Over the last decade, stock buybacks created a great deal of controversy. This single move showed how companies engineered things to reward shareholders. Taking advantage of record low interest rates, companies could borrow for next to nothing. This enabled them to preserve their cash while buying back the stock.
Stock buybacks, of course, help earnings since there are less shares on the market. Not only does this reward shareholders but CEOs gain since the companies' numbers look a lot better.
According to Jim O'Neill, this could be a thing of the past. As we move forward, the implications of such actions might not be tolerated.
Millennials are gaining more power as time passes. The first wave is in positions of authority. Some are starting to enter their prime earnings years. They also stand to inherent trillions of dollars over the next couple decades as their boomer parents start to pass on.
Their view is radically different from the Baby Boomer generation. Instead of having a "profit at all costs" outlook, Millennials feel that investing and business needs to operate in a different manner.
Thus, over the past few years, ESG (Environmental, Social, Governance) has taken on greater importance. Even large hedge funds got into the act, opting out of those stocks that are deemed harmful on these levels.
Over the past decade, stock buybacks were regularly announced while employees suffered flat wages, reduced benefits, and less job security. At the same time, R&D was often cut, instead opting for the easy path of financial engineering.
This could be pushing us into an era of stakeholder capitalism. Here is where many other variables are taken into account. The idea that shareholders are the only ones who matter is wearing thin on this younger generation.
“The whole role of share buybacks and the way that companies so dramatically are focused on managing their balance sheets, for example, I think that could become a bit a thing of the past,” O’Neill said.
https://www.cnbc.com/2020/06/22/jim-oneill-era-of-stock-buybacks-could-be-over.html
It is a shift that will put more pressure on CEOs to keep many different stakeholders happy. It is one thing to answer to a Board of Directors but a different matter when activists are knocking at your door.
How will this affect things going forward?
Companies that operate under the old model, if O'Neill is correct, will find themselves struggling in the new paradigm.
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