Tax reform and the burden of excess cash

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Among the tangible benefits of the Tax Cuts and Jobs Act, including lower unemployment, higher job figures and rising wages, are excess cash available to corporations, according to Jamie Fowler, national managing partner of tax services at Grant Thornton.

“I spend most of my time working with boards and upper-level management,” she said. “There are four constituencies that have an interest in what to do with this excess cash, and that’s unusual in itself. It’s not usual for these four constituencies to be in alignment.”

The four groups are boards, management, shareholders and employees.

“In the order of frequency of how often I hear it, boards indicate their interest in use of excess cash is in mergers and acquisition activity, the funding of pensions or debt, and buybacks,” Fowler said. “When I speak to them I try to bring forth other areas that should hold equal consideration.”

“The first is technological advancement. Boards have been very concerned with cyberrisk. I recommend to them that this is the time to think about some of these areas they’ve been talking about the last couple of years, such as new ERP systems and core technology,” she explained. “The last area I’ve asked them to consider is in the area of culture. We found that spending time, energy and resources on culture advancement does pay off in a tangible way. Grant Thornton always had a great culture, but three years ago we decided to double down on using our resources on driving strategy around culture, and we found the results to be measurable and real. So we asked them to consider the use of excess funds in those two areas – technology and culture -- where perhaps it didn’t initially come to mind.”

“The second constituency is management,” Fowler continued. “Interestingly, in my conversations with upper-level management I found that management is aligned on two areas also interested in by the boards. The two areas are the funding of pensions and technological advancement.”

The third constituency, shareholders, is aligned primarily on one area only, according to Fowler. “Shareholders are aligned largely on stock buybacks,” she said. “Maybe every now and then they will say they can find alignment in cyberrisk and core technology as well, but it seems to be very heavily weighted toward buybacks.”

The fourth constituency, employees, is the least aligned with the other constituencies, according to Fowler. “All four have valid thoughts and concerns, but employees are the least aligned and the most disparate in their priorities compared to the other groups,” she said. “What employees talk about as priorities for excess cash are raises, bonuses, and then, interestingly, training,” she said. “And they want the training to be relevant.”

“The last priority they mention, which I find fascinating, is they have an interest in their companies investing in their respective communities, to make their communities a better place,” she added. “I’ve never seen such an interest in such differing priorities, all of which are valid.”

The excess cash generated by tax reform provides a chance for companies to do something that will add to their profitability going forward, according to Fowler. “They now have an opportunity to completely rethink the operating model of the company – where they do business, how they source goods and services, and how they gain capital. This is an opportunity like no time before to rethink the business from top to bottom and draw out efficiencies that tax reform affords through the rate reduction. A company that does this will find itself with new sources of funds in the future, beyond the one-time benefit they’re thinking of now.”

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