Curbing Short-Termism in Corporate America [Brookings]

In “Curbing Short-Termism in Corporate America: Focus on Executive Compensation,” Robert Pozen, nonresident fellow with the Brookings Institution, lecturer at Harvard Business School, and former vice chairman of Fidelity Investments, evaluates numerous policy approaches to reduce short-termism including: (1) altering the compensation arrangements of asset managers and corporate executives; (2) constraining the rapid trading of stocks by public investors; and (3) limiting the influence of institutional shareholders on corporate governance.

After examining such solutions, Pozen arrives at the following conclusions:

  • The most effective way to curb short-termism would be to lengthen the time horizons in the compensation packages of asset managers and corporate executives;
  • Other effective measures to curb short-termism would be to limit “empty voting” by investors not owning shares and to discourage companies from publically projecting their quarterly earnings;
  • The proposals to constrain rapid trading, even if they reduced trading volume, would not significantly change the business plans of most corporations; and
  • The benefits from most proposals to reduce the governance influence of institutional investors would be outweighed by the costs of undermining corporate accountability.

There have recently been a number of prominent voices in the financial sector speaking out against short- termism. These individuals believe that short-term trading is driving bad corporate investment decisions and that directors should have longer terms and that activist hedge funds are bad. Pozen’s paper, however, raises serious factual questions about the link between short-term trading and corporate decisions, and criticizes restrictions on hedge funds and longer terms for directors as inappropriate solutions to whatever the problems are. None of these critics suggest, as Pozen does, that the key solution is redesigning executive compensation – he suggests moving to a 3-year measurement period for bonuses or force executives to hold on to half of their shares from options or stock grants.

Download the Full Paper at Brookings.edu…

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

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 (AZN) — with its tremendous implications for U.S. tax collections and tax policies. Pfizer’s (PFE) 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 (AAPL) recently borrowed $17 billion to pay dividends, despite holding more than $130 billion abroad.

Read more at finance.fortune.cnn.com…

Newest MIT Course for Professionals [Sloan Review]

How many hours do you work a week?

If you’re like a lot of managers, including many who attended the recent “Maximizing Your Personal Productivity” program at MIT Sloan Executive Education, your estimate might be between 49 hours and 58 hours.

Robert Pozen, a senior lecturer at the MIT Sloan School of Management and leader of the session, said when he speaks to groups, there’s usually a large cluster of people who say their work hours fall in this span. Some outliers claim as few as 80 hours a week for sleep and personal time, meaning they work 88 hours.

“People say they’re working so many hours because they have ‘so many things to do’ or they’re not productive enough,” said Pozen.

Please read more at sloanreview.mit.edu…

Surge in China internet money funds is risky [Financial Times]

Co-Authored with Theresa Hamacher

The money market fund offered by Alibaba, China’s leading ecommerce company, has gathered the equivalent of $65bn in less than one year. During that period, the assets of all money funds sponsored by internet companies have soared to the equivalent of more than $100bn.

In response, the governor of the Bank of China recently suggested that this new online product needs to be supervised closely. What are the benefits and risks of these internet money market funds, and how should they be regulated?

Read the complete article at FT.com…

If Facebook Overpaid For WhatsApp, It Did So With ‘Cheap Stock’ [RealClearMarkets.com]

It’s easy enough to conclude that Facebook overpaid for WhatsApp –the Internet texting service with a subscription fee of $1 per year (after an initial free year). The $19 billion purchase price paid by Facebook seems extravagant for a company with no profits, modest revenues and only 55 employees.

But Facebook paid this price mainly in its own “cheap” stock, and the price per user for WhatsApp is lower than the implied valuation of users in other social media companies. In the final analysis, whether this acquisition makes economic sense for Facebook will depend on how effectively it can monetize the rapidly growing user base of WhatsApp.

Read the complete article at RealClearMarkets.com…

Why myRa Is Not The Way To Save For Retirement [Fortune/CNN Money]

President Obama’s proposal is well intentioned but may not get workers to save more. A better plan: Automatically enroll workers to an IRA.

