Corporate responsibility: it’s time to start investing those record profits and cash piles

December 3, 2013

Corporate profits and cash piles have never been higher. But it’s not just an economic imperative that firms get spending and investing, it’s their social and moral responsibility to do so.

Three of the four sectors that make up the economy got battered by the global financial crisis and Great Recession:

  • - Households: millions of workers lost their jobs, households retrenched their finances and times got extremely tough
  • - Governments: they rescued and guaranteed the global economy and financial system at a cost of trillions
  • - Banks: often vilified for their role in causing the crisis and apparent lack of punishment or contrition, they’re being forced to undergo huge structural change that will cost them billions

The one sector that flourished – even more than banks (and bankers) – is the corporate sector. By some measures, it has never had it so good – profits, cash reserves and share prices have rarely been higher:

The problem is, hardly any of that is being reinvested and relatively few are enjoying the spoils. Management and shareholders are sitting pretty, thanks to dividend payments and share buybacks. According to financial market consultant and author Andrew Smithers, US companies invest barely twice as much as they  pay out to shareholders. In the 1970s that ratio was as high as 15:1.

Smithers argues this is largely down to the distorted and myopic monetary short-termism of management incentives.

“If you reward people for very short-term changes in profitability, you encourage the management to achieve those short-term changes. The present pattern of behavior from U.S. and UK publicly quoted companies is against the public interest. The public interest would be better growth and lower budget deficits,” he said.

 

 

He pointed to evidence that shows non-publicly quoted U.S. firms spend twice as much on investment as do their publicly quoted peers.

Smithers refused to be drawn on the morality of firms’ spending habits. But one man who’s a bit more vocal on morality made it clear last month what he thinks about the “tyranny” of unfettered markets, the ”idolatry of money” and the divergence between corporate Wall Street and the average man on Main Street.

“In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile … is defenseless before the interests of a deified market, which become the only rule,” said Pope Francis.

Having emerged from the ashes of the crisis in better shape and richer than almost anyone else, maybe it’s time companies put back in some of what they’ve got out. For their own benefit (long term) and everyone else’s (short and long term).

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