governance

Taking a short break from my crusade to get information taken more seriously in economics …

Yesterday’s Financial Times includes, on page 9 of the print edition, one of its regular “Market Insights” columns.  This is the space the FT allocates to sundry financial market types to opine on subjects of general interest to other financial market types.  It’s always a good read if you want to gain insight into how our magnificent financiers talk to themselves whilst allocating capital appropriately around the economy.  Well that’s what they see themselves doing, so let’s not nitpick.

The column yesterday was written by a luminary of the investment community, someone who sat on the board of a popular retirement fund, and who has written extensively on subjects related to finance, investing and so on through the years.  The subject was the possibility of eliminating the new tax that Congress just established on stock buybacks.  The new tax, all of 1% and thus hardly onerous, has stirred up a ton of ire in the corporate world where stock buybacks are viewed as a centerpiece of good “stewardship”.  That is if you consider stewardship to be centered purely on making shareholders happy.

Stock buybacks have become a go-to method for boosting stock prices at appropriate moments — dare I say just before the CEOs allocation of stock vests?  No that’s me being too cynical.  They have also become accepted as part of the arsenal of good governance of a modern corporation.  Excess capital ought, in the absence of new internal investment opportunities, be returned to the shareholders so that they can then re-allocate it in their portfolios to higher return projects.  It sounds so anodyne when you say it out loud that way.  And from within the hermetically sealed bubble of high corporate finance it is extremely sensible.

Except.

Let’s face it, it’s a tax dodge.  The corporation could pay the cash back as a dividend instead,  But that’s subject to a different tax rate.  Share buybacks make more sense.  They are “tax efficient”.  What an ugly and laden term.

So, the article’s author says, as the cash flows pile up and there are apparently no great opportunities for managers to use it within the day-to-day business, why not give it “back” to the shareholders?  And that new 1% tax is simply an unnecessary dabbling in management by an ungrateful and perhaps spiteful Congress.  Besides, gasp, it might make American business uncompetitive.  If all it takes is a paltry 1% tax on stock buybacks to make American business uncompetitive, then I suggest there are bigger problems to remove.

What the author doesn’t consider are alternative uses for that excess cash.  In his mind it is either retained within the corporation or it is “returned” to the shareholders.  I have other suggestions — I am trying to be helpful here.

How about lowering prices in order to reduce excess cashflow?  Pass the benefit along to consumers.  That would be one option.  It’s one that economics text books like.

How about raising wages?  Or, if you want to be conservative, paying out bonuses to your workers?  That would be another option.  The economics textbooks wouldn’t like this one unless each workers marginal productivity has gone up.  But we can try.

I am just trying to be helpful!

Either of those might get rid of the awful headache of having too much cash on hand.  Both might garner more support and/or enthusiasm for the corporation.  Just think: if people and workers look more kindly on the business they might be more apt to consider those alternative new products that the corporations is currently shelving.  You never know.  The business might grow and gobble up that excess cash.

Who knows?  It’s worth try.

Now, about the scare quotes I put around a couple of words up above.

I object to the trope that corporate cash is the property of shareholders and thus could be given “back” or “returned” to them.  Very very few of the current shareholders have ever contributed cash to a modern corporation.  They have simply bought paper in a secondary market.  They do not “own” the corporation’s cash.  That cash is the property of the business to use as it sees fit.  Like pay workers more.  The idiotic notion that good corporate governance begins and ends with the relationship the business has with the owners of whatever paper it issued in the past is one of the reasons that the economy is less vibrant than in the past.  Good governance extends beyond that.  Way beyond.  The error of blind attachment to the concept of shareholder value is a tragic one for workers, consumers, and society at large.

So let me repeat: yes, there are options for the use of the excess cash beyond stock buybacks.  Like lower prices or higher wages.

That a doyen of the investment community doesn’t comprehend that, or acknowledge it, is a sign of how far we have to travel if we are to rebalance the economy and society away from the real excess: our over-emphasis on finance.