Clayton M. Christensen: The New Church of Finance: Deeply held belief systems and complex codes must be changed

Published: Sunday, Dec. 9 2012 12:00 a.m. MST

In a more dynamic economy, the balance sheet would be in service to the income statement. It's the bottom line of the income statement that a company can actually deposit in a bank. In a growing and balanced economy, companies would be focused on the bottom line of the income statement and the top line of the ratios. But modern finance encourages CEOs to manipulate the denominator.

The religion of finance has emancipated cash from the balance sheets of companies, placing it in hedge funds and private equity shops. This migratory capital seeks very fast financial returns. The minute it's in, investors want to pull it out, and if they can pull out more capital than they put in, they are successful and profitable. But that's not the kind of long-term investment that creates growth and jobs.

Our current tax code encourages this kind of migratory capital. If you put money in a company for 366 days, investment returns count as tax-favored long-term capital gains. I would prefer to see the tax code restructured so that taxes on capital gains declined on a scale over a much longer period. Migratory capital would disappear if, when you left money in a company for a period of something more like 6-8 years, there might even be no tax on your gain. Such treatment would encourage capital to invest in empowering innovations, not flip in and out of sustaining and efficiency innovations.

The financial doctrines so zealously followed by American companies might help optimize capital when it is scarce. But capital is abundant. If we are to see our economy really grow, we need to encourage migratory capital to become productive capital — capital invested for the long-term in empowering innovations. But until deeply held belief systems and complex codes are changed, I fear we will continue to experience over-investment in efficiency and meager attention to empowering innovation, growth and jobs.

Clayton M. Christensen, a Harvard Business School professor, is consistently ranked as one of the world's leading thinkers on innovation. He is a member of the Deseret News Editorial Advisory Board.

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