The ideology of shareholder supremacy has been around for more than four decades now. It was popularised in the 1980s and since then shareholders are empowered with various rights that have the ability to shape top management’s decisions. Companies are expected to maximise profits in the short-term for their shareholders, which can be achieved at the expense of long-term strategies and wider stakeholders’ interest. The expectation to maximise profits for shareholders has only increased the powerful force of short-termism in corporate culture.
Short-termism not only caused the last financial crisis but has also increased since then across the globe. A new culture of analysing and obsessing every quarterly or half-yearly report of listed companies has increased worries for top executives worldwide. Business leaders are managing spendings from quarter to quarter and pushing their sales at each quarter end to meet the numbers. This has increased ‘financial manipulation’ and fraud but has also reduced the ability of executives to invest in robust investments that might generate handsome returns in the long term. Capex is often deployed with the aim of improving a firm’s long-term competitiveness and market share. However, investors nowadays prefer a capex-lite business model that offers them good payouts in the form of dividends or share buybacks.
Citi’s global equity strategist Robert Buckland recently noted that “markets currently value a dollar paid out more in the form of dividends than a dollar reinvested in the form of capex.” In theory, dividends are discretionary, yet listed company’s payout ratios rarely decrease. Instead, executives aspire to have a more progressive dividend policy each year. Citi’s study indicates that globally listed companies will have an increase in capex-related investments for 2017 of 3%, whereas shareholder payouts are expected to rise by 5% over the same period. The study also highlighted an interesting trend of ‘capital expenditure to payouts’ ratio being popularised at the start of this millennium. US-listed companies had invested $2 for every $1 payout to shareholders in the year 2000, but this has now plummeted to $1 capex for every dollar payout to shareholder.
The Bottom Line
Asian companies, which had historically capex-heavy business models in the hope of generating long-term value now follow a similar pattern to its US counterparts. South Korea had a capex to payout ratio of 12:1 in 2000 which has now significantly dropped to 5:1. Japan’s ratio is 4:1 currently. Such Asian companies are now feeling the pressure to reduce their investment outlays and instead pay out excess cash in short term to their shareholders.
Capex in projects and human capital through the channels of employment, education, training programs, scientific research and product development are important for the organic growth of a company. But, through the lens of an investor, such expenditure on human capital is merely identified as ‘costs’ on financial statements and reduce payouts
Companies are currently operating in a fluid environment and face a unique mix of external dynamics ranging from political instabilities to environmental issues. In such challenging circumstances, a short-term focus adopted by organisations and their shareholders is not only detrimental to a company but also to the wider economy.
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