On Squawk Box this morning, DealBook maven Andrew Ross Sorkin made some comments about the role investor activism played in getting companies to lever up their balance sheets during the boom times.
That this happened is indisputable, as conservative boards and executives were constantly getting pilloried for taking on too-little debt, paying out too low of a dividend or not executing stock buybacks rapidly enough.
The converse to this idea is that more entrenched, conservative boards, impervious to investor activists would’ve been more likely to resist the temptation of leverage. (If there’s any academic literature on this question, please let us know.)
Perhaps the most striking thing, though, is not just that companies and investors levered up during the boom times (that’s obvious, people always think that they’ll last forever) but that calls for more buybacks and debt were occurring very late into 2007, early 2008. We remember going to media industry banking-sponsored in early 2008, when it seemed pretty obvious that the writing should be on the wall, and yet investors would barrage management with requests for more buybacks. As we wrote, elsewhere, companies frequently complied.
Too bad more boards didn’t have the spine to stick with common sense.