Those Short-Sighted Attacks on Quarterly Earnings [Wall Street Journal]

Co-authored with Mark Roe

The clamor against so-called corporate short-term thinking has been steadily rising, with a recent focus on eliminating the quarterly earnings report that public firms issue. Quarterly reports are said to push management to forgo attractive long-term projects to meet the expectations of investors and traders who want smooth, rising earnings from quarter to quarter.

The U.K. recently eliminated mandatory quarterly reports with the goal of lengthening the time horizon for corporate business decision-making. And now Martin Lipton, a prominent U.S. corporate lawyer, has proposed that U.S. companies’ boards be allowed to choose semiannual instead of quarterly reporting. The proposal resonates in Washington circles: Presidential candidate Hillary Clinton has criticized “quarterly capitalism” as has the recently departed Republican SEC Commissioner Daniel Gallagher.

But while quarterly reporting has drawbacks, the costs of going to semiannual reporting clearly outweigh any claimed benefits.

On the claimed-benefit side, it is doubtful that replacing quarterly with semiannual reporting will induce corporate executives to make longer-term business decisions. Do we really believe that moving from quarterly to semiannual reporting will bring forth many new five-year investment projects? Similarly, without quarterly reporting, why won’t earnings smoothing occur in six-month intervals instead?

Read the rest at wsj.com…

How to Fix Jeb Bush’s Corporate Tax Reform Plan [Real Clear Markets]

The corporate aspects of the tax plan recently announced by presidential candidate Jeb Bush are aimed at achieving the worthwhile goals of economic growth and job creation. However, these goals are likely be undermined by the plan’s treatment of foreign profits of U.S. multinationals and unrealistic projections of tax revenues from rate cuts.

Almost everyone would agree that the current U.S. system for taxing foreign profits of U.S. multinationals is seriously flawed. In theory, such profits are taxed by the U.S. at its standard corporate tax rate of 35 percent — one of the highest in the industrialized world. In fact, such profits are NOT subject to any U.S. corporate tax as long as they are held overseas. As a result, such profits of U.S. multinationals are effectively “trapped” overseas – they are generally not repatriated to build US plants, buy US start-ups or pay dividends to their American shareholders.

The Plan on taxing PAST foreign profits of U.S. multinational is sensible — a one-time tax of 8.75 percent paid over a period of years. That could raise close to $180 billion in revenues. Since U.S. multinationals reasonably relied on the existing U.S. tax rules for foreign profits by holding them abroad, these corporations should be taxed at a modest rate on such past profits.

In the future, however, Jeb’s plan calls for a pure territorial system — foreign profits will be taxed only in the country where they are “earned.” This plan, if adopted, would strongly encourage U.S. multinationals to transfer their intellectual property (patents, copyrights and trademarks) — which can be moved easily at minimal cost — to tax havens, like the Bahamas, where they pay little or no corporate taxes.

Read the rest at realclearmarkets.com…

Pfizer’s bid for AstraZeneca: It’s time to reform the U.S. corporate tax system [Fortune]

The debate over Pfizer’s bid to buy U.K. drugmaker AstraZeneca is intensifying. Last week, AstraZeneca rejected Pfizer’s offer of $106 billion, even though it was about 7% higher than its previous bid.

As negotiations escalate, it’s worth taking a close look at Pfizer’s proposed merger into AstraZeneca – with its tremendous implications for U.S. tax collections and tax policies. Pfizer’s determination underscores how driven U.S. multinational corporations are to shift their domicile outside the U.S. Why? Unless they keep foreign profits abroad, the U.S. subjects them to a corporate tax of 35%.

As a result, more than $2 trillion in foreign profits held by multinationals are “locked out” of the U.S. These funds could otherwise be spent making critical investments in the U.S. economy, such as building manufacturing facilities, buying U.S. companies, or even paying dividends to shareholders. For instance, Apple recently borrowed $17 billion to pay dividends, despite holding more than $130 billion abroad.

