TIME Economy

Wall Street’s Values Are Strangling American Business

When finance calls the shots, we all lose

It’s widely known that more than half of all corporate mergers and acquisitions end in failure. Like many marriages, they are often fraught with irreconcilable cultural and financial differences. Yet M&A activity was up sharply in 2013 and reached pre-recession levels this year. So why do companies keep at it? Because it’s an easy way to make a quick buck and please Wall Street. Increasingly, business is serving markets rather than markets serving business, as they were originally meant to do in our capitalist system.

For a particularly stark example, consider American pharmaceutical giant Pfizer’s recent bid to buy British drugmaker AstraZeneca. The deal made little strategic sense and would probably have destroyed thousands of jobs as well as slowed research at both companies. (Public outcry to that effect eventually helped scuttle the plan.) But it would have allowed Pfizer to shift its domicile to Britain, where companies pay less tax. That, in turn, would have boosted share prices in the short term, enriching the executives paid in stock and the bankers, lawyers and other financial intermediaries who stood to gain about half a billion dollars or so in fees from the deal.

Pfizer isn’t alone. Plenty of firms engage in such tax wizardry. This kind of short-term thinking is starting to dominate executive suites. Besides tax avoidance, Wall Street’s marching orders to corporate America include dividend payments and share buybacks, which sap long-term growth plans. It also demands ever more globalized supply chains, which make balance sheets look better by cutting costs but add complexity and risk. All of this hurts longer-term, more sustainable job and value creation. As a recent article on the topic by academic Gautam Mukunda in the Harvard Business Review noted, “The financial sector’s influence on management has become so powerful that a recent survey of chief financial officers showed that 78% would give up economic value and 55% would cancel a project with a positive net present value–that is, willingly harm their companies–to meet Wall Street’s targets and fulfill its desire for ‘smooth’ earnings.”

Some of this can be blamed on the sheer size of the financial sector. Many thought that the economic crisis and Great Recession would weaken the power of markets. In fact, it only strengthened finance’s grip on the economy. The largest banks are bigger than they were before the recession, while finance as a percentage of the economy is about the same size. Overall, the industry earns 30% of all corporate profit while creating just 6% of the country’s jobs. And financial institutions are still doing plenty of tricky things with our money. Legendary investor Warren Buffett recently told me he’s steering well clear of exposure to commercial securities like the complex derivatives being sliced and diced by major banks. He expects these “weapons of mass destruction” to cause problems for our economy again at some point.

There’s a less obvious but equally important way in which Wall Street distorts the economy: by defining “shareholder value” as short-term returns. If a CEO misses quarterly earnings by even a few cents per share, activist investors will push for that CEO to be fired. Yet the kinds of challenges companies face today–how to shift to entirely new digital business models, where to put operations when political risk is on the rise, how to anticipate the future costs of health, pensions and energy–are not quarterly problems. They are issues that will take years, if not decades, to resolve. Unfortunately, in a world in which the average holding period for a stock is about seven months, down from seven years four decades ago, CEOs grasp for the lowest-hanging fruit. They label tax-avoidance schemes as “strategic” and cut research and development in favor of sending those funds to investors in the form of share buybacks.

All of this will put American firms at a distinct disadvantage against global competitors with long-term mind-sets. McKinsey Global Institute data shows that between now and 2025, 7 out of 10 of the largest global firms are likely to come from emerging markets, and most will be family-owned businesses not beholden to the markets. Of course, there’s plenty we could do policy-wise to force companies and markets to think longer term–from corporate tax reform to bans on high-speed trading to shifts in corporate compensation. But just as Wall Street has captured corporate America, so has it captured Washington. Few mainstream politicians on either side of the aisle have much interest in fixing things, since they get so much of their financial backing from the Street. Unfortunately for them, the fringes of their parties–and voters–do care.

