Responsibility through dissent
Q: Although they now have record amounts of cash on their balance sheets, corporate executives have been reluctant to hire and invest, complaining loudly of a new "anti-business" attitude in Washington. Is this public criticism courageous business leadership or an abdication of personal and corporate responsibility?
There are actually several different questions at play here, reflecting three different questions management teams like ours ask ourselves:
First, how much should we invest right now to generate future growth and returns?
Second, how should we finance that investment?
And third, where should we make those investments?
The high levels of cash right now are a blend of answers to questions one and two. It's safe to say that individual business trends, and overall macroeconomic data are contributing to some conservatism on the part of the corporate leaders we serve, leading them to refrain to from large scale addition of fixed costs (permanent labor and/or capital) to their businesses.
On question 2: It's also worth remembering that the events of the past couple years have changed the capital structure philosophy of at least some, if not many, large corporate CEOs and CFOs. The double whammy of late 2008: a seizing up of the debt and bank lending markets, extending even to the mundane business of placing commercial paper, coupled with sharp drops in demand and cash flow put many very solid companies at risk of a true liquidity crisis.
I think we are likely to see many companies live with a larger cash cushion and lower relative debt levels even if this affects some key return measures and defies some principles of modern corporate finance.
On question 3, management teams are able to, in fact are obligated to, deploy capital where it has the highest possibility of return. That is the cornerstone of "corporate responsibility." Some of the regulatory/governance proposals floating around Washington will put even more pressure on boards and companies to chase shorter term returns. This incorporates a wide variety of factors, proximity to key markets, infrastructure, rule of law and IP protection, labor cost and quality, tax structure, regulatory environment, risk, etc.
Government policies, from education and training to infrastructure to regulatory structures, play an important role in determining how well a country competes for the "next dollar" of operating or capital expense. Particularly important is stability and consistency across time, instability is the enemy of capital formation and deployment.
When business leaders squawk about government policy, they aren't abdicating responsibility, they are embracing it. It is far more preferable for them to point out policies (or even general tone) that threatens the formation and deployment of capital, than for them simply to relocate investments silently.
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