BOSTON/LOS ANGELES (Reuters) – Four U.S. public pension fund officials on Wednesday warned that McDonald’s Corp and other companies may be jeopardizing their own futures by returning excessive amounts of cash to investors via share buybacks.
The statement by the fund officials marks the first time in which some of the nation’s biggest institutional investors have joined up to urge companies to rethink their focus on immediate returns and aim for long-term growth.
The four officials – New York City Comptroller Scott Stringer, New York state Comptroller Thomas DiNapoli, Chicago Treasurer Kurt Summers and California Controller Betty Yee – are fiduciaries to pension funds with $860 billion in assets. Yee is on the boards of both the California Public Employees’ Retirement System and the California State Teachers’ Retirement System.
The statement singled out McDonald’s and comes a day ahead of the fast-food chain’s annual shareholders meeting.
It said McDonald’s is continuing an “aggressive” share buyback program even as it begins an overhaul of its operations.
The drive by the four officials runs counter to calls for more payouts from high-profile activist investors, including some that recently disclosed stakes in McDonald’s, which could set up a clash over how the country’s largest restaurant chain allocates capital.
The pension leaders, in the statement, said that companies’ productivity and wage growth had once matched and helped drive prosperity.
“Today, however, 95 percent of corporate earnings are being distributed to shareowners, prompting us to question whether companies are adequately reinvesting for sustainable returns over the long-term,” they said. “If the pendulum swings too far in favor of returning capital to shareowners, the future viability of the companies in which we invest may be placed at risk.”
The statement referred to “serious performance challenges” at McDonald’s.
McDonald’s Chief Executive Steve Easterbrook, who took over the top spot on March 1, earlier this month announced a turnaround strategy that included returning up to $9 billion to investors through dividends and share repurchases.
“McDonald’s is in turnaround mode and that is a business decision our leadership made in balance with other factors,” company spokeswoman Heidi Barker Sa Shekhem said on Wednesday.
Recent filings showed new shareholders in McDonald’s include activist investors Jana Partners LLC and Corvex Management LP, which have pushed for share buybacks elsewhere. Neither would comment about the restaurant chain.
DON’T OVERDO IT
McDonald’s annual meeting on Thursday, at its headquarters in Oak Brook, Illinois, is to include a shareholder vote on a measure known as “proxy access” that would make it easier for small groups of shareholders to run director candidates.
McDonald’s board opposes proxy access and said it could open the door to what it called “special-interest” candidates.
In their statement, the four pension fund officials said proxy access would help “hold boards accountable when they place short-term interests ahead of long-term value creation.”
Share buybacks have come under increasing scrutiny as academics and politicians criticize them as potentially short-sighted and argue that more profits should be used to shore up companies’ long-term growth and improve wages for employees.
Last year Laurence Fink, CEO of BlackRock Inc, the world’s largest asset manager, warned companies against overdoing dividends and buybacks at the expense of future growth. In April, U.S. Senator Tammy Baldwin, a Democrat of Wisconsin, asked securities regulators to review buyback rules.
From 2003 to 2012 S&P 500 companies used 54 percent of their earnings to buy back stock, or $2.4 trillion, with dividends absorbing another 37 percent of earnings, according to a paper by University of Massachusetts Lowell Professor William Lazonick published in the Harvard Business Review late last year.
“That left very little for investments in productive capabilities or higher incomes for employees,” Lazonick wrote.
On the other side of the debate, a generation of activist investors has had success pressing companies to step up buybacks and to increase dividends, both meant to boost returns amid a soft economic recovery.
Under pressure from billionaire activist investor Carl Icahn, for example, Apple boosted its repurchase program in April to $140 billion from $90 billion last year. Icahn this week said he is again pressing to increase that amount.
(Reporting by Ross Kerber in Boston and Lisa Baertlein in Los Angeles; Editing by Leslie Adler)
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