A recent proposal regarding corporate stock buybacks has reframed what has historically been viewed as a purely economic decision to more of a social issue. While it is early to determine whether this will evolve into a growing or lasting trend, it is becoming increasingly clear that corporate leaders and communicators may now need to grapple with the social repercussions of the financial decisions they make for capital allocation.
In a recent New York Times op-ed, Sens. Chuck Schumer and Bernie Sanders announced their intentions to introduce legislation that would “set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan.” In their piece, they ask: “Why wouldn’t it be better for our national economy if, instead of buying back stock, corporations paid all of their workers better wages and provided good benefits? Why should a company whose pension program is underfunded be able to buy back stock before shoring up the pension fund?”
The senators’ idea may be just a political trial balloon, unlikely to come to the Senate floor, and even less likely to pass, at least as currently proposed, with the current Senate. Certainly it has spurred debate over the appropriate way to view and regulate stock buybacks. Jason Zweig of the Wall Street Journal provides a historical context for a very different view of buybacks, reminding readers that in another era a notable Democrat, President Franklin D. Roosevelt, actually moved Congress “to enact an undistributed profits tax, penalizing companies for not maximizing their payouts to shareholders.” Regardless of whether you agree or disagree with both the senators’ premise for the proposal, or whether this is an apt solution, however, one thing is certain: like many other business decisions, the stock buyback may increasingly move from being a neutral act to one attached to a broader social context.
According to Larry Fink, influential chairman of investment manager BlackRock, “society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” Similarly, New York Times columnist David Brooks recently proclaimed we need a “remoralization of the market,” where “capitalism needs to be embedded in moral norms and it needs to serve a larger social good.” Some of this is playing out in the form of ESG (environmental, social, and governance) disclosures and frameworks, as the “S” in ESG gets increasing attention from company stakeholders and management teams are being asked to explain how they are handling things like gender diversity and community involvement.
When President Trump took office in early 2017, Wall Street was buzzing about how a pending tax overhaul would unleash a wave of cash for many American corporations. At that time, we wrote about the importance of a solid capital allocation plan and corresponding communications strategy. Now, with even more riding on what is expected from corporations, what are actions a company can start taking now to ensure that its capital allocation plan does not make it a target for criticism?
- Justify your financial decisions: Articulate the rationale behind capital deployment – including investments in the business, and its people – going forward. Expound on the “why, how, and when” – not just the “what.” Many companies that have improved communication around capital allocation have done so only after being criticized, and that is often too late. Don’t wait! Companies should work to improve their capital allocation communications proactively to justify the reasons for the timing and rationale of all their decision-making for M&A, buybacks, dividends, capital expenditures, and the like. Proactive transparency goes a long way and gets points from the right audiences.
- Talk with your base. As part of your ongoing interaction with your investors, ask them directly how they feel about your current capital allocation plan and ascertain what they see as strengths and weaknesses. Discuss the industry environment and make clear that you are listening to concerns raised. Extract actionable ideas from what they say.
- Think long term, and clarify your purpose and strategy: Because a growing number of stakeholders are calling on CEOs to communicate their company’s social purpose as part of their business model and corporate strategy, management teams must justify how they are helping employees, consumers and the communities in which they reside or operate. Refine your organization’s long-term value proposition and messaging and consider how capital allocation supports that strategy, as well as the company’s overall purpose. For example, ride-sharing companies not only aim to efficiently and affordably match riders with drivers 24/7 and give them a safe and convenient ride in an “asset-light” model, but longer term these companies claim to strive to solve social problems like reducing traffic congestion and ultimately emissions.
- Don’t forget the “S” in ESG: Employee relations, human rights, community involvement and supply chain labor standards are no longer things to discuss only internally. Use the full set of communications tools to amplify all the good things your company is doing for employees through effective communications and address the areas where your organization is falling short. There are a number of ESG frameworks to choose from to disclose what you are doing (GRI, SASB, TCFD, CDP), but no matter which framework you choose, you should formally communicate to investors and other core stakeholders how your company is responsibly managing ESG.
- Amplify employee perks: Communicate externally what soft and hard investments the company is already making – and will be making in the future – on employees (higher wages, paid medical leave, retirement benefits, worker training sessions, performance-based bonuses, mentorship programs, employee discounts on products, subsidized cafeterias, etc.) Work with your HR and communications teams to leverage the relevant content from internal communications channels and the careers/recruiting section of your company’s website for use in external communications to investors and other stakeholders. Include a slide or two on employee investments and perks in the annual report, talk about them in relevant interviews, and showcase them on your website. Increasingly, companies are being defined by what was previously considered the internal culture, so it’s time to proactively showcase externally how you are investing in your employees – in both big and small ways. Conversely, if your company isn’t currently investing as much as it should be in its employee base, look thoughtfully to see where you can make changes, set goals to remedy the situation, and then communicate those goals externally and how you are actively working to address the issue.
Companies must make the capital story a key part of their investor narrative, and they should be prepared to explain the social repercussions of the financial decisions they make for capital allocation. This now includes talking about how companies are helping and investing in employees. Whether Schumer’s and Sanders’ proposed legislation gets traction or not, being prepared on the communications front will help the company retain the confidence of its key stakeholders.