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Comment by cheriot | Hacker News Reader

This is why I think we need to figure out executive compensation. Boards just rubber stamp whatever the CEO wants.

Tie their compensation to real goals and require them to hold for the next 10 years.

I saw an interview with an old finance guy some years ago talking about this, he was saying in the past you'd work for a company and spend your career there, you'd get shares somehow (through partnerships or some other mechanism, but you can't sell them) and as the years go by the value of your shares increases and you get more and more, so its in your self interest to keep the company going.

Now it's in the interest of a CEO to take a performing company carve out the middle so profits go up in the short term, shareholders get more money, he gets fat bonuses and the company dies.

Though there were problems with the old style too - they became very conservative and couldn't adapt among other things.

+1 the way shareholders and managers have a shorter time horizon than their employees is a huge red flag

Why would the board care about the 10 year health of a public traded company, If that same board could profit on the short term gains and get out before it tanks?

When the board members taking their gains and re-investing them in other companies to then repeat this strategy.

One possible solution: weight shareholder votes by how long they're willing to lock up their shares.

There's still an agency problem between the shareholders and board members, but at least the shareholder votes will be weighted for the long haul. Locked shares would have to be held in a way that prevents wrapping them in a salable derivative.

This is a good idea along with progressively decreasing taxes based on how long you hold the shares. They could go down every year all the way to 5% at 10 years.

This would have a significant impact on encouraging long-term investing for investors and long-term planning for companies.

This should apply only to shares in individual companies and not index funds or mutual funds.

It would also encourage a shift away from short-term speculation and to long-term investing in great companies.

> This is a good idea along with progressively decreasing taxes based on how long you hold the shares. They could go down every year all the way to 5% at 10 years.

Where I live stocks profits are taxed at 20% at first, then 5% less for each 5 years you hold them, down to 0 taxation after 20 years.

That sounds amazing! Where is this?

It would also mean that sufficiently rich people pay only 5% taxes on their income.

The bigger problem with taxes is that companies are not paying their fair share of taxes in the countries where they generate revenue and profits.

Also, this kind of progressive tax reduction should only apply after the company is public. So the clock for VCs, founders, etc only starts at the time of the IPO.

This would ensure all the early stakeholders are also aligned in investing in the long-term success of the business.

Currently, these early stakeholders are more likely to be focused on cashing out and having a liquidity event.

Could always tax other things, like consumption, inheritance, or carbon emissions.

Consumption taxes hit poor people harder than rich people. Inheritance might work, and carbon emissions might also work if you have a tax-and-rebate system so that poor people can still afford stuff.

Consumption taxes can give rebates just like carbon taxes. A somewhat popular national sales tax proposal a few years back would have done it that way.

https://en.wikipedia.org/wiki/FairTax

Hadn't heard that one before, that's fantastic.

I think the solution is in reforming capital gains taxes. You should only get the discount on taxes if you hold for 5+ years. And even then, the brackets should be more progressive for extreme (e.g. hundreds of millions) in income.

Overall, these two changes would incentivize holding stocks <1 year more often than people do currently.

Perhaps you could get a longer-term effect if you had another, lower tax level at 5+ years, or raised moderately the 1+ year cap gains rate and moved the current one to 5 years.

That's fine with me -- they shouldn't get a discount if it isn't a long term investment.

Why not just treat all stock investment like 401k’s: taxed as income when selling, tax deductible when buying? The deferred income tax still provides an incentive to invest, yet you don’t get a tax break when selling (unless you happen to be in a lower tax bracket between then and and when you sell).

There are severe market stability issues associated with people gravitating towards <1 year holdings. The cap gains rate exists partially to encourage long-ish holdings.

With that incentive severely reduced as your plan proposes, you’ll see much Miles’s incentive to hold and more volatile markets.

I doubt there is anything specific about an exact one year holding cutoff, but I'd love to see a source. If anything, the fact that we're having this conversation suggests the long term investment theory has been demonstrated to be either false or uncalibrated as it exists now. I'd also be open to a graduated rate (almost like a vesting schedule) of discounts starting at 1-2 years and ending at 5 years. But do we really need more complexity? Just have it be 5 years and public companies can be long-term focused once again. Markets will survive -- day traders tend to lose money and drop out.

This is what happens after you hold a stock for 12 months:

https://www.investopedia.com/articles/personal-finance/10151...

How would investors tell the difference between executives that are actually optimizing for ten year health, vs. executives who are floundering and using fake long-termism as an excuse to delay accountability? Ten years is a long time to wait to find out if a strategy works or not.

> Boards just rubber stamp whatever the CEO wants

Boards often want the same thing because members usually own stock in the company. Make a lot of money in the short term, pump that into stock buybacks, profit. Shareholders want the same thing - they often aren't looking past the next 1-4 quarters, they want fast returns.

