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Dominic Barton’s capitalism for the long term

February 18, 2011

McKinsey global managing director Dominic Barton has spent the last 18 months meeting with business and government leaders in the hope of resolving what he calls a “crisis in capitalism” that took root well before the financial meltdown in 2008.

This journey led him to conclude that the U.S. needs to shift from “quarterly capitalism” to “long-term capitalism.” (McKinsey defines long-term as the time it takes to invest in and build a new business, roughly five to seven years.) Barton outlines his suggestions for the new capitalism in the March issue of the Harvard Business Review.

The biggest problem he identifies is a breakdown in trust between the public and big business. Forcing CEO’s to focus on rolling three-month targets leads to the type of decision making that leads to the global financial crisis.

He believes that everyone — the public, governments and most importantly, business — would benefit if big corporations adopted a longer-term view when making strategic decisions.

In the article, Barton suggests some key changes to corporate boards. Most intriguing is a policy adopted by some French companies that gives two votes to shareholders who’ve held their stock for more than one year. He believes that handing more control to shareholders who have bigger, longer-term stake in the business would remove some of the pressure to meet quarterly targets.

Despite the bad press the quarterly earnings treadmill receives, Garett Jones, a professor for the Study of Capitalism at George Mason University, thinks the system that exists now serves as a reasonably effective way to “make sure the company isn’t just creating vaporware.”

So what do you think? Does American capitalism need to be rethought? Or do quarterly earnings updates provide a valuable check on what companies are doing with investors’ money?

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