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In practice company leaders can do pretty much whatever they like. The "best interest" test doesn't hold up in court, except in cases of shameless looting of a
by gizmo 4y ago
In practice company leaders can do pretty much whatever they like. The "best interest" test doesn't hold up in court, except in cases of shameless looting of a company by insiders.
Take a leveraged buyout for instance. The company takes on a perhaps fatal amount of debt, the employees stand to lose their jobs, the shareholders might benefit if the LBO works out, but they lose if the company goes bankrupt. Who wins? The vultures who organized the LBO, because their downside is limited and their upside is highly leveraged.
Company suffers. Shareholders suffer. Some insiders benefit. And it's still legal.
Another example. Executives award themselves generous option packages. Then they announce a massive buyback program, which drives the stock price up (by arithmetic). The executives' options go to the moon. Big companies like Facebook have incinerated hundreds of billions in shareholder value this way. But it's legal, shareholder interests be damned.
- tyre 4y ago> Big companies like Facebook have incinerated hundreds of billions with buybacks at absurd valuations at the expense of shareholders. But it's legal, shareholder interests be damned. Facebook returned profit to shareholders via buybacks. If you invest in a company, you expect to make a return. There are two ways to do this: dividends or selling your equity. Dividends drain cash from the company to repay investors. Stock buybacks drain cash from the company to repay investors. Both are in the interest of shareholders! What is the other option? Make profit forever and never return anything to shareholders? Then we’re not talking about an investment. It’s crypto-ponzi all over again.
- gizmo 4y agoShare buybacks when a company is overvalued are bad for shareholders. Share buybacks when a company is undervalued are good for shareholders. When you buy shares the price matters! This is still true when a company buys its own shares! During the 2021 mania the share buybacks accelerated, even though executives could easily have waited a year or two and sat on their money as the zero interest rate era was coming to an end. You don't want to do buybacks at $300 a share when your company is going to trade at $100 in a year. Because the shares you bought will then be $200 underwater. A buyback is a stock transfer between a party that believes the stock to be overvalued to the company. And in this case of facebook the seller was right and facebook was wrong.
- naasking 4y agoAnd on top of that, you don't want buybacks to happen at the expense of other operations. For instance, railway companies bought back a shitload of stock and then cut funding to inspections and other safety measures.
- dfxm12 4y agoWhat is the other option? You can sell your stocks to someone else. The company doesn't have to be the one to buy it. Also, remember, investments do come with risk.
- rootusrootus 4y ago> You can sell your stocks to someone else. The company doesn't have to be the one to buy it. But that defeats the purpose. The company buys back stock not to hold it, but to dissolve it and drive up the value of remaining shares mathematically.