Bailouts are coming for Boeing (BA) – Get Report and the airlines.
Now, the term “bailout” is a somewhat politically motivated misnomer; the money the government provided during the 2008 crisis was repaid with interest. So to be clear: this is a loan. It’s more accurate to think of it as an investment where the government will get exceptionally favorable terms and equity stakes in companies it saves. So while the anger is well understood, please don’t view this though it’s free money for corporations.
However, having the government step in and quasi nationalize companies so they don’t go bankrupt is not capitalism. A competently run business should be situated to weather economic storms as best it can. And what isn’t remotely acceptable is companies without strong balance sheets and cash flows taking capital they may need to survive and spending it on share buybacks.
Companies buy back their shares as a form of returning capital to shareholders, similar to a dividend. When they do so share count is reduced, increasing earnings per share, and driving up stock prices in the process. This is often preferable to sending money outright to shareholders via a dividend because you’re not taxed on unrealized gains when stock prices increase, but you are when a dividend is disbursed.
Boeing has spent about $44 billion on buybacks over the last six years, representing 74% of its free cash flow; it’s now seeking $60 billion in federal money. The airlines, which have a history of bankruptcies, spent 96% of their cash flow on buybacks totaling about $50 billion over the last 10 years; they are now seeking $50 billion from the government.
When Boeing and the airlines get their bailouts, the government will have effectively subsidized these companies repurchasing shares. Executives, who typically receive much of their compensation by way of stock grants, will have enriched themselves by means of the taxpayer. No one could have foreseen this virus, but that’s not the point: you should be reasonably prepared for outlier events. The hammer needs to be brought down hard on executives whose buyback decisions have now placed their companies in need of federal money.
This kind of wanton recklessness by executives needs a reckoning. This isn’t criminal, so jail or arrests are not the answer. So how do you end this malpractice for companies that require government credit to stay alive?
You stop this corporate negligence via onerous financial punishment. Self-preservation plays a role in every business person’s decision making; this motivation needs to be leveraged to disincentive this behavior. Here are some potential deterrent repercussions for executives that institute share buybacks and end up needing government loans:
- Bar executives from leadership positions in public companies ever again. Depending on the degree of negligence, make it apply to private companies as well.
- Bar the board members who authorized the buyback from ever serving on a public board again, perhaps private too.
- Claw back all cash bonuses. This should be done either over the timeline that the company effected the buyback programs, or the entire duration of the executive’s employment. Claw back all compensation provided to all members of the board who voted for it as well.
- Disgorgement of all company stock. Taking back all the company stock that executives received throughout their employment with a firm will hurt a lot. This alone may act as an effective deterrent of heedless buybacks. In many cases, this comprises the majority of executive compensation, and is often tied to performance incentives linked to higher EPS. Apply this to board members, too.
You could also employ a company-based restriction, such as multi-year or lifetime bans from subsequent share repurchases as Mark Cuban has recently suggested, and something Trump is open to. This is a fine additional penalty, but by itself would be ineffectual in ending the self-interested motivation that underpins this behavior going forward.
Banning companies that get bailouts from buybacks does nothing to punish the executives who made the decision. They’ll likely get fired and still enjoy the fruits of their misdeeds as they depart the wreckage they left behind. Companies don’t make decisions, people make decisions. People should be made the target of these sanctions.
The name-and-shame approach doesn’t really work. Once the two-week news cycle forgets about it, the departed executive spends his remaining years slowly floating away on his golden parachute. If you have Apple or Berkshire Hathaway-like balance sheets or robust non-cyclical cash flows, by all means repurchase as much as you see fit; there is nothing wrong with the practice itself.
But be forewarned if you think taxpayers will ever have to help bankroll this decision.