US companies rewarding shareholders while cutting thousands of jobs

‘Who should expect that their continued employment will be the company’s first concern’

While thousands of their workers are filing for unemployment benefits, companies are rewarding their shareholders with millions in cash dividends.

Since the coronavirus pandemic began, Caterpillar has suspended operations at two plants and a foundry, Levi Strauss has closed stores and toolmaker Stanley Black & Decker is planning layoffs and furloughs.

Steelcase, the office furniture manufacturer, and World Wrestling Entertainment have also shed employees.

As the pandemic squeezes big companies, executives are making decisions about who will bear the brunt of the sacrifices, and in at least some cases, workers have been the first to lose, even as shareholders continue to collect.

Executives say the layoffs support the long-term health of their companies, and often the executives are giving up a piece of their salaries.

Furloughed workers can apply for unemployment benefits, but distributing millions of dollars to shareholders while leaving many workers without a paycheck is unfair, critics argue, and belies the repeated statements from executives about their concern for employee welfare during the novel-coronavirus crisis.

Caterpillar, for example, announced a $500m (£401m) distribution to shareholders 8 April, about two weeks after indicating that operations at some plants would stop.

The company declined to say how many workers are affected.

“We are taking a variety of actions globally, but we aren’t going to discuss the number of impacted people,” Caterpillar spokeswoman Kate Kenny said in an email.

The Caterpillar website advertises that despite the crisis, the company’s “dedication and service to the safety, health and well-being of our team and the communities they serve remain strong.”

The coronavirus has turned prevailing economic logic on its head: Grocery clerks, meat plant employees and nursing home aides, though generally at the bottom of the pay spectrum, have been deemed “essential” and compelled to take risks while others stay home.

This spate of dividends is also likely to revive long-standing debates over economic rewards.

“There are no hard and fast rules about this,” said Amy Borrus, deputy director of the Council of Institutional Investors, a group that argues for shareholder rights and represents pension funds and other long-term investors.

Many large US companies choose to issue a regular, quarterly dividend to shareholders, often increasing it, and they boast about these payments because they help keep the share price higher than it might otherwise be.

Those companies might be reluctant to announce that they are cutting or suspending their dividend during a crisis, Ms Borrus said.

“Companies have to be mindful of the optics of paying dividends if they’re laying off thousands of workers,” she noted.

Others see the tradeoffs in starker terms, and William Lazonick, emeritus economics professor at University of Massachusetts at Lowell, has been one of the leading critics of companies that distribute cash to shareholders through stock buybacks and dividends rather than reinvesting the profits into employees, innovation and production.

For companies continuing to issue buybacks and dividends during the crisis, he said, it is business as usual.

“In a downturn like this, the first thing a company should do is give up any distributions to shareholders,” Mr Lazonick said. “But in a crisis, companies will differ. Some will care...and some will rob the workers, who should expect that their continued employment will be the company’s first concern.”

While some companies have suspended payments to shareholders during the coronavirus pandemic, others have not.

Caterpillar announced on 26 March that due to the pandemic, it is “temporarily suspending operations at certain facilities.”

Two plants, one in East Peoria, Illinois, and one in Lafayette, Indiana, were stopping, as was a foundry in Mapleton, Illinois, according to news reports.

About two weeks later, the company announced that it would be giving shareholders $500m (£401m) in cash dividends.

“We are taking a variety of actions at our global facilities to reduce production due to weaker customer demand, potential supply constraints and the spread of the Covid-19 pandemic and related government actions,” Ms Kenny said by email, referring to the disease caused by the novel coronavirus.

“These actions include temporary facility shutdowns, indefinite or temporary layoffs.”

Similarly, Levi Strauss announced 7 April that the company would stop paying store workers, and about 4,000 are now on furlough. On the same day, the company announced that it was returning $32m (£25.7m) to shareholders.

“As this human and economic tragedy unfolds globally over the coming months, we are taking swift and decisive action that will ensure we remain a winner in our industry,” Chip Bergh, president and chief executive said that day.

Stanley Black & Decker announced on 2 April that it was planning furloughs and layoffs due to the coronavirus, and two weeks later, it issued a dividend to shareholders of about $106m (£85.2m).

“Throughout our company’s 177-year history, Stanley Black & Decker has weathered a series of exogenous shocks and thrived,” president and chief executive James Loree, said in a statement announcing the job cuts.

“We are in a strong position as we face today’s challenges and are taking the necessary actions now to protect our employees and the business while positioning the company to thrive into the future.”

The notion that a company’s primary purpose is to serve shareholders gained prominence in the 1980s and has been criticised in recent years, even from business executives.

In August, a group of companies from the Business Roundtable, an advocacy organisation composed of the chief executives from dozens of the United States’ largest corporations, announced that they were dropping their insistence on “shareholder primacy – that corporations exist principally to serve shareholders.”

In a statement signed by 181 chief executives, the group said companies would consider customers, suppliers and workers as well.

“Each of our stakeholders is essential,” their statement said. “We commit to deliver value to all of them.”

But of the executives that endorsed the Business Roundtable statement, at least three of their companies are among those that have implemented at least some furloughs while issuing dividends: Caterpillar, Stanley Black & Decker and Steelcase.

Steelcase executives announced 24 March that the company was reducing or suspending operations at plants in Michigan, Texas, Pennsylvania and California.

The company, which employs about 12,000 people, said workers in Michigan would be on a temporary layoff, but it did not disclose the status of workers in the other states. The same day it said it was issuing a dividend of about $8m (£6.4m) to shareholders.

The Steelcase dividend was smaller than usual, but it followed another payday for shareholders: The company earlier in March had bought back $38m (£30.5m) in shares.

In a statement announcing the coronavirus measures, the company said it “is taking these actions in an effort to avoid permanent headcount reductions so the company and its employees can come through this crisis together.”

Steelcase did not respond to requests for comment. Nor did officials with World Wrestling Entertainment, which furloughed workers and released about 20 wrestlers, including Kurt Angle and Luke Gallows, and the next day announced about $9m (£7.2m) in dividends for shareholders.

Some companies that have furloughed or laid off workers have also suspended the buyback and dividend programmes that reward shareholders: The Gap, which has furloughed tens of thousands of employees, announced in March that it was suspending its dividend. So did Darden Restaurants, which owns Olive Garden and LongHorn Steakhouse.

American Eagle Outfitters deferred its dividend and halted its stock buyback program.

Williams Sonoma has closed stores but continued to pay its full-time workers.

Other companies, such as fashion retailer Ralph Lauren, point out that while they have furloughed workers and recently issued a dividend, the decision to issue a dividend was made 13 March, before the magnitude of the coronavirus crisis was fully apparent.

“This was before we closed our stores for what we then anticipated would be a two week period and when our associates worldwide were being compensated with their normal pay,” a company representative said in a statement.

The company also noted that its executive chairman, Ralph Lauren, would forgo his entire salary and that the company had also suspended stock buybacks.

Corporate decisions to suspend dividends and buybacks are complex, however, and it’s difficult to know whether these suspensions of dividend and buyback programmes were motivated by a desire to conserve cash in anticipation of bad times, and how much they are prompted by a sense of obligation to employees.

Over recent decades, the mandate to “maximise shareholder value” has become orthodoxy, for many, and it’s often unclear what motivates to companies to pare dividends or buybacks for shareholders, according to Mr Lazonick, the University of Massachusetts professor emeritus.

He said: “I would not want to hazard a general explanation of this laudable, but unfortunately aberrant, behaviour.”

The Washington Post