President Obama recently proposed to help more workers save for retirement through an executive order creating the myRA. The plan is being billed as the ROTH IRA for every man or woman with neither access to a 401(k) plan at their workplace nor the lump-sum deposit to open an IRA on their own.

Though well-intentioned, this isn’t the best way to encourage workers to save more – it’s just a politically easier route.  A better way is to automatically enroll workers with a retirement plan through payroll deductions and give them the option to opt out. Congress has considered such a plan for years, but it has never gone anywhere and it’s tough to see how things could turn around given the partisan bikering we’ve seen in Washington.

Nonetheless, an automatic Individual Retirement Account (IRA) is worth re-evaluating as the president makes his pitch for myRa. Half of America’s full-time employees, about 75 million, are not offered any type of retirement plan at work (except for Social Security).  Although many work at small firms with fewer than 10 employees, some work at larger firms. Over 20% of American employers with 100 or more employees — mainly in agricultural, construction and retail sectors –do not offer any type of retirement plan at work…

Read the full article at Fortune.com…

The ins and outs of managing up and down [MIT Sloan innovation@work Blog]

Managing Your Team:

“To be an effective boss,” says Pozen, “you need to set up a system that enables both you and your employees to get meaningful work done. At the core of this system is the successful implementation of ownership.”

Pozen encourages the principal of “Owning Your Own Space,” whereby all employees of a large company view themselves as owners of a small business. This approach builds entrepreneurial spirit among your team and sets everyone up to succeed—including you.

Here are five steps to effectively implementing ownership:

  1. Set project goals. At the start of a new project, clearly communicate your goals and constraints—but let your employees establish the time frames for milestones. They will be more committed to meeting deadlines if they have a role in setting them.
  2. Establish accurate metrics. Reach an explicit agreement on quantitative and qualitative criteria that will guide your team’s work. Choosing the right metrics will also help you have a deeper discussion with your team about what you really consider important about the project.
  3. Supply needed resources. Make sure your team has the funds, head count, and equipment needed to get the project done. Also, be ready to help your “lieutenants” win battles with other parts of the organization. Leverage your authority to help them.
  4. Monitor without suffocating. You may be micromanaging, even if you think you’re not. Monitor the project in a supportive way by offering suggestions and revising goals and metrics as necessary, but be clear that they are free to achieve the revised goals in the way they think is best.
  5. Tolerate mistakes. Be quick to forgive employees if they make a well-intentioned error. Create an environment where employees can talk openly about mistakes and learn from them. Whatever you do, don’t humiliate them. According to research, half of all humiliated employees intentionally decreased their productivity in reaction to their boss’s actions.

Read the full article at MIT Innovations@Work…

A Better Path to Corporate Tax Reform [Wall Street Journal]

A 17% levy on foreign profits of U.S. companies to help finance a 5% rate reduction.

Last week Oregon Sen. Ron Wyden became the chairman of the Senate Finance Committee. Even as a liberal Democrat, he has supported two key goals of corporate tax reform: reducing the U.S. corporate tax rate and repatriating corporate profits held abroad. Sen. Wyden’s challenge will be implementing these goals without increasing the federal debt.

Though there is widespread support for reducing the 35% statutory corporate tax rate, which ranks among the highest in the world, the reduction cannot be financed by the plan President Obama touted in his State of the Union address: closing tax “loopholes.” Congress would have to find $1.2 trillion in new tax revenue over the next 10 years to fund a 10% rate reduction. But politicians can realistically repeal only $200 billion in tax loopholes, including the favorable tax treatment of corporate jets, incentive fees and drilling costs.

That’s because tax preferences are popular. Most of the major existing preferences are intended to promote economic growth, so they are supported by both Democrats and Republicans. The four tax preferences that generate the largest revenue losses are: tax credits for research and development, special deductions for U.S. manufacturing facilities, accelerated depreciation for capital investments, and tax-exempt interest from municipal bonds.

Rather than fighting about political untouchables, legislators should change the tax treatment of foreign profits of U.S. corporations. Under current law, foreign profits are subject to a 35% U.S. tax, but that tax may be deferred indefinitely if those profits are kept abroad. U.S. corporations are sheltering almost $2 trillion in profits abroad, according to Audit Analytics.

Read the complete article at wsj.com…