News 18th Nov 2020

Buy back better: corporates and regulators need to learn the lessons from this crisis

Rory Donaldson

Programme Manager, Business Integrity

Rory’s work aims to raise corporate anti-corruption standards. He leads project teams working on quantitative benchmarking and analysis, thought leadership and policy development.  He also engages at the senior level with companies to create a dialogue on the company’s priorities for improvement, and regularly chairs industry workshops.  Recent work includes leading a research project into the relationship between successful impact investing outcomes and strong approaches to anti-corruption, and the links between corruption and other ESG factors such as environmental and labour standards.

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Some corporate executives chased bonuses instead of ensuring their company could handle financial shocks, and taxpayers have been left to bail them out


During the 2008 financial crisis, corporate excess and poor risk management led to a near financial collapse followed by extensive government bailouts. The crisis was partly self-inflicted and partly contagion as the consequences rippled through the financial system. The COVID-19 pandemic is of course an external force, and one which has hit businesses hard. In response, the UK Government created the COVID Corporate Financing Facility (CCFF), among other measures, to provide much needed liquidity to larger businesses. 

There are numerous corruption risks surrounding any kind of government bailout. First, the conditions of bailouts, particularly the eligibility criteria, may have been unduly influenced by private interest lobbying. Second, individual businesses can dishonestly lobby for their company to be included in valuable categories such as ‘essential businesses’. Third, there are risks of fraudulent applications or, as is the focus of this article, risks that eligible businesses will not use the loans for their intended purpose.

What is the intended purpose of a government bail out? Typically they are aimed at the public interest; to maintain employment, help society weather the storm of financial shocks, and to support the transition to more sustainable business models. There is, however, the real risk that some of the bail out funds will be harvested, as they were in the 2008 financial crises, to provide returns to investors and management without meeting these public interest goals. One means of doing this is the share buyback, a traditional way of generating shareholder returns in the good times.


Why do companies engage in share buybacks?

There are several reasons why companies buy their own shares. First, they benefit investors, who can put pressure on companies to maintain the practice. Second, buybacks benefit senior management who either own stock or whose pay is linked to stock price. There are other reasons, such as when a company’s stock is genuinely undervalued, but these are not the core use case, indicated by the proliferation of buybacks over the last decade.

Share buybacks, along with the more common practice of paying out dividends, however, impact a company’s resilience as they redirect funds away from the company reserves. They also mean a company is not using the cash for investing in its own operations, creating more jobs, raising employee wages or investing in innovation. 

The scale of practice is now staggering. In 2019 alone, dividend payments from the FTSE 100 hit a record £110.5 billion – a rise of 11% over 2018 and more than double the £54 billion paid out in 2009.[1] The latest University of Sheffield-led research entitled ‘Against Hollow Firms’, finds that on average 28 per cent of the FTSE 100 companies paid out more in shareholder returns than they actually generated in net income in their last financial year. As the study argues, this practice is one of the key reasons large firms lack the capital buffers to absorb losses in downturns.  


Are governments putting any conditions on bailouts?

If this practice undermines the financial resilience of companies, are governments putting any conditions on the loans they are providing? In the UK, the Government has indicated that corporates participating in CCFF may be required to ‘show restraint’ on dividend payouts and buybacks, and also on senior pay. 

The Bank of England has published details of the CCFF awards it has made to many household name companies. The UK Government has, however, resisted greater transparency on the other recipients of COVID-related loans, including the £17 billion provided via the Coronavirus Large Business Interruption Loan Scheme (CLBILS) through the British Business Bank, loans which are largely unsecured and underwritten by the British taxpayer.[2] In order to prevent and detect fraud and promote transparency, TI-UK and partner organisations have written to the UK Chancellor to request the Government publish the names of all companies that have received government-backed loans.


What should corporations receiving government support consider?

Corporations in receipt of loans should consider the associated risks. First of all they should be aware that being the recipient of bailout funds creates additional public scrutiny; companies must be seen to be doing the right thing with the funds received, and act in the best interests of their employees, especially in wider context of a recession. As highlighted by our chapter in the US, there are lessons to be learned from the 2008 financial crisis, where billions of dollars believed to be dedicated to foreclosure mitigation instead went to executive bonuses and stock buybacks. 

In practical terms, as the law firm Mayer Brown points out, compliance staff in companies receiving loans will need time and resources to understand and monitor new obligations and conditions on the loans. They also need to be able to assess the risks surrounding the loans, including fraudulent or corrupt misuse of funds but also the reputational damage that misspending could bring. Companies should ensure that any concerns raised or whistleblowing is heeded early on, before the damage is done.

Transparency International recognises that increasing transparency helps companies develop trust and we advocate for this across ownership, organisational structure and country-by-country reporting in our latest Open Business report.  With this principle in mind, we recommend companies should be transparent on how the loan has been used to support the continued operation of the business. 


Where do we go from here?

Our Business Integrity team sees a lot of the hard work that companies are doing to mitigate their corruption risks, but the headlines remain full of stories of companies where the unchecked, short-term profit motive still dominates. If companies really want to be trusted and maintain their reputations, they need to aspire to operate in a way that is beyond reasonable criticism and not waiting for laws or public scrutiny to force them. Regulators too need to reflect; the pandemic has taken us by surprise, but the systemic risks some companies were running beforehand were well understood. The situation has contributed to the very real consequences we face, in the form of job losses and a recession, which now fall not just on the companies but on wider society too.