Companies as Financial Instruments: could the trend for share buyback undermine the Northern Powerhouse?

One enduring paradox which has accompanied the slow emergence from recession in the UK has been the disconnect between economic productivity and the pace of job creation. There have been numerous theories floated in the attempt to find the answer and thereby a remedy but none yet – at least to the Blog’s knowledge! – has been universally accepted.

It is currently being reported that there is growing concern at increasing levels of share buy-backs by listed companies with between 40-50% currently engaging in this activity. The concern is at such a level that a formal process of investigation is getting under way to identify the rationale behind the behaviour.

One obvious motivation is to increase the Earnings Per Share (“EPS”) Ratio, a common measure of the value of a business. The EPS Ratio is also, perhaps not coincidentally, often one of the performance measures which underpins senior executive remuneration packages. There are more benign explanations, including for example, the effect of consolidating and reinforcing the capital value of the company concerned.

Our point here, however, is that all of this tends to indicate (at least in part) a mindset in which corporates are regarded as financial instruments rather than as engines of economic growth.

Could this be at least a contributory factor to a rounded explanation of the “Productivity Gap”? Just a thought – but in the context of an economy which needs to match its productivity with its job creation and which needs to grow its way out of difficulty it is an interesting thought. 

From the perspective of the nascent Northern Powerhouse and the underlying drivers for devolution of powers to region cities in the UK, including significant increases in productivity and economic growth, do we need a change of mindset towards regarding and developing our businesses as levers of that growth rather than as the sole domain of the financial sector?

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