Big companies today are under the control of a Silent Generation of CEOs, reared under crisis conditions and rewarded more for quiet perseverance than boldness. As a result, even four years into an economic recovery and with global stock markets at new highs, big U.S. companies are in danger of taking too few chances to grow.
The Silent Generation is the name given to Americans born between 1925 and 1944, brought up amid the Great Depression and World War II to be sober, conventional and risk-averse.
While they have personally thrived during ebullient economic times throughout their careers and are quite wealthy and successful as a group, today’s CEOs largely assumed their leadership roles immediately before, during or in the wake of wrenching financial crisis, recession and the anxious repair process that has followed.
This worry-shrouded environment has conditioned corporate decision makers to operate their businesses defensively, and can help account for executives’ miserly spending on growth-directed capital projects and the unusual lack of merger-and-acquisition activity despite stock prices being at record highs.
To a greater degree than in any prior bull market, big companies now are content to keep lots of cash on hand, except when sending it back to investors in the form of rising dividends and stock buybacks – which end up shrinking a company’s financial profile while supporting measured per-share earnings and goosing CEO compensation.
According to a new report on CEO succession trends by The Conference Board, more than 60% of CEOs of Standard & Poor’s 500 index member companies assumed their roles since 2007, just ahead of the housing-and-credit meltdown.
That means most leaders have spent their time navigating around the implosion of financial markets, the deepest recession in 75 years and the constant threat of a European debt collapse or U.S. fiscal seize-up. The typical big-company CEO today has held the job for around six years, and the average tenure of a CEO upon his or her departure has hovered near seven or eight years since 2005. So the majority of the average CEO’s run as boss has been consumed more by avoiding risks than seeking out new opportunities.
At this point in an economic and financial-market cycle, many such new opportunities would include companies that CEOs attempt to acquire or merge with in order to expand product arrays, enter new markets or enlarge their corporate empire. Stock prices are high, which usually gives executives confidence and arms them with a valuable currency. Debt is remarkably cheap thanks to pliant credit markets. And with profit margins already at records, CEOs ought to be looking for sources of growth in M&A.
Subdued M&A activity
Yet M&A volumes so far this year have remained subdued, with the number of offers down 10% in the U.S. and dollar volume running roughly at the pace of 2012 – which itself saw activity roughly 20% below historical norms as a percentage of total stock-market value.
A handful of large deals – such as the $23 billion purchase of H.J. Heinz Co. (HNZ) by Berkshire Hathaway Inc. (BRK-A, BRK-B) and a private-equity firm, the proposed $6.9 billion leveraged buyout of BMC Software Inc. (BMC) and the contested going-private plan for Dell Inc. (DELL) – has bolstered the total of fresh deals. Yet these are sober transactions made by financial buyers rather than strategic gambits by expansionary CEOs.
Of course, M&A in itself is no magical growth formula for the economy or investment returns. Most big mergers don’t create long-term value. And the current picture could change soon if the buoyant stock market finally lifts corporate animal spirits with some splashy, transformational deals.
Yet it seems the dearth of deals is part of a general bias toward inward focus, restrained capital investments and unimaginative financial engineering. CEOs prefer to use their idle cash, and more borrowed at record-low rates, to acquire large parts of their own companies.
The buyback instinct
Last year S&P 500 companies bought back more than $400 billion worth of their own stock, bolstering per-share reported earnings and earnings-linked executive pay along the way. This year, new buyback authorizations are running at nearly double year-ago levels, according to Goldman Sachs (GS). Companies such as Home Depot Inc. (HD) and AT&T Corp. (T) have showed signs of being addicted to constant heavy buybacks to engineer EPS growth.
And the market has reinforced this buyback instinct among CEOs. A new S&P 500 Buyback Index – which tracks the 100 S&P 500 companies with the highest buyback ratios – has returned 240% since the March 2009 market low (when backdating), versus a 160% total return for the S&P 500 itself.
Apple Inc. (AAPL) is, of course, the latest and biggest exemplar of this trend, borrowing $17 billion atop its $140 billion in cash to spend up to $60 billion on its own shares over the next couple of years. Apple’s balance sheet is at a cash-laden extreme, and its deceleration in organic growth is dramatic by any standard. So CEO Tim Cook’s bit of apparently grudging paper-shuffling makes sense.
Still, too many other CEOs seem a bit too comfortable simply shrinking their corporate profile with shareholder cash and cheap debt rather than thinking hard about how to grow as this economic recovery matures.