Elizabeth Warren Can't Dictate How Companies Spend Tax Savings

(Bloomberg Gadfly) -- Senator Elizabeth Warren's latest gripe with Wall Street doesn't really stack up.

On Monday night, the Massachusetts Democrat appeared on The Late Show with Stephen Colbert. Her end game is to halt the Republicans' tax plan, so perhaps it's not surprising that one of her grievances was with U.S. companies planning to spend potential tax savings on dividends or stock buybacks, moves designed in part to support their share prices:

They don't say, "We're going to hire more people; we're going to invest more here in America." They say, "We're going to maximize our returns to our wealthiest shareholders."

But Ms. Warren's argument doesn't hold, and not just because she's saying that companies prioritize their wealthiest shareholders. Believe it or not, dividends and buybacks are non-discriminatory.

Rather, boards -- who sign off on these decisions -- have a fiduciary responsibility to act in the best interests of stockholders. Politicians should remember that companies aren't bound to channel potential tax savings into hiring sprees or U.S. expansion, just for the sake of it. In fact, even if tax cuts or rebates are dangled as an incentive to do so, taking such actions may instead destroy shareholder value. Plus, it should be assumed that any capital changes -- such as buybacks or dividends -- are made as a last resort, once a company has weighed its alternatives and sees no better way to spend its excess capital.

The conflict between Washington's agenda and Wall Street-listed companies isn't new. My colleague Brooke Sutherland has written that companies praised by President Donald Trump for putting "America First," such as Boeing Co., have actually been cutting jobs. Such contradictions are destined to occur as long as the largest U.S. companies exist in their current form, if only because management teams are accountable to boards who must act in shareholders' best interests.

There is a route that can by taken by companies wanting to take pro-America actions, although shareholders would likely revolt. Long-established companies have the option of changing their practices to join the likes of Etsy Inc. and for-profit college operator Laureate Education Inc. which are rare publicly traded "B corporations." Such companies sacrifice profitability in exchange for non-financial benefits such as social and environmental impacts -- and on-shoring U.S. jobs would fall into this category. Still, there hasn't been widespread interest in this type of conversion, and the bulk of the companies that are certified B corporations remain closely held (think Warby Parker and Patagonia). 

Let's assume there won't be mass conversions to B corporations. If that's the case, then regardless of what happens in Washington with the Republicans' plan, dividends will continue to be doled out. And buybacks, though currently in a lull, will persist. There's no reason to believe that U.S. public corporations will suddenly stop prioritizing shareholders -- nor should they.

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

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

To contact the author of this story: Gillian Tan in New York at gtan129@bloomberg.net.

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