The question Carl Icahn needs to be asking

Activist investor Carl Icahn achieved a solution with eBay regarding the PayPal spinoff and getting an independent director named to the board.

When activist investors like Icahn tell a company what to do with their cash, or to spin off a part of the company, they really need to understand more information than the company's public filings provide to investors to reach a proper conclusion. His questions, if responded to, would be helpful in gaining some of the needed insight. However many companies may consider it a competitive disadvantage to publicly disclose potential plans. This is often the case with companies that are innovative industry leaders.

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Carl Icahn
David Grogan | CNBC
Carl Icahn

Having been a board member and CEO of many companies, private and public, I think the first question that needs to be asked when considering whether or not to spend cash on dividends and buybacks, is: What is the proper capital structure for the company?

Unfortunately many companies adopt rigid rules and also set expectations to shareholders regarding buybacks and dividends without considering properly the long-term need for capital, the ability and cost of raising future capital and the return that investment would bring.

If growth expectations for the company exceed the average growth rate of the overall industry, many additional factors need to be considered and it's likely the amount of risk also increases.

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Taking on debt is a risky position for any company and I believe many boards do not adequately address this fundamental factor — especially in cyclical industries with large capital-expenditure requirements.

While taking on debt may significantly increase returns on equity, the interest expense represents cash that might otherwise be distributed to shareholders as a dividend and there are certainly more options for management or a board to stop the dividends, if necessary, than the difficult, expensive and risky process of restructuring debt.

Conservatism does not assure longevity, however — it provides a capital structure that will likely enable the company to weather and maybe prosper in a stormy environment. It also provides an opportunity to acquire an overleveraged competitor in a downturn. Many great companies excelled during significant downturns because they had the capital to invest. Warren Buffett, for example, made a $5 billion investment in Goldman Sachs's 10 percent perpetual preferred stock in 2008, which provided approximately $1.4 million in dividends per day. His acquisition of Burlington Northern Santa Fe for $34 billion in cash and stock in 2010 is also notable.

The board should not allow management to just sit on major amounts of cash without providing a need or opportunity to use the cash — otherwise it should be returned to shareholders in the form of a stock buyback or a dividend.

I have always found it interesting that one of the biggest fans of dividends is Warren Buffett. He has said payment of a dividend consistently is a key factor he considers when he buys a stock and yet, his company, Berkshire Hathaway, does not pay a regular dividend.

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This gets us to the old rule that many ascribe to: If the company can ultimately achieve a higher return by investing the capital vs. returning it to shareholders via a dividend or stock buyback, the company should keep the cash. It seems that is a rule that Warren applies and his shareholders seem to agree.

Consistency in distributing dividends or the buyback of stock are important factors to enable shareholders to make an informed decision.

The transition to higher interest rates is coming, the swiftness of those increases are an unknown variable, one that will surely impact the "proper capital structure" of many companies. Too much debt at variable rates and too little cash in a rising interest rate environment increases risk.

Cash in a company is fuel — you do not want to run low. Healthy companies keep it flowing in a positive way making investments for growth, rewarding shareholders with buybacks and dividends, but companies should not keep more cash than necessary just to provide a big safety cushion that is not needed to enable management or its board members to sleep well at night and expect to be rewarded it's not what any shareholder wants or pays for.

My thanks to Icahn and Larry Fink, who recently took issue with what Larry characterized as the short-term visions of activist investors like Icahn, for highlighting a topic that should be analyzed, addressed and communicated to shareholders and potential shareholders of all public companies on an annual basis.

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Boards should begin to do their homework if they have not already on this topic because the answers are not simple and if shareholders in a public company do not like the answers, or lack of information and answers from the board and management, the majority will eventually vote for change!

John Jastrem is chairman and CEO of architecture firm Callison. He also serves on the boards of Medquist and Hancock Technology Partners as well as several advisory boards. He is a member of the Young Presidents' Organization and World Presidents' Organization, (YPO & WPO). Follow Callison on Twitter @CallisonGlobal.

Correction: An independent director was named to the eBay board at Carl Icahn's urging but it was not one of Icahn's original nominees.