TIME politics

The Students vs. the Unions

New York City’s mayor handed teachers a big win. Struggling students will be the losers

Back in 2005, when New York City was pre-crash flush, Mayor Michael Bloomberg offered the United Federation of Teachers a raise in return for 150 extra minutes of classroom work per week. The mayor’s idea was to spend that extra time tutoring the kids who needed the most help–the bottom third of each class. UFT president Randi Weingarten agreed that the group sessions would be small, no more than 10 students per class. Schools chancellor Joel Klein wanted three 50-minute periods per week. The union wanted five 30-minute periods. They compromised on four 37½-minute sessions.

The program was never given a name, which made it easier for New York’s new “progressive” mayor Bill de Blasio to give it back–to eliminate the required 150 minutes of special instruction–in his negotiations with the UFT this spring. You might well wonder why. I tried to find out but received a heaping ration of gobbledygook from a source close to the mayor. He said that the program had been “inflexible” and “one size fits all.” That it was not “workable to the purpose.” Translation: it didn’t work. But how do we know that? No studies or evaluations were done. At his press conference announcing the new union deal, the mayor and his schools chancellor, Carmen Fariña, gave several foggy reasons for the change: the time would be used for additional parent conferences and for “professional development” so the teachers could learn how to teach the new core curriculum. A lot of unspecific wiggle room was negotiated on both counts–part of the mayor’s drive toward “flexibility.”

But flexibility is not a trait often associated with teachers’ unions. The American Federation of Teachers, which Weingarten now heads, calls itself “a union of professionals,” but it negotiates as if it were a union of assembly-line workers. Let’s start with the 37½ minutes, especially that half-minute. What happens if the teacher is in midsentence–or is in the midst of a breakthrough with a student–when the bell rings? A professional finishes the lesson and is paid in personal satisfaction. (I’m sure that the overwhelming majority of teachers do so; these sorts of work rules insult their dedication.) A professional talks to parents whenever and wherever. A professional also doesn’t resist evaluation–but the current New York City union president, Michael Mulgrew, actually bragged that he “gummed up the works” on an evaluation agreement with the far more rigorous Bloomberg administration; de Blasio, of course, hasn’t sought to implement that deal.

The most damning aspect of de Blasio’s giveback is the “didn’t work” argument. We are talking about one of the ground-zero principles of a healthy school system: extra help for those who need it. If the program doesn’t work, you don’t eliminate it. You fix it. The mayor’s spokesman said the extra help would be continued in “flexible” ways. Apparently, “flexibility” is a mayoral euphemism for “I cave.” And given the current atmosphere, if it isn’t specified in the contract, it doesn’t exist. A mayor who actually cared about education would be seeking longer school days, longer school years, more charter schools (which have to be more rigorously monitored) and the elimination of tenure and seniority rules to make sure that the best professionals, not the longest-serving assembly-line workers, are in the classrooms.

Teachers’ unions are suddenly on the defensive across the country. The Supreme Court recently ruled–unfairly, I believe–that some home health care workers did not have to join the union that negotiated their contract. That could have an impact on all public-employee unions. In California, a district court judge recently threw out the state’s tenure rules. In his ruling, he wrote that the widespread protection of incompetent teachers “shocks the conscience.” A group called the Partnership for Educational Justice, which is led by former CNN anchor Campbell Brown, is filing a similar suit in New York and promises to take the movement national. Brown’s group has hired Robert Gibbs, the former Obama press secretary, to run its communications strategy; other Obama stalwarts will soon join the effort as well. Obama’s Secretary of Education Arne Duncan praised the California decision, which caused the National Education Association, the country’s largest teachers’ union, to call for him to be fired.

All of which raises an old labor-movement question for Democrats in 2014 and 2016: Which side are you on? Competent teachers should certainly be paid more, but the protection of incompetence is a national scandal, as is the unions’ resistance to teacher evaluations and charter schools, as is the quiet undermining of educational creativity by eliminating special programs for needy students. The Obama Administration has clearly edged away from the unions’ excesses. But what about the rest of the party? Which side are they on: the students’ or the unions’?

TO READ JOE’S BLOG POSTS, GO TO time.com/swampland

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