STOCK BUYBACKS ARE UNPRODUCTIVE, SELF-ENRICHING, MARKET MANIPULATION

The billions of dollars that corporate executives are spending to buy back their own companies’ stocks have significant effects on the economy, on stock prices and stock markets, and on economic inequality. Stock buybacks, which benefit large stockholders, including corporate executives, set a new record in 2022. Until 1982, stock buybacks were illegal. Making them legal has led to a dramatic change in corporate executives’ behavior. Instead of retaining and reinvesting profits in their corporations, they are distributing them to shareholders, including themselves. They are also aggressively cutting (aka “downsizing”) costs to maximize profits.

(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.)

The billions of dollars that corporate executives are spending to buy back their own companies’ stocks have significant effects on the economy, on stock prices and stock markets, and on economic inequality. These buybacks use up corporate cash that therefore CANNOT be used to pay employees, to expand production or service delivery, to invest in research and development, nor to improve productivity and efficiency.

Stock buybacks set a new record in 2022. The world’s 1,200 largest corporations spent a total of $1.3 trillion (an average over $1 billion each) buying back their own stock. Buybacks reduce the number of the corporation’s shares that are available on the stock market, thus increasing the value and price of the shares that remain on the market.

The stock price increases generated by stock buybacks benefit large shareholders, who include corporate executives. One half of stocks are owned by the wealthiest 1% of Americans and the wealthiest 10% own 90% of stocks. Corporate executives are large shareholders because they receive large portions of their compensation as shares or stock options. In addition, a significant portion of their compensation is often determined by the performance of the stock’s price. Therefore, these executives are doubly rewarded if the price of their corporation’s stock goes up. Clearly, the decision to buy back stock presents a huge conflict of interest for corporate executives because it’s a use of corporate funds that results in substantial self-enrichment. [1]

Almost 80% of U.S. corporations have conducted stock buybacks, while only 45% of corporations headquartered elsewhere have. Corporations often borrow money to buy back stock – a kind of speculation that adds no value to the economy but enriches large shareholders.

Until 1982, stock buybacks were illegal; they were banned because they were considered market manipulation. President Reagan’s Securities and Exchange Commission (SEC) changed market regulations to allow them. It took a while, but before long corporate executives realized that this was a gold mine for self-enrichment, given the large amounts of company stock they owned. By the ten years from 2003 to 2012, they were spending 54% of profits ($2.4 trillion) on stock buybacks and another 37% of profits on dividends to shareholders.

All told, from 2003 to 2012, corporate executives used 91% of profits to enrich shareholders, including themselves. This behavior continues to today. This distribution of profits leaves little for employees, research and development, and other investments in their corporations. (These data are for the 449 corporations of the S&P 500 index whose shares were publicly traded on a stock market over that 10-year period.) [2]

This spending on buybacks and dividends represented a dramatic change in corporate executives’ use of cash from profits. Prior to 1982, much of profits was retained and reinvested in innovation, infrastructure, and employees. Since 1982, profits have been increasingly distributed to shareholders while the number of employees and their compensation, as well as other costs, have been aggressively reduced or downsized.

The focus of corporate executives has shifted from value creation to value extraction. [3] The 2017 cut in the corporate tax rate from 35% to 21% was supposed to give corporations more cash to use to create jobs, but instead they’ve used it for stock buybacks and dividends.

The retention and reinvestment of profits of the 1940s through the early 1980s was essential to the success of the U.S. economy, the growth of the middle class, the reduction of economic inequality, and America’s leadership in the global economy. These positive trends have been reversed by the “distribute-and-downsize” ideology that is now prevalent among corporate executives, having increasingly taken hold since 1982. [4]

This ideology is focused on extracting value from corporations for shareholders through profit distribution and through profit maximization by aggressive cost cutting, including downsizing the workforce. It reflects the ascendance of the economic and corporate ideology that maximizing returns for shareholders is the only goal for corporate executives; that it’s literally all that matters. This is a self-serving ideology for wealthy economic elites, including corporate executives.

This ideology overturned the previous (and perhaps resurgent) ideology that corporate decision-making should include responsibilities to serve a broad set of stakeholders including employees, customers, communities in which the corporation operates, and ultimately the overall society in which the corporation exists. These stakeholders have contributed knowledge, skills, and education; infrastructure such as roads, utilities, and public safety services; and a stable legal and societal environment in which to sell goods and services.

My next post will highlight some specific examples of the effects of prioritizing returns for shareholders over all other stakeholders. It will also identify efforts to reduce stock buybacks and move corporate decision-making back toward an ideology of value creation through the retention and reinvestment of a bigger share of profits, as well as of responsibilities to stakeholders other than shareholders.

[1]      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/)

[2]      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/

[3]      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./)

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