> Shareholders want the same thing

Maybe that's the root of it and long-term capital gains should take longer than 1 year. The owners have a shorter horizon than employees!

I'm not convinced this is even a problem that needs to be solved.

If companies inevitable self-destruct from short-term management, that creates space for new companies to emerge with new approaches. Sure, there will be some noise/churn but overall I think it makes the overall ecosystem stronger.

The 1,000-year monopoly is a terrifying idea.

Creative destruction is important, but some businesses are easier to replace than others. How do you create another Intel or Boeing? The start up costs are insane. Even beyond that, there's value in some institutions.

I mean if we really need leading-edge aerospace or semiconductors protected from the vicissitudes of the market, the government getting more directly involved seems like the obvious answer.

I agree for these two cases, but more generally the market has some inefficiencies when good companies self-immolate like this.

It's not really a solvable problem IMO. Big corporations and humans have different lifespans, so trying to tie together their fates is kind of fools errand. Intel's success has a time horizon of decades. The only person willing to sacrifice that kind of time for a company to see things through is the founder, because it's more sentimentality than achievement or profit seeking.

If Intel's business requires a time horizon of decades and its owners time horizon is a couple years isn't that a problem? I'd propose some portion of a leader's comp should stay in company stock for 10 years even if they leave after 3. That will incentivize them to make good capital investments and train the next generation of leaders.

What do you mean "we"? Like government intervention? These are private companies, if they don't want to change this aspect, there's not a lot you can do aside from getting on the board...

> What do you mean "we"?

Perhaps people who are interested in building great companies, like the regulars of a tech startup-centric forum

I think it's great that companies particularly large incumbents tend to decay and fall after a time. It promotes renewal and evolution, like the cycle of life and death. It's a bit sentimental to want a company to survive decades.

It would be much worse if the big incumbents all remained at the top and dug themselves into the regulators and politicians and crowded out others (they already do to a great extent but it could be a lot worse).

On the other hand, as a consumer, I'd like the services that I'm using now to remain useable for the rest of my life.

People in 1900, as consumers, thought they'd need a reliable supply of horse feed for the rest of their lives too.

Uncertainty and risk are big reasons why people fear change, I completely understand. I'm not saying the feeling or desire for stable incumbents is invalid, although maybe my comment could have been worded a bit better.

Governments place a lot of rules on corporate governance already. Maybe a new one is called for. Maybe a social movement that pushes index funds to exercise the voting shares they hold. I'm open to ideas.

They are publicly traded companies, mostly.

The real defense against this dynamic is the takeover bid. If you think the existing board and CEO are doing a poor job of running the company by neglecting growth opportunities, you can literally buy out the existing shareholders' position and be in charge. If you're right, you'll reap the gain in the form of increased valuation for the shares you bought.

That only works if the market recognizes the long-term impact of financialization and prices the company accordingly. Otherwise you'll be paying more than the company is actually worth. By the time it becomes obvious that the company was overpriced it's too late. Whatever actual value might have been there back in the day has already been destroyed.

I've been successful enough, but glancing at my bank account it doesn't look like i can literally buy 51% of any company I've heard of. Have you done it? Or can you help point me to someone like myself who has? If 'you' meant "Private Equity Firms that specialize in hostile leveraged buyouts", are they numerous enough to squeeze inefficiency out of the Fortune 500?

Activist investing is a thing if that's what you're asking. This link includes a short list of such famous individuals: https://www.investopedia.com/terms/a/activist-investor.asp

Forgive me if this sounds foolish, I don't know how this stuff works. Could it be possible to somehow write something like this as a requirement into the corporate charter or articles of incorporation such that if these terms were violated the company would have to be dissolved (or some other equivalent nuclear option)? Has there ever been anything like this e.g. 'if company ever stop selling x, it has to close down'?

Not foolish at all.

That's the sort of bespoke governance that Eric Ries' Long Term Stock Exchange is meant to enable and support.

https://wikipedia.org/wiki/Long-Term_Stock_Exchange

This is excellent. Thank you!

There's reasons why that doesn't happen to this kind of company

- short term-ism leads to great financial results in the short term so the stock price goes up making a buy out expensive. Anyone that can see the internal issues will know it's not worth that price.

- very few groups can make an offer on companies as large as Intel and Boeing. Those groups are not known for deep engineering expertise.

- companies use poison pills and other measures to prevent take overs

But stock prices are ruled by long-term dynamics not short-term ones. That's how firms like Amazon can see their stock prices rise even well before posting any profit.

Stock compensated C-suite can get shares on start, juke the stats for four years to vest, stock is well-up, cash out for juicy comp, buy a new boat, stay a few years more if wanted, exercise more shares/options for cap-gains taxed new money, buy second home, quit and watch the company crumble over a few years from comfort.

> But stock prices are ruled by long-term dynamics not short-term ones.

You have more faith in public markets than I do.

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