I am reposting this from the blog of the Productivity Insights Network, which is funded by the Economic and Social Research Council in the UK. I will provide a further elaboration on my thinking that flows from this work very soon.
A new report by Professors Adam Leaver and Richard Murphy of Sheffield University Management School and Prof Colin Haslam and Dr Nick Tsitsianis of Queen Mary, University of London, examines the investment and productivity performance of large UK listed firms who make outsized distributions to their shareholders. This report builds on their earlier work (Baker et al 2020) which found a significant minority of large US-based corporations made shareholder distributions in excess of their declared income earned over a ten year period.
Their project examines accounting information from 182 companies who were members of the FTSE 350 index in every year between 2009 to 2019. Those companies were ranked according to the ratio of paid out dividends and share buybacks to their declared net income attributable to shareholders over that period. They were then grouped into quintiles and the investment and productivity performance of those quintiles were then analysed.
The results show that the quintile with the highest distributions to net income ratio paid out on average 178 per cent of their net earnings over the decade reviewed. The next quintile distributed 88 per cent of their earnings, on average. Together these two quintiles represented 60 percent of the market value of the sample of 182 companies. In contrast, the lowest quintile distributed just 37 per cent of their earnings, on average, and represented 7 per cent of the sample by market value (Table 1).
Source: Thomson Refintiv database
The report then explores the variable performance of the top 20% of highest distributing firms more granularly, noting sectoral variations. It identifies particular weaknesses in large outsourcing firms, who distribute aggressively, have low levels of productivity growth, invest little, generate thin margins yet carry a lot of debt and goodwill.
A number of implications follow from the report. First, there is a sizeable minority of large UK firms who distribute more to shareholders than they generate in net income. This suggests a more financialized corporate world where financial engineering and creative accounting play an enlarged role. Second, there is a growing dislocation between the ‘firm identity’ of a company i.e. its social and technological activities and relations, and its ‘corporate identity’ i.e. its reporting and legal personality, with the latter being prioritised by some Boards to pay rewards in excess of those that the underlying entity appears capable of supporting. Third, if shareholder returns can be met from financial engineering and creative accounting practices, as this implies, this may divert corporate efforts towards representational rather than operational concerns, crowding out investment-led productivity-enhancing strategies. Fourth a closer examination of the outsourcing sector may be necessary to explore the extent of these practices and its relation to the UK’s productivity malaise, particularly when public procurement is estimated to account for 12-13% of UK GDP. And fifth, those seeking long term value in stock markets may need to be aware of these structural and behavioural differences which the research shows can exist between firms and sectors.