Hillary Clinton Aim Is to Thwart Quick Buck on Wall Street

While Washington and the media were worked up about Hillary Rodham Clinton’s emails last Friday, most of the nation seemingly missed — or at least largely ignored — what may have been her most important comments yet about how she plans to transform Wall Street and corporate America.

If Mrs. Clinton becomes president, her remarks may turn out to be more than campaign talking points — and could radically change the way investors and chief executives behave.

For those who were too distracted by the email controversy, here’s a brief recap of what she said:

Speaking at N.Y.U.’s Stern School of Business, Mrs. Clinton announced a radical proposal to rewrite the tax code to empower “outside investors who want to build companies” and discourage “cut-and-run shareholders.”

To end what she described as “quarterly capitalism” — meaning investors’ obsessions with quarterly earnings reports — she proposed extending the definition of the long-term holding period for the lower capital gains rate to two years from one, saying one year “may count as ‘long-term’ for my baby granddaughter, but not for the American economy.”

But the real shift is a plan to introduce a “six-year sliding scale” for capital gains taxes. Individuals in the top bracket would pay ordinary income tax on the sale of investments — 39.6 percent — in the first two years and “then the rate would decrease each year” over the next four years until it returns to the current capital gains rate of 20 percent.

To some degree, she could have been channeling Laurence D. Fink, the chief executive of BlackRock, the $4 trillion asset manager, who has long lamented the short-term nature of individual shareholders and the perverse impact their buying and selling can have on boards.

This year, he wrote a letter — recounted in this column — to corporate chieftains complaining about their focus on buying back stock and paying special dividends instead of investing in their businesses for the long term, citing the same statistic as Mrs. Clinton (or was it the other way around?): $900 billion has been shoveled back to investors instead of reinvested in research or equipment or jobs. Mr. Fink, too, proposed a new tax scheme to compel investors to hold shares long-term.

Mrs. Clinton’s proposal is useful in starting a meaningful conversation about an issue that might be too wonky for most voters but could have a significant impact on business. Helping create an incentive system that makes investors — and therefore chief executives and their boards of directors — less focused on quarterly profits and their immediate stock price should be a boon to the economy. From a political perspective, it’s hard to argue with — it’s about as safe as they come.

Even one likely target of her proposal, the activist investor Carl C. Icahn, who has long mounted proxy contests, in part to push companies to buy back stock, said he was a fan. “Although I’ve said this before, you may be surprised by what I’m telling you: I agree with a lot of the things she has been saying,” Mr. Icahn told me. “She is onto something.” (Of course, for some progressive Democrats, that’s an endorsement that might raise more questions about whether she is soaking the rich enough.)

Mr. Icahn, positioning himself as a shareholder advocate who has long argued that he has been miscast as short-term-oriented, added: “In too many cases the real culprits of short-termism are the boards and the C.E.O.s that do buybacks which they know will promote their stocks in the short term and make their options more valuable.”

Critics of her plan said that, in practice, changing investor behavior was more challenging than a stump speech or even the change she suggests in the tax code.

After all, public pension plans and 401(k) plans don’t pay taxes and they represent about two-thirds of all invested assets. To her credit, Mrs. Clinton points out the shortfall of her program’s reach.

Having said that, most of the volume on any given day isn’t coming from public pension funds and 401(k)s — those are actually real, long-term invested assets — but from hedge funds and the like.

Curiously, Mrs. Clinton says the new tax structure would apply only to the nation’s wealthiest in the top tax bracket. (Why she wants to give incentives to the richest to make long-term investments and those with less wealth to be able to day-trade without any disincentive is inexplicable.)

As she continued her speech at the business school, she stepped into riskier territory, commenting on the activists and buybacks themselves.

“As president,” she said, “I would order a full review of regulations on shareholder activism, some of which haven’t been re-examined in decades, let alone modernized to reflect changing realities in our economy.”

She called some of them “hit-and-run activists whose goal is to force an immediate payout,” using language akin to that of under-attack C.E.O.s. She also hinted that she would “take a hard look at stock buybacks.” That’s code for an argument by some — Senator Elizabeth Warren included — that stock buybacks could be considered stock manipulations.

While that might resonate politically for some in the party, it is likely to be a step too far, one that even Democratic supporters like Mr. Fink would never back.

Find the full article at http://www.nytimes.com/2015/07/28/business/dealbook/clinton-aim-is-to-thwart-quick-buck-on-wall-st.html

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