Saturday, June 13, 2009 0 comments ++[ CLICK TO COMMENT ]++

Michael Porter thinks short-term investors hurting the economy

The Globe & Mail reports that Michael Porter criticized the short-term nature of Wall Street in a recent speech:

Players in financial markets are rewarded for trading stocks and facilitating mergers and acquisitions, the Harvard business professor said, not for creating any real value. That has contributed to the business community's poor image, which has been eroded further by the financial meltdown.

“We have a tremendous reputation problem. We have poisoned our nest here,” he told alumni at the Rotman School of Management at the University of Toronto. Business has a long way to go to “rebuild the trust of communities and society,” he added.

With so much focus on the immediate value of stocks, and the resulting costs from short-term trading in and out of individual company shares, “the stock market now is a tax on the real economy,” he said.

“The financial sector is extracting value from the rest of the economy [through] fees, costs and expenses.”

...


Now, with investors owning shares for much shorter periods – and usually through third parties such as mutual funds or pension funds – there is increasing pressure on executives to deliver immediate results, he said.

And with their own compensation also directly tied to the stock market, there is even more incentive on executives to focus on short-term performance.

Mr. Porter said one way to shift this mindset is to change capital gains tax rules, so that tax breaks kick in only after a stock has been held for a specified term.

There is also a move among some companies, he said, to give their executives restricted stock, rather than options. That stock can't be sold until the end of a specified hold period, and sometimes not until the executive retires.


Not a novel idea but it's somewhat surprising to hear the trashing of the short-term thinking prevalent on Wall Street from, arguably, the most influential business strategist alive.

The problem is a difficult one to solve. The shift to short-term investing was due to greater participation of retail investors, and increased liquidity and capital flows (across the world and across all assets.) Both of these are very good things but the side-effect is that it has pressured short-term results to a greater degree than in the distant past.


Those who ever took business courses in university will likely have run across Porter. For those not familiar, Michael Porter is famous for developing his 5 forces model for analyzing industries and businesses:



If you are interested in business, you may want to refer to this Wikipedia write-up and eventually read his book. As Warren Buffett has often alluded to, a good investor should also be a good businessperson and vice versa. Reading business strategy books, as opposed investment books, may be helpful in the long run.

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