The Future by Al Gore Page B

failure to take into account the cost and consequences of the 90 million tons of global warming pollution spewedevery twenty-four hours into the planet’s atmosphere. The problem of externalities in market theory is well known but has never been so acute as now. Positive externalities are also routinelyignored, leading to chronic underinvestment in education, health care, and other public goods.
    In many countries, including the United States, the growing concentration of wealth in the hands of the top one percent has also led to distortions in the political system that now limit the ability of governments to consider policy changes that might benefit the many at the (at least short-term) expense of the few. Governments have been effectively paralyzed and incapable of taking needed action. This too has undermined public confidence in the way market capitalism is currently operating.
    With the tightly coupled and increasingly massive flows of capital through the global economy, all governments now feel that they are hostage to the perceptions within the global market for capital. There are numerous examples—Greece, Ireland, Italy, Portugal, and Spain, to name a few—of countries’ confronting policy choices that appear to be mandated by the perceptions of the global marketplace, not by the democratically expressed will of the citizens in those countries. Many have come to the conclusion that the only policies that will prove to be effective in restoring human influence over the shape of our economic future will be ones that address the new global economic reality on a global basis.
SUSTAINABLE CAPITALISM
    Along with my partner and cofounder of Generation Investment Management, David Blood, I have advocated a set of structural remedies that would promote what we call Sustainable Capitalism. One of the best-known problems is the dominance of short-term perspectives and the obsession with short-term profits, often at the expense of the buildup of long-term value. Forty years ago, theaverage holding period for stocks in the United States was almost seven years. That made sense because roughly three quarters of the real value in the average business builds upover a business cycle and a half, roughly seven years. Today, however, the averageholding period for stocks is less than seven months.
    There are many reasons for the increasing reliance on short-term thinking by investors. These pressures are accentuated by the larger trends in the transformed and now interconnected global economy. As one analyst noted in 2012, “our banks, hedge funds and venture capitalists are geared toward investing in financial instruments and software companies. In such endeavors, even modest investments can yield extraordinarilyquick and large returns. Financing brick-and-mortar factories, by contrast,is expensive and painstaking and offers far less potential for speedy returns.”
    This short-term perspective on the part of investors puts pressure on CEOs to adopt similarly short-term perspectives. For example, a premier business research firm in the United States (BNA) conducted a survey of CEOs and CFOs a few years ago in which it asked, among other things, a hypothetical question: You have the opportunity to make an investment in your company that will make the firm more profitable and more sustainable, but if you do so, you will slightly miss your next quarterly earnings report; under these circumstances, will you make the investment?Eighty percent said no.
    A second well-known problem in the way capitalism currently operates is the widespread misalignment of incentives. The compensation of most investment managers—the people that make most of the daily decisions on the investment of capital—is calculated on a quarterly, or at most annual, basis. Similarly, many executives running companies are compensated in ways that reward short-term results. Instead, compensation should be aligned temporally with the period over which the maximum value