The Wall Street Journal's John Miller had an interesting observation ( Read Article here) regarding Bill Gates' language at the announcement of the Warren Buffett contribution to the Gates Foundation. Gates stressed the importance of giving "the wealth back" to society. Miller points out this is a typical cliche at such events, but he rightly objects at the strange use of this language. "Giving back" implies the wealth was made by "taking away". Did not MSFT create value for society and shareholders? Certainly over the life of the company this appears to be true.
Miller also raises the question of the usefulness of such Foundations to begin with. Many Foundations are mere conduits for political activism and other idiosyncratic causes. Buffett himself has been a lifelong supporter of one of the most ghoulish of "causes"---"population control". It is odd that a Capitalist would embrace such Malthusian views as they seem to be founded in fundamentally opposite views of the world. One concern Miller has is that Buffett will move the Gates Foundation in that direction. To Gates' credit his focus is on disease and malnutrition (which of course is the opposite of "population control") which apparently is where the biggest bang for the philanthropic buck lies (Strassel on Lomborg). In the same weekend edition of the WSJ, Strassel interviews Bjorn Lomborg who makes this point persuasively.
But back to "giving back". Maybe there is more to this phrasing than mere cliche speak. Perhaps there is some guilt that drives this language. But why should there be guilt? The answer could be that the guilt is deserved. One of the great 3 card monte schemes of all time has been the ubiquitous larding of option grants on employees. Of course there is nothing wrong with granting options to employees. But that somehow they do not constitute a cost to shareholders is of course absurd. In fact, this is another area where Buffett and Gates were at opposite ends of the spectrum. Buffett had long been a proponent of expensing options, while the entire Tech industry managed to put forth every imaginable ludicrous argument against it. GAAP rules are finally moving somewhat in Buffett's direction.
It should be the case that as long as the information is revealed, regardless of how it is accounted for, that investors have only themselves to blame for ignoring it. The 8 year total return for MSFT shareholders through 6/30/06 is minus 14%. How can this be? They generate enormous amounts of cash. Remember that 8 years ago was still 2 years before the tech bubble. Any investment after 6/30/98 is far worse. If you had an investment in a private company that generated the amount of cash flow return on capital that MSFT does, the investment would be outstanding. So what has happened?
The answer is that the apparent cash flow generation is not completely what it appears to be. Let's say a company generates $10 billion in free cash flow. If they then choose to pay that entirely to employees it is rather apparent that investors have received no cash flow. Or, lets say that the company purchases $10 billion of gold and gives that to employees. Again it is obvious that shareholders did not receive that cash flow. But what if a company buys $10 billion of its own stock and gives that to employees? Is it not obvious that shareholders have also not received any cash flow? In fact, it is the ultimate legal laundering scheme.
The first 2 examples would be considered expenses, but the 3rd one is not according to GAAP. Company makes $10 billion. Company buys $10 billion of shares from current shareholders. Company gives those shares to employees. Employees then sell shares back to market for $10 billion. Net impact is previous investors (in totality) received $10 billion, then upon the resale by employees paid it right back. No cash flow to investors. (Of course if the shares are not sold back, investors suffer $10 billion worth of dilution--still no cash flow).
Where does MSFT stand in this regard? I have not done a study but others have done some analysis.("Dirty Little Secret"). The Business Week article shows that MSFT has been quite active in this regard. While Intel seems to be the champ (their shareholder returns are almost identical to MSFT), MSFT has a high ranking on the the "Dirty Little Secret" scoreboard.
While the Buffett-Gates combo seems even stranger on closer inspection, Gates' "giving back" language may not be such a cliche after all. Although "giving back" is not the term that seems most appropriate. In fact he is not giving back at all, but taking from suckers and giving to his causes. Let's hope that 20 years from now there won't be any "dirty little secrets" emanating from the Gates Foundation.