Perspective | Dodging Accounting’s Moral Hazards
As a callow youth, I was shoved into accounting to head off the juvenile delinquency for which I seemed otherwise destined. Accounting suited me: There’s always a right answer.
In the far-off 1960s, man, when people were experimenting with communes, drugs and rock ‘n’ roll, I was studying ethics and company law. It was a time when corporations and hippies shared a certain naiveté about how the world works.
I recall with great clarity the rule that a company could not reduce its share capital without the approval of the court. Beyond the legal niceties, in Britain, shrinking a company’s equity would have been considered poor form, not cricket. A company’s capital was evidence of its boast that it was a reputable organization that would be there when it was needed.
Being there when needed is, of course, the very raison d’etre of insurance. It thus seems odd that many companies, especially insurers, have in the past few years reduced capital via an aggressive program of “share buybacks.” More than $2 trillion of buybacks have been processed in the U.S. alone in the past few years, according to online reports. Repurchased shares are held in treasury for subsequent reissue or are cancelled.
I understand just how old-fashioned, in the age of Trump, is the notion of placing probity and integrity above all else. I suppose I get it. I just wish I didn’t.
It would comfort me to believe that the requirement for court approval remains intact, but I expect it doesn’t. The idea that companies would need to obey cumbersome laws seems almost laughable these days. After all, 2008 happened and no one went to jail.
This being the information age, I suppose I could easily enough find out whether court approval is still required for share buybacks, but it’s too depressing, frankly. The whole thing feels like one more nail to be hammered into capitalism’s coffin.
The moral dimension aside, share buybacks make perfect economic sense in this market. In the U.S., this is partly due to tax reform, which has enabled companies to more easily repatriate cash from abroad, making money available for buybacks.
A society that values Internet companies for their sex appeal and possibilities more than for their profits is unwilling to value stodgy insurance companies much beyond book value — and often less than that. Companies able to buy their stock at less than par are logically correct in doing so.
Directors act out of the purest motives in this regard, of course. They would never consider that share buybacks are one way of buttressing sub-standard performance that might, in turn, drag down executive bonuses. This would constitute what we in the tut-tut business call moral hazard.
It would have made sense in the ’60s to force directors to argue the case for reducing the capital on which customers relied. Plus, since people generally avoid the legal system like the plague, the idea of obtaining jurisprudential approval for an accounting trick would have had a seriously chilling effect on those considering such a course of action.
Having become, thanks to the passage of time, non-essential personnel, confined to quarters, I understand just how old-fashioned, in the age of Trump, is the notion of placing probity and integrity above all else. I suppose I get it. I just wish I didn’t. &