Assessing the Impact of Shareholder Primacy and Value Extraction: Performance and Financial Resillience in the FTSE350

This paper explores the relation between shareholder distributions, corporate investment, productivity growth and other performance metrics in large listed UK firms. Using a sample based on accounting information from 182 constituent members of the FTSE 350 from 2009 to 2019 the paper provides new insights into the impact of distribution policy on productivity, investment, operating performance and corporate resilience. Building on previous research (Baker et al 2020, Leaver and Murphy 2021), we explore whether a proportion of large UK firms follow their US counterparts in paying dividends and share buy-backs in excess of their declared income attributable to shareholders earned over a sustained period. In addition, we examine the productivity, investment, operating performance and impairment resilience profile of high distributing firms. Our key findings are: • The top 20% of highest distributing firms paid out 178 per cent of their net income attributable to shareholders between 2009-19. The next quintile distributed 88 per cent of their earnings, on average. These two quintiles represented between them 60 percent of the market value of the sample of 182 companies. • In contrast, the lowest quintile distributed just 37 per cent of their earnings, on average, and represented 7 per cent of the sample by market value over the same period. • The top 20% of highest distributing firms registered the lowest productivity increases, measured by sales growth per employee and value added per employee between 2009-19. • The top 20% of highest distributing firms also had the lowest growth in capex per employee between 2009-19 • The top 20% of highest distributing firms had the lowest net income margin and net income ROCE performance between 2009-19. • The top 20% of highest distributing firms had the highest gearing ratio • The top 20% of highest distributing firms had the highest goodwill to shareholder equity ratio, indicating their exposure to impairment ‘shocks’ We then explore the variable performance of the top 20% of highest distributing firms more granularly, noting sectoral variations. We identify the particular vulnerability of large outsourcing firms, who distribute aggressively, have low levels of productivity growth and low levels of investment, generate thin margins yet carry a lot of debt and goodwill. A number of implications follow: • The presence of a sizeable minority of large UK firms who distribute more to shareholders than they generate in net income attributable to shareholders is reflective of a more financialized corporate world. It suggests an enlarged role for financial engineering and creative accounting. • This may imply a growing disconnect between the ‘firm identity’ of a company i.e. its social and technological activities and relations, and its ‘corporate identity’ i.e. its reporting and legal personality. • If shareholder returns can be met from financial engineering and creative accounting practices, this may divert corporate efforts towards representational rather than operational concerns, crowding out investment-led productivity-enhancing strategies. More accountingled case study research is needed to explore this phenomenon. • A closer examination of the outsourcing sector, where individual examples of such practice have been found (e.g. at Carillion) would be one way of understanding the extent of these practices and its relation to the UK’s productivity malaise, particularly when public procurement is estimated to account for 12-13% of UK GDP. • Those seeking long term value in stock markets may need to be aware of the behavioural differences which the research shows can exist within as well as between sectors.