Thursday, February 09, 2012

Reap. Sow. All That.

Check this out. Companies are laying off workers and buying back shares - exactly what I predicted years ago (2009).

But this take is all wrong:
“Here we have all these companies obsessed, basically with keeping their stock prices up, and saying the best thing that they can do with their money is spend billions of dollars on stock. And my view of that is, any company that says that they have nothing to better do with their money, the CEO should be fired.”

A CEO's ultimate responsibility is delivering acceptable risk-weighted returns to shareholders by way of widget-making. If acceptable returns cannot be achieved through widget-making, a responsible CEO and BoD ought to return excess capital to shareholders for them to do with as they see fit. It is not the responsibility of CEOs to deploy capital at all times and in ever-increasing amounts, but to survey the opportunity set and deploy capital against reasonably attractive opportunities. Sometimes the opportunities aren't there at all, sometimes the opportunities are too risky for a company to undertake, like, for example, when a President sits in office that: is unrelentingly hostile to business; is prone to thuggish behavior towards business; is hyperactively expanding regulations on business; raises the cost of capital to business; makes unreasonable demands of business that he has no authority to make...

When faced with a too risky environment, the CORRECT thing to do is NOTHING and return capital that you don't need. These businesses are acting rationally and correctly. Let's not demonize them for responding correctly to the terrible environment that has been engineered by our policymakers and leaders. You want to crap all over risk-takers, then don't bitch when they choose to not take risks.


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