The massive fiscal and monetary stimulus introduced the world over in the past 15-16 months was put in place for sound reasons. Presumably not to lay the ground for big companies to carry on regardless while employees were being turfed out.
I thought 2020 was supposed to be a year of restraint and caution, where companies stockpiled cash to tide them over during economic lockdowns and revenue trauma while in the throes of a sharp recession.
How wrong was I? S&P 500 stock buybacks reached almost US$520 billion in 2020, according to S&P Dow Jones Indices. And so far this year, S&P 500 companies have approved plans for US$567 billion of buybacks, according to a Goldman Sachs report quoted by various sources. The bank is apparently expecting US$726 billion in buybacks for the full year.
In March 2020, in this column, I railed against companies going cap in hand to governments for state support at the beginning of the pandemic-induced recession after they had pulled out trillions of dollars of cash in previous years through buybacks. Acute criticism of buybacks has arisen in the wake of their thundering return. In the grip of a global pandemic that has destroyed millions of lives and livelihoods, condemnation of this practice is vindicated in a wholly new dimension.
The comment by Berkshire Hathaway vice chairman Charlie Munger at the company’s stockholders’ meeting last month was fascinating. He said that buying back stock “just to bull it higher” was “deeply immoral”. That echoed previous comments he’d made on this subject so in that respect was unremarkable. But he added: “But if you’re repurchasing stock because it’s a fair thing to do in the interest of existing shareholders, it’s a highly moral act, and the people that are criticizing it are bonkers.”
That’s pretty provocative at the same time as it’s thought-provoking. Far be it from me to naysay someone as revered as Munger but I don’t think I’m bonkers. Stock buybacks may be financially expedient but I struggle to find any reason for doing them as moral, let alone highly moral. By contrast, I have no issue defining the motivations for this self-engineered practice as immoral at this incredibly difficult time for so many.
Buying back shares to pump their price while at the same time mechanically enriching already wealthy stock-holding corporate executives through zero additional contribution or effort covers pretty much all buybacks, doesn’t it? It’s a practice that demonstrates how rigged and driven by greed the system is, especially over a period that has seen real wages for working people decline for years.
Berkshire's chairman Warren Buffett and Munger have in previous years very carefully defined “in the interest of shareholders” as being when the market values shares below a company’s intrinsic value and when the company has no other need for the cash. That sounds reasonable if highly nuanced – and pretty rare, I would have thought.
In a world still gripped by the pandemic, a scenario where a company has shares trading at a discount and has no other need for cash so buys back shares is hard to envisage. In his 2017 letter to shareholders, in support of buybacks, Buffett said he wasn’t aware of “any enticing project that in recent years has died for lack of capital”. Fast-forward to today and the goalposts have moved. The issue for today is defining what “enticing” is for companies and their shareholders in a pandemic and post-pandemic scenario.
Let’s be 100% clear: a company’s money belongs to shareholders. It’s theirs to do whatever they want. I’ve railed against wholesale regulatory blocks on capital distributions, although I do admit to potentially altering my stance and potentially sitting more on the fence on whether I support the imposition of carefully defined temporary blocks on capital outflows in highly stressed scenarios.
A fascinating emerging area of discussion has arisen around how companies define, to use Buffett’s language, enticing projects, especially in a pandemic.
Is increasing wages to employees in real terms enticing? Or doing away with zero-hours contracts? Or delaying mass redundancies until the economy improves while temporarily foregoing basis point pick-ups in profit margins? Or, if companies really must downsize their employee count, how about coming up with generous severance packages that go beyond statutory minimums? Funding community projects? Improving your environmental footprint? increasing your philanthropic engagement?
Probably not what Buffett had in mind but then again isn’t improving corporate reputation as a means of driving value also an enticing idea in today’s world?
I’m not postulating any sort of Marxian-style takeover of capital ownership; it’s much more about companies managing with a semblance of fairness, empathy and compassion towards the needs of employees and the communities in which they operate, particularly in times of stress and trauma.
That costs money. But in truth it’s no more than putting in place robust social and governance principles (the S and the G of ESG), putting your money where your mouth is, stopping the epidemic of cheap virtue signalling and following through on promises. The world is changing. Companies should too.