One thing the financial meltdown of 2008 and the subsequent slowdown in economic growth for much of the world has sparked is a debate about the appropriate types of capitalism for the future. Much talk has centred on reining in the excesses of the financial services sector that nearly led the world into global depression.
Things like splitting up the investment and retail parts of big universal banks have been debated, and some countries look to be moving towards this, albeit in a watered down way. Stopping proprietary trading by banks is also up for discussion and giving regulators more power to crack down on supposed abuse is moving forward.
Then there is the debate about taxing the rich more to create a more equitable distribution of wealth. France has introduced a 75% tax on incomes of more than €1 million. Others like the UK are taxing foreigners living in the country more. And the US looks set to scrap some estate tax relief for the wealthy.
But discussion has also gone into the more abstract – like short-termism versus the appeal of long-term decision-making and structures, which many family businesses espouse. The German Mittelstand business model – often family-controlled businesses focused on long-term growth targets – is back in favour with policymakers.
But in reality these moves towards more long-term capitalism aren’t likely to receive much policy support, even though it could be the best way of securing a more consensual-based economic system for the future.
The trouble is that most policymakers, as much as they agree with the virtuousness of long-term planning and growth of businesses like family ones, do very little to encourage such growth. They are, for the most part, driven by short-term factors like being re-elected on normally four to five-year election cycles. As such, they enact policies to generate short-term economic growth, to cut unemployment figures and to reverse the negative GDP figures – all designed to appeal to the electorate.
The pumping of money into the economy – now known as quantitative easing – is an example of this short-term approach in its grandest aspect. Smaller efforts to get the economy going like the UK government’s temporary removal of planning permission on residential properties are also examples of this short-termism. All the big developed economies use similar short-term policies to help generate growth. Of course, the emphasis on short-term solutions to encourage growth is not without its benefits. As the economist John Maynard Keynes said: “In the long run we are all dead.” So, what’s important is the short term.
Short-termism is a dominant theme in the financial world as well. Read most investment analysts’ reports and short-termism in their advice is dominant. Typically, these reports are about listed companies and tradeable commodities, centred on short-term sentiments, or even the animal instincts of the herd. They say things like “global equity and commodity markets rally strongly as confidence grows over the outlook for the US and eurozone”, and “investors pile into gold as a hedge to global inflationary pressure”.
The financial media reinforces short-termism by mostly reporting on listed companies. They neglect non-listed companies, despite the fact that out of the 24 million companies in the US, only 8,000 of them are listed. That startling eight to 24,000 ratio is similar in most other developed markets. But still the coverage is all about those very small number of listed companies – the ones usually reporting targets. This has effectively given us “quarterly capitalism”.
That said, much of this investment analysis and media coverage isn’t out of place. Many of the biggest and most successful companies are listed and coverage on them is more than worthwhile for a healthy functioning economy. It’s just that there is too much of it and some rebalancing towards the privately owned sector needs to be encouraged. This is especially true at a time when global equity markets are in retreat as new issuances and initial public offerings grind to an almost complete halt. So can family businesses switch the focus more towards what has been often referred to as “patience capital”? That is, waiting for a payback in the long term – something that many family businesses are so good at.
One thing that is for sure is that family firms need to do more to get their message heard among all the noise of short-termism. That won’t be easy, given all the vested interests around short-termism. But a more concerted effort on the part of family businesses, indeed privately controlled capital, needs to be made to shift the parameters towards a more long-term