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Value Creation Blog

Why Do We Allow Public Companies To Steal From Their Shareholders?

Posted by Josh Patrick

nasdaqPart 5 In Our Series On Public Companies

The title of this blog entry is pretty strong.  It’s also something I believe strongly about.

We’ve recently heard about large companies who have huge amounts of cash offshore lobbying to bring this cash back, but only if they get a reduced tax rate.  We see public companies paying the senior executives as much as 400 times the salary of their rank and file employees.  We also see public companies not having to follow the same rules as private companies as it relates to retained earnings. 

All of these are theft from their shareholders, many who own this company stock in their 401(k) plans.  Let’s look at each of these three issues:

Companies holding cash offshore

There is almost 2 trillion dollars sloshing around corporate treasuries.  Much of this money is held off shore in the form of “foreign earnings”.  The reason it’s allowed to be held offshore is because many of the corporations who are holding money there don’t pay dividends to their shareholders.

We know that over the past one hundred years dividends have been a significant portion of returns for shareholders in companies.  In years past if you didn’t pay a dividend, your company could be easily out of favor.  Today, the opposite is true.  If you pay a dividend your stock price is often depressed.

Senior executives get paid too much

We’ve all read about CEO’s of companies who might make $80 Million dollars or more for a years work.  The problem isn’t only what the CEO’s make it’s also what the top executives in a company make.

When a CEO and the senior executives are over paid (and in my opinion almost all public CEO’s are overpaid) profits are reduced and cash that should be paid out in dividends to shareholders goes to those executives.  In some cases this is hundreds of millions of dollars per year.

Private companies have to pay dividends put public ones don’t!!!!

If you own a private C Corporation and you’ve retained a large amount of cash in your company, the IRS will make you pay a dividend to the owners of the company.  This is to make sure that private companies don’t retain too much cash that hasn’t been taxed.

For some reason, public companies don’t have the same requirements.  In addition, many public companies have a history of making disastrous acquisitions where the funds would have much better used in the pockets of its shareholders.  (Microsoft’s recent acquisition of Skype comes to mind.)

If public companies were forced to disgorge its excess cash to the shareholders of the company much of that money would end up in individual middle class people’s 401(k) accounts.  And, in my opinion that’s a much better place for it to be.

I’m curious as to your thoughts on this weeks blog posts.  Please feel free contacting me with any thoughts you might have.  You can reach me at Jpatrick@stage2planning.com or by calling 802-846-1264.

Josh Patrick

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Topics: wealth management

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