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Sad About a Buyback Ban and Pay Cuts? Deal With It

Conor Sen

(Bloomberg Opinion) -- Shareholders of companies such as airlines have a case to make when they argue that the coronavirus pandemic is nobody's fault, and therefore any entity that needs government relief shouldn't be penalized when it seeks public assistance. Why put restrictions on stock buybacks or executive compensation for a publicly traded company seeking aid if small businesses making similar requests don't receive the same restrictions? But in a situation like this requiring significant new legislation and spending, maintaining public trust and support is paramount. If penalizing shareholders and executives is what it takes to ensure political support and keep the country united behind the work of Congress, then it's worth doing, regardless of whether it's fair.

A key question is why publicly traded companies alone warrant restrictions. Nobody's clamoring for workers to pledge not to buy a car or smartphone until they pay back whatever assistance they get from the government. There's not even a requirement that they repay. The same goes for small businesses that have been forced to close because of voluntary or state-ordered mitigation efforts in the fight against Covid-19. What makes American Airlines any different?

The most common complaint about airlines seeking assistance is that they spent tens of billions of dollars buying back their shares during the past decade. If they hadn't done that, the argument goes, they'd have the money to survive this shock.

This specific argument against buybacks has only come about in response to the crisis. For most of the decade, the argument against buybacks was that it was shortchanging investment, and hence, economic growth. I'm not aware of anyone arguing in 2016 that airlines and hotels should hoard cash in preparation for a pandemic rather than buy back their shares.

Stockpiling cash also would have been untenable. Activists have spent much of the past decade pushing companies to take more shareholder-friendly actions. Just this month Elliott Management Corp. successfully pressured Twitter to agree to  buy back $2 billion of its shares. Companies that hold excess cash quickly find themselves under assault from activist investors demanding that spare cash be returned to shareholders.

Perhaps the public just hates stock buybacks. Maybe the tax code should be changed so that buybacks and dividends are treated equally because there doesn't seem to be the same level of outrage over dividends. AT&T pays more than $10 billion a year in dividends without earning the wrath of the public.

In all likelihood, the public anger over aiding large companies stems from both the level of buybacks during the past decade, and lingering resentment over taxpayer assistance to Wall Street in the financial crisis. Banks and investors got bailed out while Main Street was left with a jobless recovery and a decade of subdued wage growth. And during the ensuing decade, the public has rightly felt that big companies went right back to business as usual, focusing on shareholders and executive compensation rather than workers and the common good. It's not hard to see why there might be an uneasy sense of déjà vu, with critics of the financial-crisis bailout seeing an opening to exact some revenge for bad corporate behavior.

So it's understandable why there are demands that publicly traded companies seeking government relief should have strings attached to that assistance. What we're going through isn't a typical recession. It's a forced cessation of commerce as a way of fighting a lethal virus. Congress is close to wrapping up a third bill to help the economy weather this storm, but in all likelihood it won't be the last. States and local governments are experiencing a large decline in tax revenue and it may turn out that the $2 trillion in the current package is insufficient. Keeping the public engaged and supportive of new rounds of legislative aid is critical. If part of that effort means shortchanging some investors and limiting executive compensation, that's good politics.

To get through this fight, everyone's going to have to give up something. Medical workers are accepting great risk to their own health to treat sick patients. Families are having to cancel vacations and postpone weddings. Parents are working at home while taking care of their kids as schools close for weeks or months. Millions of workers are losing their jobs. Fiscal conservatives are having to stomach trillions of dollars in new spending. Progressives have to accept large companies getting government assistance. If that means executive compensation and shareholders of some companies gets restrained for a while to shore up public support for fiscal bills, nobody should shed any tears.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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