The upset presidential election victory of Donald J. Trump and the Republican party’s victory in races for the House of Representatives and the Senate signal major changes ahead in both the federal government’s approach to growth and the Federal Reserve’s approach to monetary policy. Most evident among forthcoming policy changes will be a return of supply-side tax cuts, large operating fiscal deficits, and a move back toward more traditional monetary policies that, over time, should lead to higher short and long-term interest rates.
Below is an outline of my views on the implications of a Trump presidency for economic growth, taxes and infrastructure, central bank policy, and interest rates and trade.
My firm anticipates that the Trump administration will attempt to achieve the economic equivalence of a strategic breakout with respect to the pace of economic growth. In other words, with the economy mired in a long-term sluggish growth path below 2 percent, the administration will turn to deficit spending, infrastructure, and fiscal stimulus to achieve stronger economic growth. The administration will also seek to reform Dodd-Frank in a significant way, which would be a boost for Wall Street, and will also move to inject private competition into the health care system.
While there will likely be a faster pace of growth in the near term, uncertainty about the role and status of the U.S. in the global economy may combine to create longer-term issues, particularly involving free trade that, ironically, act as a drag on growth.
Taxes and infrastructure
From a purely economic point of view, it will be difficult to lift the long-term growth trend much above 1.5 percent without significant tax reform and productivity-enhancing changes related to tax investments and improving national infrastructure. Given the major demographic challenges associated with the aging of the Baby Boomer generation, and the gradual entry of the Millennial generation into the workforce, the underlying conditions of the post-Great Recession economy are not conducive to a quicker pace of growth unless there is major tax and entitlement reform.
In our estimation, based on visits to policymakers in Washington, the order of operations for the first two years of the Trump Administration will likely proceed in the following fashion.
A move to engage on comprehensive tax reform will likely be one of the primary orders of business in January 2017. We expect the Trump administration to work with Congress to craft a deal that would revolve around lower individual and business tax rates along with an end to corporate tax inversions. Under these conditions, an attempt to lower individual tax rates based on the framework set out in the House Republican blueprint released in June of this year of 12, 25, and 33 percent, would be the most significant tax reform since 1986.At the heart of Trump’s tax plan is the intention to reduce taxes on pass-through entities (eg, sole proprietorships, limited liability companies, S Corps., and so on) to 15 percent, which would decisively favor the middle market, which accounts for 40 percent of GDP and employs one-third of the labor force.
The probability that a bipartisan bill on a multi-year infrastructure project will pass is high. The glue that would hold this together would likely be parallel legislation that would seek to tax the $2.6 trillion in corporate profits being held abroad. There is growing realization in both political parties that the infrastructure around the country has been allowed to slip into such disrepair that it has become something of a national embarrassment.
It is important to note that a robust infrastructure is not an economic panacea. It is a long-run productivity-enhancing policy that is more of a legacy issue, as opposed to something that will jump start economic activity in the near-term. If there is no tax reform, then growth will remain decisively in the sub 2 percent range.
This is the third of a three-part series looking at the global economy and uncertainty in 2016 and 2017. In the first post, the challenges of slow growth in developed and emerging markets was addressed. The second postexplored how political entrepreneurs such as Donald Trump have exploited voter anger over limited economic opportunity and the perceived inability of institutions and elites to solve problems. To dive deeper into election implications, join DJ Peterson and David Kistenbroker, Global Co-Head, White Collar and Securities Litigation, Dechert LLP, for a webinar on December 15, 2016. Members may register to attend here.
On November 8, American voters extended a series of striking political surprises and rebukes that in 2016 began with the June referendum on Brexit and in October Colombians’ rejection of a peace deal with rebel forces. Looking forward, the success of Donald Trump raises questions about what will happen next in Europe when voters go to the polls in Italy, the Netherlands, France, and Germany in the coming months. Populism, nationalism, anti-globalism, and authoritarianism seem to be on the rise and time-honored principles and institutions are being weakened as a result.
In the corporate boardroom, disruption usually is thought of in terms of innovation, technology, and the competitive landscape—it is looked at as both opportunity and risk. And while board members are sometimes challenged to address economic disruption in business, political disruption is even more difficult to grasp and manage. Are board members asking the right questions? Are we creating the right scenarios?
