MacroScope

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

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┬ábeing 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.

from Davos Notebook:

Tigger bounces back in the boardroom

PWC_chart for blogCEOs are, of course, ebullient by nature.

So it's no surprise that confidence about growth prospects is bouncing back as emerging markets continue to barrel along and even sluggish developed economies show signs of recovery.

What is, perhaps, remarkable is just how far confidence has returned. The latest survey of 1,201 company bosses by PricewaterhouseCoopers shows it is back almost to pre-crisis levels.

But how much should we trust the bouncing boardroom Tiggers? There are also plenty of Eeyores in Davos, warning about fiscal deficits, growing economic imbalances and the rising threat from inflation.