Cash is king, right? Maybe. But it could put your company at risk of being targeted by an activist investor. Significant cash on your balance sheet can also be a sign your business isn’t investing in itself or providing an attractive ROI to its shareholders. So, how can you effectively allocate capital and what do the C-Suite, boards and investors need to be thinking about? PwC’s Governance Insights Center has released a new piece of thought leadership to explain.
US companies are holding record sums of cash on their balance sheets. In fact, the total cash balance of S&P 500 companies was $1.45 trillion at the end of the third quarter of 2015, representing a 5.8% increase year-over-year. While this phenomenon indicates robust balance sheet health, it also raises questions about the best way to use this liquidity. And these challenges stimulate provocative questions and discussions about the most prudent use of company resources–taking into account different stakeholders’ expectations, the company’s individual circumstances, and the overall economic environment. Ultimately, companies need an effective capital allocation strategy that is well thought- out, linked to their overall strategy, and clearly communicated. And a key element of this capital allocation strategy is whether, and/or how, cash is returned to shareholders.
At the same time, shareholder activism has shifted into high gear. With about $173 billion currently under activist management, proxy contests are more frequent – as are settlements. Activists’ strategies often involve pressuring companies to take one or more of several actions: increase share repurchases, increase dividends, restructure, spin-off a division, or even sell the company. In many of these areas, including increasing share repurchases and dividends, activists have been effective in achieving their goals.
Read more here.
Visit PwC’s Governance Insights Center on the web.
On LinkedIn
On Twitter: @paula_loop
