Ruining American business

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How American businessmen are ruining American business — and the U.S. economy

“The missing link in the anemic, five-year-old recovery has been business investment. … Instead of using record profits to buy new equipment or build factories — and boost the economy — corporate America has been sitting on nearly $2 trillion in cash. Corporate balance sheets are stuffed.

When CEOs do put money to work, it’s almost always to help shareholders, through higher dividends and stock buy-backs that boost share prices. More recently, companies have been using some of that dough for a tricky financial technique known as an ‘inversion,’ buying an overseas rival to take advantage of lower international tax rates. Never have companies spent such a tiny share of the cash they generate on capital investment, according to economist Andrew Smithers.

Even worse, argues Harvard’s Clayton Christensen in a recent paper, much of that investment is directed toward making existing products or delivering existing services more efficiently — often with fewer workers — rather than innovating new products or services that create new, high-paying jobs. This plague of risk-averse ‘short-termism,’ as Nobel-winning economist Edmund Phelps writes in Mass Flourishing, reduces the total ‘supply of innovation’ in the U.S. economy, resulting in slower growth and job creation. …

… executives pay has become more dependent on bonuses, often linked to a company’s stock prices …. At the same time, CEO tenure has declined since 2000. So bosses have big incentive to embrace short-term strategies — like buy-backs — that keep the stock price high and avoid those — like, say, a pricey new research initiative — which might make it tougher to hit those all-important quarterly earnings targets. As a result, Smithers writes in The Road to Recovery, ‘managements are willing to accept possible long-run damage from lower investment and the possible loss of market share.’ That’s the next CEO’s problem.”


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