Thus, the current tax rules reduce investments in the American economy and distort business decisions of American executives. Moreover, although the U.S. corporate tax rate is almost the highest in the world, the U.S. Treasury receives relatively little revenue from taxes on foreign profits from multinationals.

Read the rest at fortune.com…

The Role of Institutional Investors in Curbing Short-Termism [Financial Analysts Journal]

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term proj- ects to avoid missing earnings estimates for the upcoming quarter.

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably.2 The typical activist program involves raising dividends, increasing stock buy- backs, or spinning off corporate divisions—usually accompanied by a request for board seats.

Read the rest at cfapubs.org…

Relief for Cities’ Budget-Busting Health-Care Costs [Wall Street Journal]

Co-authored with Joshua Rauh

The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.

The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.

The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.

Read the rest at wsj.com…

Let’s Cut Taxes By Reducing Tax Bias [Real Clear Markets]

Tax experts from around the world gathered two weeks ago in Washington DC to push forward a Euro-led project for the prevention of BEPS — base erosion and profit shifting. This project is aimed at getting multinational companies to locate facilities and jobs in real countries, instead of post office boxes in tax havens.

The corporate tax rates in Europe are already 10% to 15% lower than the 35% rate in the U.S. If Europe moves forward with BEPS, that will put more pressure on US large companies to move people and plants abroad — unless Congress substantially reduces the U.S. corporate tax rate.

While almost everyone wants to reduce the U.S. corporate tax from 35% to 25%, almost no industry is willing to give up its current tax preferences to achieve this rate reduction on a revenue neutral basis. This means that the national debt would not rise because revenues lost by rate reduction would be offset by revenues gained by restricting existing tax preferences.

Therefore, Congress should finance a substantial lowering of the U.S. corporate tax rate largely by reducing the tremendous bias in the current tax code for debt and against equity. Most importantly, companies may deduct interest paid on all their debt, but may not deduct any dividends paid on their shares. As a result, the effective tax rate on corporate debt is negative 6.4%, as compared to positive 35% for corporate equity, according to the Congressional Budget Office.

Read the rest at realclearmarkets.com…

Managing Up [AFP Exchange]

Last year I wrote a piece for the May issue of AFP Exchange about the importance of managing your team to enhance your own personal productivity. I’d like to continue this conversation by telling you about managing up—how managing your boss is a vital part to staying productive at work.

This doesn’t mean manipulating your boss for a lighter workload. Nevertheless, knowing when and how to communicate, and how to set mutually beneficial goals, will improve the work lives of you and your boss. This is a nuanced challenge that practically every individual will face in their professional lives, but there are four guidelines that can help guide the way to a more productive and prosperous working relationship with your superior.

Subscribe and read the rest at afponline.org… 

The Trend Towards Board Term Limits Is Based on Faulty Logic [Brookings Institution]

Co-authored with Theresa Hamacher

In the business world, experience is generally considered to be positive. When it comes to corporate directors, however, tenure is increasingly viewed with suspicion. Yet the trend towards board term limits is based on faulty logic and threatens performance.

The movement towards director term limits is global. In France, directors are not considered independent if they have served on the company’s board for more than 12 years. In the UK, publicly traded companies must either comply or explain: terminate a director after nine years of service, or explain why long tenure has not compromised director independence.

In the US, the Council of Institutional Investors, which represents many public pension funds, urges its members to consider length of tenure when voting on directors at corporate elections. The council is concerned that directors become too friendly with management if they serve for extended periods.

Institutional Shareholder Services, the proxy voting advisory firm that is a powerful force in corporate governance, penalises companies with long-serving directors by reducing their “quick score” governance rating. Under the current methodology, a company loses points if a substantial proportion of its directors has served for more than nine years. Although ISS recognises that there are divergent views on this, it concluded that “directors who have sat on one board in conjunction with the same management team may reasonably be expected to support that management team’s decisions more willingly”.

But the assumption that lengthy director service means cozy relationships with management simply is not supported by the facts.

Read the rest at brookings.edu…