The fiduciaries of four large pension plans—two states and two cities—joined together in writing an open letter in their fiduciary capacity that criticized corporations' stock buyback activities, questioning the corporations' long-term viability when so much of their resources are devoted to rewarding stockholders instead of reinvesting in their businesses.
The signatories are New York state Comptroller Thomas DiNapoli, the sole trustee of the New York State Common Retirement Fund, Albany, which totals $181.7 billion; New York City Comptroller Scott Stringer, the fiduciary for the five city pension funds that make up the New York City Retirement Systems, totaling $163.4 billion; Chicago city treasurer Kurt A. Summers Jr., a member of the boards of the four city-sponsored pension funds, with about $11 billion in combined assets; and Betty Yee, the controller of California, an ex-officio member of the $308.1 billion California Public Employees' Retirement System, Sacramento, and the $191.2 billion California State Teachers' Retirement System, West Sacramento.
McDonald's annual general meeting served as the catalyst. As an investment in the plans' portfolios, the company came in for a drubbing, since, the letter pointed out, it is "facing serious performance challenges." However, "despite a recently announced and much needed turnaround plan, the company continues to direct capital towards an aggressive share buyback program."
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The letter said, "As fiduciaries to pension funds with more than $860 billion in assets and responsible for the retirement security of 4.3 million participants, we rely on companies to deliver sustainable, long-term value."
If a company fails to invest in its own future via "innovation, human capital, and growth," it calls its long-term survival into question, the letter said, and chooses rewards to shareholders over the health of its own business.
With "95 percent of corporate earnings … being distributed to shareowners, [that] prompt[s] us to question whether companies are adequately reinvesting for sustainable returns over the long-term."
Companies with aggressive buyback programs, in addition to McDonald's, were put on the alert by the letter writers that plan fiduciaries are closely watching what they do—particularly since there is more than one way to achieve shareholder value.
"Buyback programs are one effective means to return capital to shareowners," they wrote. "However, in order to maximize shareholder value for the long-term, companies must also adequately invest in the future. Growth requires investment."
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