STOCK BUYBACKS ARE HARMFUL AND SHOULD BE ILLEGAL AGAIN

The billions of dollars that corporate executives are spending to buy back their own companies’ stocks reduces safety for workers, consumers, and the public. Until 1982, stock buybacks were illegal. Making them legal has led to a dramatic change in corporate executives’ behavior. They now aggressively maximize profits and returns to stockholders, including themselves, while responsibilities to other stakeholders are left behind.

(Note: If you find my posts too much to read on occasion, please just read the bolded portions. They present the key points I’m making.)

My previous post discussed, in the aggregate, the aggressive profit maximization behavior by corporate executives and their use of stock buybacks and high dividends to maximize the returns to shareholders, including themselves. It documented the occurrence of such behavior, the reasons it’s occurring, and what it reflects in terms of the goals and ideology of corporate executives, i.e., that maximizing returns for shareholders (including themselves) is all that matters. This post will focus on the impacts at individual corporations and on-the-ground. These impacts include reduced safety and economic security for workers, as well as reduced safety for consumers and the public.

One part of aggressively maximizing profits is aggressively reducing costs, which can mean that corners get cut on quality and safety. For example, in 2012, Boeing rolled out what appeared to be the very successful and profitable 737 Max passenger jet. However, at the time, Boeing was engaged in a major drive to increase profits and returns to shareholders through big stock buybacks (tens of billions of dollars) and generous dividends. In 2018 and 2019, two of the 737 Max jets crashed, killing 346 people. It turned out that the crashes were due to the same malfunction in the autopilot system. The investigations of the 737 Max crashes strongly suggest that Boeing executives’ drive to increase profits and returns to shareholders led to management decisions that cut corners on safety and were a major – if not the major – contributor to the crashes. [1]

Norfolk Southern Railroad, whose train derailed and crashed in East Palestine, OH, with disastrous results, and whose trains have derailed elsewhere as well, has used cash from profits to buy back stock instead of investing in employees and infrastructure that would have made their trains safer. (See previous posts here and here for more detail on Norfolk Southern and the railroad industry’s profit maximization.) Nike bought back stock while cutting the poverty-level wages of Asian workers. Pharmaceutical corporations buy back stock instead of investing in research and development. Nonetheless, they claim high drug prices are needed to fund the development of new drugs. [2]

The U.S. response to the Covid pandemic was hampered by corporations whose executives had engaged in profit maximization strategies that undermined the availability of ventilators and high-quality masks, among other things needed to combat the corona virus. [3]

As became painfully clear during the pandemic, corporate executives, in order to cut payroll costs and aggressively maximize profits, had created fragile supply lines dependent on other countries and international shipping. They had also reduced inventories and production capacity to absolute minimums to reduce costs, leaving their companies without the capacity to respond to disruptions in supply chains or spikes in demand and need for their products. So, for example, baby formula manufacturers did not have the inventory or capacity to fill the gap when one of them (that had cut corners on quality controls) had to pull its tainted products off the market.

Although stock buybacks are only one piece of these problems, they are a blatant and significant one that can be relatively easily addressed by dramatically reducing or banning them.

The Biden administration has been taking steps to discourage stock buybacks. The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act signed by President Trump prohibited corporations from using federal financial aid to buy back stock, but because cash is fungible, it had little effect. The Biden administration, as part of the 2022 Inflation Reduction Act, implemented a 1% tax on buybacks. However, corporations are treating this as a cost of doing business and are continuing to buy back shares. [4] Biden called for raising the tax to 4% in his State of the Union speech, but even this or a higher tax is likely to have little effect because of the huge size of the economic benefits to big shareholders, including executives.

The only thing that will really stop stock buybacks and the harms they cause is to ban them again. Recently, three House Democrats (Representatives Garcia [IL], Khanna [CA], and Van Hoyle [OR]) filed a bill, the Reward Work Act, that would ban stock buybacks. A version of this bill was filed in the Senate back in 2018 by Senators Baldwin (WI), Warren (MA), Schatz (HI), Gillibrand (NY), and Sanders (VT). [5]

I urge you to contact President Biden and your U.S. Representative and Senators to ask them to ban stock buybacks and to take other steps to incentivize corporate executives to be more responsive to stakeholders other than shareholders. You can email President Biden at http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414. You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Lazonick, W., & Sakinc, M. E., 5/31/19, “Make passengers safer? Boeing just made shareholders richer,” The American Prospect (https://prospect.org/environment/make-passengers-safer-boeing-just-made-shareholders-richer./)

[2]      Lazonick, W., 6/25/18, “The curse of stock buybacks,” The American Prospect (https://prospect.org/power/curse-stock-buybacks/)

[3]      Lazonick, W., & Hopkins, M., 7/27/20, “The $5.3 trillion question behind America’s COVID-19 failure,” The American Prospect (https://prospect.org/coronavirus/americas-covid-19-failure-corporate-stock-buybacks/)

[4]      Kuttner, R., 5/17/23, “How Wall Street feeds itself,” The American Prospect blog (https://prospect.org/blogs-and-newsletters/tap/2023-05-17-how-wall-street-feeds-itself/)

[5]      Meyerson, H., 5/25/23, “The bill that would stop buybacks,” The American Prospect blog (https://prospect.org/blogs-and-newsletters/tap/2023-05-25-bill-that-would-stop-buybacks/