Dear Lawrence,

Thank you for taking the time to read my work and thank you for taking the time to express your views on the matter as well. As you will no doubt have noted, I did not argue that share buy-backs “only” benefit senior executives, but when the compensation and incentive structure of most C-suite level executives are inexorably linked to share price, I would argue that there is a clear and present danger for executives to act in accordance with their incentives.

You are right in pointing out that a CFO’s role is balancing debt to equity ratios, however the point I was trying to make from this piece is that the use of debt for share buy-backs does little to add value to the capital stock of a company as compared with an acquisition (which has the potential to increase market share), for capital expansion, for research and development and for product development. I would argue that even an increase in wages for workers would add more value to a company than a debt loading for the purposes of a stock buy-back.

I would also humbly argue that to draw parallels between high yield debt and preferred equity would be too much of a bait-and-switch. For investors who are willing to ride along with the risk-reward ratio inherent in an investment into the stock of a company, with its attendant volatility and earnings multiple potential, stock is stock. But for debt holders who are looking for a coupon rate, whether one is high or low, depending on the credit worthiness of an enterprise, there are clear and obvious differences in the investment rationale. And in a liquidation scenario, unsecured creditors (at the very least) are ahead in the line of equity holders and rightly so. Therefore to blur the distinction between debt and equity, or worse, to make the case that high yield debt should be viewed as a convertible bond from an investor’s standpoint is unconscionable. The two instruments were built for different purposes. It is an attractive argument nonetheless from the standpoint of companies looking to get the best of both worlds, but does little to protect the interests of investors and shareholders.

You are correct in pointing out that executives are hard pressed to find better use of their money than by buying back shares, but therein I would argue that it is the role and responsibility of leadership to put that creditworthiness and cash balance to more productive uses. The argument cannot be that “we couldn’t find anything else to invest in so we’ll just buy back our own shares.” That a CEO of an S&P500 company makes in 4 days what an average American worker makes in one year should argue strongly for greater responsibility on the part of leadership to fund growth, warts and all. Yes, mistakes will be made, yes not all investments will yield returns, but it is precisely the responsibility of leadership to take on those risks, manage them, assess the potential for investment and growth and to explore new areas that is why they are remunerated so highly.

I thank you for taking the time to engage me in debate and discussion and for enlightening me in areas where perhaps my understanding has been found to be wanting, or my articulation of viewpoints less than satisfactory. Thank you for taking the time as well to reason and present your thoughts and as always, I appreciate it.

Yours,

Patrick Tan