Google CEO Larry Page announced on Monday that he intends to create a new corporate parent, called Alphabet, which will own Google as well as a variety of other ventures.
Hillary Clinton thinks Wall Street is too focused on short-term profits. So does Google.
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One way to understand the move is as a response to a problem that Hillary Clinton identified in a campaign speech last month: “quarterly capitalism.“
Clinton argued that “everything is focused on the next earnings report or the short-term share price, and the result is too little attention on the sources of long-term growth: research and development, physical capital, and talent.”
In a sense, Page is trying to prove Clinton wrong, by building a company that’s focused on ambitious long-term investments rather than quarterly financial results. But Page is also the exception that proves the rule: He and co-founder Sergey Brin have total control of Google, which isn’t true of most other CEOs.
Clinton and Page both believe Wall Street is too focused on short-term results
The villain in Clinton’s story is really Wall Street’s focus on quarterly financial results. If a company reports several straight quarters of disappointing financial results, the CEO starts to worry about losing his job. So, the argument goes, she cuts back on long-term investments that could produce profits years in the future, in favor of incremental changes designed to juice profits in the next few months. In the long run, this means that companies produce fewer breakthrough innovations, and the economy as a whole grows more slowly.
Clinton wants to tackle this problem with changes to public policy, including higher taxes on investors who hold stocks for fewer than six years and perhaps tweaks to corporate governance rules that give activists shareholders less influence over management. She hopes these changes will insulate CEOs from their shareholders, allowing them to focus more on the long term.
Page is tackling the same problem from a very different angle: He wants to turn Google — now Alphabet — into a company dedicated to making big, risky, long-term investments. Google has long been a company with an interest in long-term investments — as evidenced by its “moonshot” investments in things like self-driving cars and life-extension technology — but the creation of Alphabet makes it official. Where Google was a search company with a side interest in moonshots, Alphabet aims to be a moonshot company whose most successful moonshot is Google itself.
It might seem like Page’s plan proves Clinton’s thesis wrong, by demonstrating that companies are still able to make long-term bets. But it’s important to recognize how unusual Page’s position is. Through savvy negotiating in Google’s early years, Page and co-founder Brin were able to maintain a majority of Google’s voting rights. That means Page can’t be fired by other Google shareholders, no matter how bad Google’s quarterly results look or how much its share price drops.
But the vast majority of public company CEOs don’t enjoy this degree of autonomy. They serve at the pleasure of their shareholders, and are liable to lose their jobs if their share price falls too much. So most CEOs couldn’t emulate Page if they wanted to; if they tried to turn their companies into moonshot factories, they’d face a revolt from their boards and likely lose their jobs. So it’s worth thinking about whether there are ways to make it easier for other CEOs to behave more like Larry Page.
