A global pandemic is not a signal that it's OK to continue business as usual. But hundreds of public companies seem to be treating it that way.
For many companies, taxes and regulations represent an extended game of cat and mouse. When a new rule comes along, companies employ a flotilla of accountants and lawyers to figure out why, actually, the new rule doesn't apply to them. It's about obeying the letter of the law, not the spirit of the law.
Take that worldview, throw in a $349 billion relief program meant for small businesses with a set of vague guidelines, and maybe the outcome is predictable. As of April 29, it appears that 267 public companies decided that technically, they were entitled to some of this money, and managed to get $954 million of it. Meanwhile, thousands of small businesses have been unable to even get an application in front of a lender. At an average loan size of $206,000, that $954 million could support more than 4,600 small businesses that actually need the money.
If ever there's been a time for public companies to forget about the technicalities that allow them to raid the public purse, to consider the larger ethical implications of their actions, and to ask their advisers to stand down, this is it.
On April 23, the Treasury Department said publicly traded companies would have until May 7 to give the money back. On April 29, Treasury said it would review all loans for more than $2 million. That's about 26,000 loans, which represents only 1.6 percent of the number of loans but 28 percent of the dollars paid out. Treasury even threatened criminal penalties for those who didn't meet the program's criteria. But some, like real estate investment trust Ashford, say they intend to keep the money. Here's why that's wrong.
This money was not intended for them
AutoNation, a company with $3 billion in market capitalization, told Reuters it was "clearly eligible" for the $77 million in loans it got from the Paycheck Protection Program (PPP). That sort of rationalization is far too common. It's like saying that if you find a wallet on the street, it's OK to keep the money for yourself. Sure, it's legal, but let's not kid ourselves--we all know it's wrong. And if someone catches you doing it, you're smart to find a way to return the money, which is what AutoNation now says it will do.
In trying to make more small companies eligible for the PPP, Congress loosened the typical restrictions governing who can apply for loans backed by the U.S. Small Business Administration. They wanted to include franchisees, for example. So instead of requiring a company to have fewer than 500 employees, they required fewer than 500 employees per location.
Congress made a similar change for companies in the hotel and restaurant industries. That led Ashford and its related companies, with a market value of more than $2 billion, to get at least $51 million in paycheck protection loans. Ashford's own fact sheet says it will probably only "minimally qualify" for loan forgiveness, suggesting that the company will not use at least 75 percent of the loan for employee payroll.
Public companies have other options
Public markets offer sources of funding that private companies can't access, such as issuing new stock or bonds. Some of the public companies that got PPP loans are small, with market values of less than $10 million. These other options may not be available to them. But they're certainly not available to your local hair salon or family restaurant or bookstore.
In an effort to make the PPP loans available quickly, Congress got rid of the requirement that businesses show they couldn't get funding elsewhere before turning to the SBA. Shake Shack would have failed that test spectacularly: At the time it was trying to get its PPP loan, Shake Shack had just drawn down on its $50 million credit facility. On April 17, Shake Shack announced that it had sold $150 million in new equity. But it was able to get a $10 million PPP loan anyway. Shake Shack later said it was "fortunate to now have access to capital that others do not," and would return the money.
Customers will hate this
If the just-do-the-right-thing argument doesn't get you, the public relations nightmare should. If you can't explain, in simple language, why your public company should get a PPP loan while there are medical offices that can't even get an application through, you can't expect your customers to be happy about it.
There's no way to keep this a secret. Public companies need to disclose this information, and the government said it would help out by publishing a monthly list of everyone who's taken a loan from the program.
On April 23, the Treasury Department said that borrowers would have to certify in good faith that a PPP loan was necessary, adding, "It is unlikely that a public company with substantial market value and access to credit markets will be able to make the required certification in good faith."
Fewer than 6 percent of all small businesses got help from the first $349 billion allocated to the PPP. It's time for everyone else to make their parents proud and return the wallet.
Kimberly Weisul has been covering the stimulus program and hosting Inc.'s weekly town halls in partnership with the U.S. Chamber of Commerce. She occasionally writes commentary pieces.