Is Too Much Cash a Risk?

At what point does holding a large amount of cash go from being an asset to a liability?

It’s a question a lot of board directors are asking these days. At the end of the second quarter, S&P 500 firms held a record-high $3.8 trillion in cash and cash equivalents on their balance sheets. Now, with inflation normalizing and interest rates easing, directors are pressing CEOs and leaders about capital-allocation plans for next year and beyond. The fear, say experts, is that holding on to the cash for too long could arouse unwanted attention from activists. David Larcker, an accounting professor emeritus and director of the Corporate Governance Research Initiative at Stanford University’s Graduate School of Business, says activists often target companies holding substantial amounts of cash that they aren’t putting to work for shareholders. “Activists have lots of ideas about what companies could be doing with their money,” says Larcker.

Companies didn’t build their cash reserves overnight, of course. Much of it was brought back from overseas, in response to pre-pandemic tax cuts. Over the last few years, firms have also cut back on expenses, laid off workers, and slowed investments, among other measures. At the same time, firms have become more conservative about committing to major purchases or capital-allocation plans, due to the volatility and uncertainty of the economic and political environments, combined with the rapid rise of AI and changing nature of work.

But conditions are changing. Lower inflation means companies are paying less for goods and services. As interest rates decline, cash in the bank won’t earn as much, and borrowing will get cheaper. Following upcoming national elections, many experts believe, leaders in the US and elsewhere will need to make some hard choices about what to do with their cash. That means smart boards—or worried ones, depending on your point of view—are already asking questions about next year’s investment plans. “In companies where there isn’t a plan, that’s where the trouble starts,” says Anthony Goodman, head of the board effectiveness practice at Korn Ferry.

Signs suggest that companies have already begun reopening their coffers. Global M&A activity jumped 17% through June 30, for instance. Share-repurchase programs and dividend payouts are also on the rise, in terms of both value and corporate buybacks. In the view of Jeff Constable, co-leader of the Global Financial Officers practice at Korn Ferry, firms are putting money back to work because valuations for acquisition targets and share prices for buybacks are normalizing. “As more certainty comes into the system, more companies will ramp up spending,” he says.

How leaders plan to spend that money is what concerns boards. Share buybacks and dividends will only go so far with investors. And if their scrutiny of the big tech giants’ spending on AI is any indication, investors are paying close attention to return-on-investment potential. Michelle Lowry, a professor of finance and corporate-governance expert at Drexel University, says directors are keenly aware that they could individually and collectively become targets if companies don’t spend their cash wisely. There’s a long historical record, she notes, of failed mergers and acquisitions involving leaders who moved too quickly—whether to mimic a move by a competitor or to pursue the short-term goal of keeping shareholders at bay rather than the long-term interests of the company. “Boards need to be continually asking, ‘What are we doing with our money?’” says Lowry, “and, more importantly: ‘Should we be doing anything different?’”

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