> If companies don’t behave responsibly they should lose that privilege and the owners could be held liable for debt and these kinds of mistakes personally.
What mistakes? Is it a mistake to not keep a rainy day fund that will allow a company to weather a once-in-a-hundred-years shutdown of the entire economy? If this turns out to last a year, will you think it's a mistake that companies didn't keep a year's worth of reserves?
Especially since we're talking about SMBs here. Your local electrician, who has a staff of 3, should keep enough money saved up to pay all staff for the next year just in case?
You're saying a bunch of buzzwordy slogans kind of like "limited liability is bad" or "obligation to shareholders was invented by Friedman", but not dealing with the actual facts on the ground or the current catastrophe.
My analysis was in response to and in the context of large companies conducting stock buy backs which is in no way related to the position SMBs find themselves. So yes, those buy backs were mistakes.
In the last 20 years we have had at least 3 “once in 100 years events”, so yes, maybe corporations should be required to be more prepared for down turns as a condition of being granted the right to operate with limited liability.
These are not buzz words, I practiced law in New York and worked on the bankruptcy of American Airlines, Lehman, GM and others. I saw the conditions on the ground, the incentives management responded to; I saw $200M bonuses for traders that lost $1B, I saw how decoupled management was from the risks they engineered. There is a prevalent attitude that as long as the short term reward hits before they quit then they should do it.
Since 2008, airlines have experienced one of the most profitable periods in their history with drastically lower competition and low oil prices. What did they do with that? They wasted significant amounts of cash on buy backs. American Airlines reduces outstanding stock by 37%, thats massive. Why? Because executives are taught in business school that there is an obligation to maximize shareholder value. No such obligation exists in law and I am arguing that is really bad social policy.
Employees are going to be decimated as this unfolds, are they more responsible or in a better position to plan for these once in 100 year events?
> My analysis was in response to and in the context of large companies conducting stock buy backs which is in no way related to the position SMBs find themselves. So yes, those buy backs were mistakes.
Fair enough - I was mostly talking in the context of the article (SMBs).
And to be frank, it sounds like you're much more knowledgeable about this issue than I am, certainly in terms of actual practice.
That said, I still disagree with you and not sure why you arrived at your conclusion.
Let's put aside for a second the question of whether shareholder primacy is good social policy or not in the general case - and I agree with you here - it's not mandated by law, and even if it were, we could change that if we decide it's bad policy.
Your specific contention here is that companies are using buybacks to prop up their share price, and thus are reducing their reserves. And that they should keep more reserves around.
So firstly - tax structure aside, I've never understood why anyone treats buybacks differently than dividend payments. It's just a way of giving money back to shareholders. Do you agree with that or not?
Secondly, how much reserves should a company actually keep? If this situation/recession drags on for a year, will you be saying that it's bad that companies didn't keep a year's worth of reserves? Two years?
I think that's both an unrealistic demand, and a supremely inefficient one. No company could've, nor should've, had to predict this kind of disaster happening, and been prepared for it. I'm generally a libertarian, but this is exactly the reason we have governments - this kind of crisis should be prevent by the government - both in terms of preventing a pandemic in the first place, and in terms of fixing the economy once we're in this situation.
In other words, I don't see any good way to change the market to incentivize companies to keep tons of cash lying around as a rainy day fund - and I don't think it would make sense for so many companies to hoard so much money. Much better to have them return the money to shareholders, to go invest in new companies.
What mistakes? Is it a mistake to not keep a rainy day fund that will allow a company to weather a once-in-a-hundred-years shutdown of the entire economy? If this turns out to last a year, will you think it's a mistake that companies didn't keep a year's worth of reserves?
Especially since we're talking about SMBs here. Your local electrician, who has a staff of 3, should keep enough money saved up to pay all staff for the next year just in case?
You're saying a bunch of buzzwordy slogans kind of like "limited liability is bad" or "obligation to shareholders was invented by Friedman", but not dealing with the actual facts on the ground or the current catastrophe.