Jamie Dimon and Warren Buffett have again made a pitch to eliminate “short-termism” by calling on CEOs to stop providing quarterly guidance while Bob Lutz, former GM vice chair calls quarterly targets one of the worst ills of American business. However, Lutz could not provide any solution to this crisis.
The 1934 Securities and Exchange Commission (SEC) Act mandates that public companies provide quarterly earnings reports. These reports are used by analysts to generate commentary and guidance. The time frame for CEOs to stay at their firms is down to about five years and hence CEOs are prone to short-term thinking, according to Jeff Sonnenfeld at Yale School of Management. Scott Galloway from Stern School of Business calls this one of the fundamental reasons for aberrant behavior of CEOs. He believes that reducing the amount of information and reporting would help reduce volatility in company’s stock and help CEOs focus on long-term planning.
I tend to disagree with Buffett and Dimon, as well as Lutz. We are living in an era of big data and reducing the amount of data would certainly not help this new data driven economy. We need, then, to discuss how to solve this issue to short-termism with proper macroeconomic reforms. I believe, and have written extensively about, the lack in the understanding of macroeconomics and violations of common sense macroeconomics which in turn resulted in short-term outlook in corporate America. It has distorted the manufacturing supply chain of U.S.-based multinational corporations (MNCs) which has led to unsustainable trade and budget deficits for the U.S.
The primary fix to this problem of short-term outlook is adjustment of the monetary policy and a shift of the corporate structure to a neo-cooperative framework where majority shares of Fortune 500 Corporations are owned by the employees. Additionally, corporate reforms are needed to ensure that wages keep pace with productivity of every employee of corporation, including the CEO. With these two reforms the outlook of the company would change. The CEO would have a fiduciary obligation to deliver results in best interest of his majority shareholders and would ensure that employee wages grow. Additionally, since employees also have a stake in success of business, the productivity of employees would be higher too, as hard work would bring higher incomes.
These reforms have become even more critical now that we are heading towards a data economy. As my upcoming book title New Macroeconomics in the Age of the Robot, I present some equations for performing better predictive analytics to gauge overproduction in the economy, estimate the rate of profit, and predict other estimates with greater accuracy. With the new business models prescribed for data driven economy as well as with a prescribed monetary policy, it would be possible to use quarterly data to generate much better analysis. Additionally, the data could be used to ensure that there is a better synergy between the monetary policy at national level and corporate performance. Most importantly, these reforms would restore the manufacturing supply chain of U.S. and avoid them from getting distorted in future with a minimal government intervention.
To conclude, more data is good for doing a better analysis but without corporate reforms, this additional data generated would result in more short-term outlook towards economy as compared to a long-term outlook. The new data economy could result in growth but structural reforms are critical for this data to provide a sustainable outlook for the economy. I believe that with needed reforms, the true power of big data could be unleased to power the next industrial revolution.