TEXT OF COMMENTARY
SCOTT JAGOW: As far as you and me are concerned, I’d say, we can never have too much cash. But for public companies, that’s not necessarily a good thing. Especially if you’re a shareholder. Last few years, companies like Exxon Mobil, Goodyear and Microsoft have been stuffing cash in the piggy bank. And commentator Robert Cottrell has a bone to pick about that.
ROBERT COTTRELL: We hear a lot these days about big struggling companies with too little money. Too little to cover pension plans, pay health care obligations or give out raises, except perhaps to top managers.
That may be so. But a lot of big and generally successful companies in this country are wrestling with the opposite problem.
They have too much money piling up in their bank accounts. Too much cash in the bank sounds like it ought to be a good thing. And it is certainly better than too much debt. That was a common problem in the late 1990s when many companies were over-investing.
But now companies are going too far in the other direction. The job of a company is to make profits, and then to reinvest them in new business which can earn a 10 or 15 or 20 percent annual return.
Instead, cash-rich companies are parking money in the bank at five percent interest. That means they’ve run out of strategy. Or run out of confidence in themselves or the economy
If that’s the best they can do, they should hand money back to shareholders and let shareholders decide what to do with it.
Some of that is taking place through share buybacks and special dividends, but not enough.
One big problem here is that managers like hanging on to cash. It makes their life easier. The more cash they have, the less of it they need to borrow. That makes them subject to less outside discipline from lenders. And if they make a bad business decision — well, they can easily cover it up, and cover the cost.
With too much money around, just like anybody else, managers get lazy and wasteful.
Perhaps worse still, if shareholders do get impatient, a cash-rich company can create the illusion of growth by taking over another company at a fancy price. Most takeovers end up losing money for shareholders, but shareholders need a few years to find that out.
Well done managers, you might say, for having got themselves into this nice position of managing mountains of other people’s money.
They’ve piled it up by being tough and mean, even more so than usual, in the past five or six years of doing business. Now shareholders need to keep them tough and mean, by deciding what money they need to run the business well — and then demanding that they hand back the rest.
Robert Cottrell is an Economist staff writer based in New York. He comes to us by special arrangement with that magazine.