelection. It's one of the third rails of American politics. It's just unpopular, but we have to do something about climate change. So it's easier to blame the public corporation as the source of the problem, and its time horizon as the source of the problem. Which leads us to miss the underlying target.

Jason Mitchell:

So it's been fascinating to discuss why market driven short-termism isn't necessarily the problem it's purported to be. How the narrative around short-termism has evolved over the last 25, 30 years, and what the potential policy solutions could be. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, head of responsible investment research at Man Group, here today with professor Mark J. Rowe at Harvard Law School, and author of the new book Missing The Target: Shy Stock Market Short-Termism is Not The Problem. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Thank you so much, Mark. I really appreciate you being here.

Mark Roe:

Thank you, Jason.

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