Not surprisingly, NACD’s member surveys, as a well as discussions at the 2016 NACD Global Board Leaders’ Summit, reveal that a top concern of board members and corporate executives is how to navigate the tremendous economic and political uncertainty in the world today. A breakdown of broad-based consensus on free trade is a related concern.
Several megatrends driving the political disruption we are seeing include:
diminishing economic opportunities for the middle and working class;
a sense that urban elites—in government, the media, and business—are distant and not very concerned about the “average person”;
social media, which tends to play up societal challenges and divides;
and political entrepreneurs who look to capitalize on these trends of unrest.
This has played out on the trade issue. While lower barriers to international movement of goods and services help boost growth, the benefits are diffused throughout an economy while job loses often attributed to trade deals (wrongly or rightly) are concentrated in working class communities—making political mobilization easier. Social media, meanwhile, has helped reduce a complex policy issue to caricatures.
How might these trends impact long-term business and economic success in the United States in the coming years? Expectations are that the new Trump administration, together with the Republican-controlled Congress, will repeal a host of Obama-era laws and regulations, cut and simplify corporate taxes, and appoint business-friendly judges to the courts. These moves would be a boon for many sectors.
But Donald Trump’s populist appeal has also been derived from his willingness to blame countries for having unfair trade advantages; to publicly name and shame firms for sending manufacturing abroad; to criticize large mergers for concentrating economic power; and to target executives for opposing him. We don’t expect such appeals to end once Trump is power. He is likely to use such tactics from the bully pulpit of the presidency to bolster his position and “tell it like it is” personal brand.
Economic populism is one area where activists on the left are likely to be cheered by Donald Trump’s presidency. They certainly have been willing to name and shame companies for actions that they see as out of line with public interests.
This is where board oversight is important.
Directors can pressure test management’s assumptions about the political implications of their actions. Directors should urge management to consider what the political risk implication of the company’s actions are. For example, how will decisions about outsourcing operations, finding tax advantages overseas, or cutting job-training programs and hiring foreign workers be perceived? Will they land the company in the headlines?
Directors can ask management questions about strategy as well:
How are we identifying trends and disruptions that may affect the business?
Are we integrating political assessments into risk management—regarding, for example, currency, regulation, or supply chain strategy?
Are political risks considered as part of our strategic planning processes?
Are we considering a range of scenarios and market impacts for a country or an issue?
How are we monitoring and reassessing developments? Do we have good information?
Focusing the board lens on the bigger picture, in today’s populist, volatile political world, companies can no longer merely defend themselves against risks and criticize government policies and social activists. Rather, public-private cooperation is needed now more than ever.
At the 2016 NACD Global Board Leaders’ Summit, participants heard about conscious capitalism—shorthand for the many ways companies can make money by doing good for societies they are embedded in. Many proactive business leaders are looking for opportunities to be a part of the solution to the challenges spurning the disruption—from raising hourly wages to hiring and training refugees, to investing in underserved communities and making healthier products. Fostering long-termism is another way that companies can contribute to this aspect of the movement.
Many such initiatives are the results of a CEO’s passion and they often get relegated to the corporate social responsibility portfolio. It’s not hard to name firms and executives that get kudos for one socially responsible initiative but come under withering criticism for major failings in other aspects of their business.
For conscious capitalism to be a meaningful response to recent geopolitical disruption, incentives and priorities must be changed throughout the organization. This is stimulating a rethinking of corporate governance—the core values, norms, and rules that drive corporate behavior. Directors can help ensure long-term, conscientious response to populist pressures on businesses by asking: What is our ultimate mission? What are we doing to help solve today’s problems? How do we maintain and enhance our social and political license to operate?
DJ Peterson founded Longview Global Advisors in 2013. Longview Global Advisors is a consultancy that works with clients on a range of tasks that include strategic planning, market intelligence, thought leadership, and executive positioning. Business leaders and investors turn to Longview Global Advisors for a relevant worldview, and Peterson helps them monitor and make sense of the political, economic, and social trends they care about.
“It ain’t over ‘til it’s over.” Truer words were never spoken when it comes to the new pay ratio rule.
