There’s nothing like intellectual consistency to inform and illuminate the world and this, from Harold Meyerson, is nothing like intellectual consistency:
Let that sink in for a moment. The staffers of CFIUS—probably the most business- and security-savvy civil servants in the government, headed by those at Treasury—are saying that the private-equity control of companies, which is a dominant feature of current American capitalism, reduces investment and results in profit extraction. CFIUS does not go on to say that the purchase of U.S. companies not only by foreign companies but by U.S. private equity firms, too, also leads to reduced investments and the kind of profit extraction that has enriched the 1 percent at the expense of other Americans; that’s not CFIUS’s mission. But having baldly stated that private equity leads to profit extraction, that’s the inescapable conclusion that any reader of CFIUS’s letter must reach.
The long term holding of equity by concentrated shareholders is a bad idea. Because those owners don’t invest in the longer term interests of the company nor its production, they just extract profits for the short term.
Hmm, OK, it’s a view, not a good one, but it’s a view. A few years back the same Harold Meyerson told us this:
What underlies this striking lack of shareholder power and utility? For one thing, shareholders ain’t what they used to be: They’re more renters than owners, and short-term renters at that. In the 1950s, a stock listed on the New York Stock Exchange was held, on average, for seven years, Fox and Lorsch write. Today, it’s six months. As much as 70 percent of the daily volume on the NYSE comes from high-frequency traders who hold a stock for roughly the same amount of time it takes a Higgs boson to disintegrate. Capital that impatient does not fund, discipline or measure the value of a company.
Short term and dispersed shareholders is a bad idea. Because those owners don’t invest in the longer term interests of the company nor its production, they just extract profits for the short term.
Assuming that companies are going to be owned by someone that rather covers the bases, doesn’t it? Whether short or long term, concentrated or dispersed, all they do is extract short term profits and don’t look nor invest for the long term. Which, given that this shareholder capitalism is what has made the modern world, by any historical or even global standard, so stinking rich is an interesting take on it.
But if any possible arrangement of shareholders just isn’t right then we’ve got two choices concerning Meyerson himself and his views. One is that it’s not what shareholder arrangements which matter to him but the mere existence of shareholders. The other is that he’s the intellectual consistency – possibly the attention span – of a mayfly. I’ll admit that I tend toward the second but am willing to be persuaded of the first. Being a fool is better than being slapdash, no?
Meyerson’s is a subset of the leftie argument that freedom implies the worst possible decisions that one is free to make. (We cannot privatize grade-schooling because free parents would never decide to educate their children on their own, etc.) So private owners of these corporate geese-laying-golden-eggs would naturally butcher them to maximize short-term gain. In fact, a corporation that you or the next owner views as a going concern is worth much more than a bunch of assets. This is true no matter how long your period of ownership.
A minor point but the reduced holding period statistics usually quoted are nonsense. Take a company with 100 shares, imagine 99 shares held for 10 years then sold. The other 1 share is traded once every year. The average hold period is c10 years. Now imagine the same but trade that 1 share 50 times per day. Average hold period on any sensible definition would still be 10. What people often do is say 100 shares; 12500 trades per annum (50 x 250 business days). Average holding period 3 days. This calculation needs access to very little data. Trying to… Read more »
PS, one of the most useless aspects of US tax policy is to discriminate between short-term and long-term capital gains assuming, as Meyerson seems to, that our values and strategy differ between the two; that government is wise encouraging us to get married to a holding and discouraging us from one-night stands. This is the same mentality as the border inspector paging through his manual to find out whether that brick is properly classified as a vandalism tool or a building material. We often fail to do the best thing because the arcana of tax law forces us to wait… Read more »
Wow. Just WOW. Companies issue and sell stock to raise capital. Except as it relates to treasury stock, the public trading of previously sold shares has ZERO impact on the business. DOUBLE OUGHT ZERO. ‘leads to reduced investments and the kind of profit extraction that has enriched the 1 percent’ Buying a share of a publicly traded stock is NOT an investment in the company. The company got their investment when they originally sold it; the get no more when it’s traded. Whether once, or a hundred times. Oh, the ‘1 percent?’ That’s the root of the complaint. He hates… Read more »
The person investing in common stock is by all means an investor, though his payment does not indeed go to the corporation. The corporation views us as its owners, curries our favor, such as by buying back shares and increasing the weight of each remaining one, pays us its annual dividend, and solicits our vote (though the outcome is too rarely in doubt, except when Elliott Management comes on the scene and demands the ouster of the chief executive). Whereas the individuals who bought the Initial Public Offering and supplied the initial capital, then sold their shares, get no favors… Read more »
There is an article on The Conversation (a web site reserved for comment by academics) Today that discusses the possibility of post-growth capitalism. Written by Adam Barrett , a multi-disciplinary researcher at Sussex University, it is based on macroeconomic modelling based on Minskian theory. As he notes: [Minsky] argued that financial crises are to be expected in capitalist systems because periods of economic prosperity encourage borrowers and lenders to be progressively more reckless. Minsky’s work was rather overlooked prior to the 2008 crash, but has received increased attention since. To test the hypothesis that capitalism might survive in a post-growth… Read more »
You think the EU, with its corporatist history, will be less statist than the UK, with its history of free markets? You think the EU will act to reduce distorting market rules.
Really, to the believers there is nothing that the EU cannot do. But it’s always “soon”.
New Zealand, Singapore etc have shown that there is zero first mover disadvantage. You just have to have a culture prepared to reduce state control. Something the EU sadly does not have.
Seems to completely fail to understand what effect high frequency traders have on a market. To sell an investment a seller has to find a buyer. For every trade on a stock market requires a matching trade in the other direction. If the market was restricted to long term investors, those wishing to sell would have to find an investor who wished to buy. If the average period investments were held was 7 years the chances of discovering a buyer who wished to buy at the time & price the seller wished to sell would be greatly reduced. To ensure… Read more »
Incidentally, there’s a second order effect in that the reduced volatility encourages smaller investors into participating in stock markets. Thus widening share ownership from only being the 1% the author seems to have a problem with.