So ensuring the payment of dividends has become too big an issue for most public companies?
We’re not saying that shareholders are unimportant by any means, not least the readers of your magazine who are some of the biggest shareholders in the world, but rather you need to deliver a competitive return to your shareholders, otherwise they won’t give you their capital.
Something we see at the moment is share buybacks. Some say it’s useful to take profit, but others believe the money could be better spent investing in the long-term health of the company.
Again, this confusing of means and ends has led to a kind of distortion in incentives which has led to some dysfunctional behaviour. So if you’re a CEO, the surest and lowest- risk way to get your stock price up is to do buybacks and dividends. Now, there are of course very legitimate reasons to do buybacks and dividends; if you have capital you’re not making good use of, it should be
returned to shareholders who can make better use of it somewhere else. But the pendulum has swung so far that investment levels have significantly dropped off, and not just recently but over the past couple of decades. The capital stock of the economy is actually depreciating, and there may be inadequate long-term investment. This isn’t good for shareholders either; for one thing, if you’re a CIO and all this money is coming back from buybacks and dividends, you have to do something with it. You’re not just going to let it sit in cash, so a lot of it is just pushing up prices and not going back into the real economy.
Can investors do anything to change the time horizon and the reporting cycle?
Transparency is good, but it can lead to dysfunctional behaviour. For example, the requirement for CEO compensation to be put into proxy statements has created a race to the top and many investors have questioned whether that’s been good for them. So there are some pretty basic questions for investors about the current system.
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