A key chapter in pay regulations closed August 5, 2015 when the U.S. Securities and Exchange Commission (SEC) issued its final rule on the pay ratio disclosure mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act. This final rule capped a two-year comment period intended to resolve many thorny issues around exactly when and how to calculate the two numbers involved in the ratio—namely median employee compensation/CEO compensation. (To see NACD’s comment letter, visit the NACD Resource Center on Corporate Governance Standards and click on our Comment on Pay Ratio.) The NACD comment letter, like some others, noted that the “annual total compensation” figure can be misleading, and suggested solving this problem by asking the SEC to permit the use of industry averages, to limit employees to full-time domestic employees, and to permit supplemental notes. In its final rule, the SEC did not make these changes but did address concerns about total annual pay by allowing companies to use any “consistently applied compensation measure” (CACM) to calculate median annual compensation for employees.
This concept of a CACM led to questions, however. So on October 18, 2016, the SEC’s Division of Corporation Finance addressed them by updating its C&DI for Regulation S-K, one of the 32 “Compliance and Disclosure Interpretations” (C&DIs) the staff maintains on its most complex regulations. Although the five questions raised are technical rather than strategic, and represent only a tiny fraction of the many issues raised by the final rule overall, they still merit board attention. Therefore, this blog presents, in simplified English, the five ratio-relevant Q&As in the newly updated C&DI (codified under Section 128 C) and provides a key question and a final “takeaway” for boards.
Summary of the SEC’s Five Questions and Answers
Summary of Question 1: If a company does not use annual total compensation to identify the median employee, how should it choose another consistently applied compensation measure (CACM) to do so?
Summary of Answer 1: SEC’s updated C&DI assures companies that a CACM can be any measure that “reasonably reflects the annual compensation of employees,” but asks that companies explain their rationale for the metric they choose. An appropriate CACM will depend on “particular facts and circumstances,” says the SEC. For example:
Total annual cash compensation can work as a CACM, unless the company has also made a wide distribution of annual equity awards for the same period.
Social Security taxes withheld would likely not be an appropriate CACM unless all employees earned less than the Social Security wage base.
Summary of Question 2: May a registrant exclusively use hourly or annual rates of pay as its CACM?
Summary of Answer 2: No. Although an hourly or annual pay rate may be a component used to determine an employee’s overall compensation, the use of the pay rate alone generally is not an appropriate CACM to identify the median employee.
Summary of Question 3: When a registrant uses a CACM to identify the median employee, what time period may it use?
Summary of Answer 3: The SEC’s answer to this question says that the company must select a date within three months of the end of its most recent fiscal year to determine the population of employees from which to identify the median employee. The CACM need not be contemporaneous. In fact, it can come from the prior fiscal year, as long as there has not been a material change in the registrant’s employee population or employee compensation arrangements—that is, a change that would “result in a significant change of its pay distribution to its workforce.”
Summary of Question 4: What about furloughed employees?
Summary of Answer 4:The SEC’s response clarifies that the final rule identifies four classes of employees: full-time, part-time, temporary, and seasonal. It does not define or even address furloughed employees, because a furlough could have different meanings for different employers. It is a matter “facts and circumstances” and provides additional guidance on the matter.
Summary of Question 5: What about independent contractors? Under what circumstances can their pay be included in the CACM for the employee?
Summary of Answer 5:The final rule had stated that “leased” workers are excluded from the definition of employees “as long as they are employed, and their compensation is determined, by an unaffiliated third party.” The SEC’s answer preserves this distinction, and gives some flexibility. In determining when a worker is an “employee,” the company “must consider the composition of its workforce and its overall employment and compensation practices.” So a company should include workers whose compensation it (or a subsidiary) determines “regardless of whether these workers would be considered ‘employees’ for tax or employment law purposes.”
Are you familiar enough with compensation patterns in your company to know whether a chosen CACM “reasonably reflects” the compensation in your company? If not, you may wish to meet with the officer responsible for employee pay below the executive level to get a better sense of this important issue.
Compensation committees have traditionally focused on executive compensation, leaving employee compensation to management. In the past few years, however, several factors have combined to broaden the committee’s purview, including concerns about pay disparity, and the new requirement to disclose compensation risk. Therefore, more compensation committees are overseeing enterprise-wide pay. For example, in its 2016 proxy statement, WPX Energy disclosed that in the past year “With the oversight of our Compensation Committee, we conducted a risk assessment of the Company’s human capital with a focus on enterprise-wide compensation programs.” (Emphasis added.)
The key word in all of these questions and answers is “reasonably.” It is exactly the right word for compensation committees to use as they oversee this disclosure, as well they should.
Alexandra R. Lajoux is chief knowledge officer emeritus at the National Association of Corporate Directors.