Balancing Company Needs, Constituencies In Guiding Uses Of Tax-Cut Windfall

CEOs are making the headlines as they announce various forms of corporate largesse in allocating portions of their company’s federal tax-cut windfall to employee bonuses, factory projects and other uses that are applauded for their stimulative effects on the entire U.S. economy.

But boards need to be guiding the hands of their management teams in the process, ensuring a balancing of short- and long-term needs and paying attention to all corporate constituencies as companies decide how to disburse their gains from the Republicans’ cut in standard corporate taxes to 21 percent from 35 percent.

Done right, advisors say, boards could help deploy savings from the tax cuts that could benefit their companies and workers not only immediately but also for years to come.

As they do so, Deniz Caglar believes most of the tax-cut “savings” will end up going into pigeonholes that don’t get a lot of media buzz, such as employee raises and bonuses, but into uses that shareholders will appreciate most.

“There will be some pre-emptive investments into the business, but I’d expect the majority of this cash to be returned to shareholders.” – Deniz Caglar

“There will be some pre-emptive investments into the business, but I’d expect the majority of this cash to be returned to shareholders,” Caglar, principal with PwC Strategy and the author of the book, Fit for Growth, told Corporate Board Member. “Simply return the cash to shareholders and let them choose what to do with it.”

Buybacks and dividend increases for shareholders should especially be on the agenda of “low-growth, low-margin businesses with tough competition,” he said. “What would you expect management to get” out of excessive investments in the business? “I would expect boards of such companies especially to scrutinize investment requests vigorously.

In any event, Caglar said, boards “need to make sure that companies don’t waste the money in super-foolish investments.” They must ensure that management “doesn’t take this as free money. Every management team has a wish list. Now, if they feel like they’ve got a lot more money and spend it, you could easily go down a rabbit hole and spend the money on lower-return projects or ones that are inconsistent with what the company is – spread yourselves too thin and spend the money in the wrong places.

“But if the board and shareholders have a good relationship with the management team and trust them that they can grow the company with the right investments, [the C-suite] will have more latitude to convert the tax windfall back into the business.”

One area of investment of the windfall that could be especially promising for companies is “people programs” that help expand and develop the corporate workforce for the long-term, in an increasingly labor-tight environment that demands more and more skills of the typical employee.

“So many companies are benefiting from the change in tax law enough to give a serious look at investments int talent that probably have been contemplated for some time, but which many deferred because of no funding or other priorities,” John Bremen, managing director of human capital and benefits for the Willis Towers Watson consulting firm, told Corporate Board Member.