Here’s The Optimizer’s Roadmap for Better Governance of the Corporate Cash Register - and Share Buyback Programs in Particular
- First and foremost, public companies should develop, and disclose in plain English, their carefully-considered estimate of the “intrinsic value” of their stock: They should be forced to explain exactly how they calculated it - and how often they plan to review and revise if necessary. They should also be required to disclose revisions promptly - along with the impact the revisions will have, if any, on existing buyback programs.
- Second, companies should promise never to repurchase a single share of stock at a higher price per share than the intrinsic value - and keep that promise - as Warren Buffett has done at Berkshire Hathaway. While shareholder money may still go up in smoke, it will never do so because of a badly conceived and executed buyback program.
- Third, whenever shares are selling at or above their intrinsic value - and after all alternative investment opportunities have been considered by the board, as it always should when the stock is selling at a premium to intrinsic value - and after establishing prudent reserves for unexpected opportunities and contingencies, of course - public companies should adopt a policy to dividend all “excess cash” directly to shareholders – to whom the “extra cash” rightly belongs.
- Lastly, all public companies that have repurchased shares be required to report on their “stewardship” of the corporate cash-box in detail: They should clearly explain in plain English - on a quarterly basis, as well as on an annual basis, and over a five-year period - exactly how well their “investment” of “excess capital” in share repurchases actually fared - in terms of (1) “total net returns on investment” of the buyback dollars and (2) how these returns compare to other investments they made - such as investments in new capacity, new product development and launch, advertising and marketing - and, of course, (3) vs. any and all acquisitions they made along the way.
This exercise requires deep thinking - and some somewhat elaborate math that needs to be ‘made simple’ for readers who are not professional economists. But shareholders truly deserve no less from the corporate directors they elect and from the senior officers and directors whose pay they are asked to approve….and honestly, it ain’t rocket science to do it right.
We will make yet another prediction on this subject: Look for more and more analyses of buyback programs to be made - and to hit the news, as the Apple and GoPro buyback flops did - and look for this to result in more No votes on pay - and on Votes No against comp-committee directors too, as well there should be.