We Stopped Pfizer’s Tax Dodge, Now Let’s End the Buybacks

By William Lazonick, President, The Academic-Industry Research Network. Originally published at the Institute for New Economic Thinking website

Now that new Treasury Department rules have effectively thwarted Pfizer’s attempt to evade its U.S. tax obligations by using its proposed merger with Allergan to do a tax inversion, it’s time policymakers turned their attention to a far more common — and even more damaging — corporate practice: stock buybacks. This mode of distributing corporate cash to shareholders helps pump up the pay of Pfizer’s senior executives, while, as President Obama said of the tax inversion, “it sticks the rest of us with the tab.”

Last October, in justifying the proposed merger that would effect the tax inversion, Pfizer CEO Ian C. Read
complained that the company’s U.S. tax burden meant that his management team had to take on global competition “with one hand tied behind our back.” But, as research by the AIRnet has shown, Pfizer makes debilitating decisions that deplete its finances far more than taxes do. During Read’s reign as CEO from 2011 through 2015, Pfizer paid out $44.7 billion in buybacks and $32.9 billion in dividends. Buybacks alone dwarfed the $16.0 billion Pfizer provisioned for U.S. income taxes over the same period.

Buybacks have clearly helped inflate the pay of Ian Read; in his five years as CEO he has raked in $76.8 million in direct compensation, of which 63% came from stock-based pay. Other senior Pfizer executives as well as stock-market traders who have been adept at timing their Pfizer stock sales have also gained from buybacks.

While it’s obvious that buybacks make executives and some other shareholders rich, how buybacks “stick the rest of us with the tab” may be far less evident. Pfizer boosts its profits by charging high drug prices. Yet from 2011 through 2015, Pfizer spent an equivalent of 71% of its profits on buybacks while also distributing 52% of its profits as dividends. By charging high drug prices to enrich shareholders, Pfizer increases the healthcare burden on America’s households – who foot huge Medicare/Medicaid pharmaceutical bills as taxpayers, and face higher retail drug prices, insurance premiums, and co-payments as patients. Bringing stock buybacks by pharmaceutical companies under control is an obvious way of making healthcare more affordable.

A pharmaceutical company like Pfizer would not be able to put drugs on the market without the massive taxpayer-funded life-sciences research through the National Institutes of Health – to the tune of $958 billion (in 2015 dollars) between 1938 and 2015. Financial aid from the public has also come to the pharmaceutical industry through such measures as the Orphan Drug Act of 1983, which birthed Pfizer money-makers Lipitor and Enbrel. Quite apart from the tax inversion that the Obama Administration has wisely thwarted, a company like Pfizer regularly wastes billions of dollars on buybacks that should be returned to taxpayers.

Buybacks will continue without any effective limits unless the SEC’s Reagan-era Rule 10b-18 is struck down. After the scrapping of its inversion plan, Pfizer’s press release quoted CEO Read as saying: “As always, we remain committed to enhancing shareholder value.” Unfortunately, “enhancing shareholder value” and the value a company creates through its actual work often bear little, if any, relation to one another. For example, not one product originated and developed in Pfizer’s own labs after 2005 has generated significant revenue for the company.

And between 2011 and 2015, as Read’s Pfizer was reducing its workforce from almost 104,000 to around 79,000 worldwide (excluding employees from its recent acquisition of Hospira) and seeing its annual revenues shrink from $67.4 billion to $48.9 billion, Pfizer distributed as buybacks and dividends an amount equal to 124% of profits. The $77.6 billion that the company devoted to “enhancing shareholder value” was twice the amount spent on R&D during the period, raising the question of how many new drugs Pfizer’s labs will be capable of putting onto the market going forward.

It’s clear that Pfizer, like far too many US corporations, has left behind the business of making products for the business of making money. Under the cover of “enhancing” or “maximizing shareholder value” — a slogan that allows executives to inflate their stock-based pay while fulfilling a pretend legal obligation — these companies are not only imperiling their own futures, but they’re also transferring money from the pockets of ordinary Americans to those of an elite few. Putting a halt to tax inversions is one of many ways to stem the flow of income to members of the “value-extracting class” who populate the top 0.1%. Banning buybacks by rescinding SEC Rule 10b-18, which for over three decades has given companies like Pfizer license to manipulate the stock market, should be a top priority of any progressive political agenda.

Print Friendly, PDF & Email


  1. tom

    Please try to refrain from the use of the word progressive. I fancy myself more a republican and agree with you. To credit seemingly only democrats as being sensible is to say the least devisive and counterproductiv.

    1. Yves Smith Post author

      Huh? Most “progressives” are at odds with the Democratic party. Some Democratic party incumbents that we call fauzgressives or the Vichy Left try to wrap themselves in the “progressive” banner when they are most decidedly not. That type is pro-corporate, issues all the right identity politics noises and makes hand-waves at environmental issues and reducing inequality.

      1. Dave

        Lest anyone be confused, what a difference a K makes:

        “Vichy” as in a government cooperating with the Nazi occupation of France.

        Vicky Left can hang out with Tom Tomorrow.

    2. Procopius

      I’m feeling a little playful, so let me tease you by pointing out that the original “progressive” movement included a lot of Republicans. I don’t know your attitude toward Theodore Roosevelt, but he was a Republican and enthusiastically supported the Progressives. I think he even called himself one.

  2. Jesper

    Lets stop the outsized profits due to the outdated IP-laws, time for a reform of IP-laws. Ceo compensation and probably patent-attorney compensation is higher than the compensation for researchers – based on that it is possible to come to the conclusion that the researchers are the least important (meritocracy right?) when making discoveries…. Seems we’re seeing researchers as a cost to be cut but CEOs and lawyers are bringing (at least they are getting) most of the benefits :-(

    1. Marc Andelman

      Mark Twain said that a country without a strong patent system is like a crab, it can only crawl sideways. We need this to encourage more independent inventors, even if they need to arise back from extinction.What could be done is to repeal Bayh Dole which allowed universities to own and patent government funded work. Putting this into the public domain would raise the quality bar on patents, without detracting from the right to own intellectual property. This right was considered so important by the founding fathers it is actually in the US Constitution. Without a strong, independent inventor class, there is less of a check against the manipulative power of large institutions.

      1. Jesper

        Some might argue that the current patent-laws are what keeps independent inventors away. The big institutions are using the threat of patent-litigation to keep competition quiet. Patent-law is now a lot about who can afford the litigation and to some extent also a little bit about who might be in the right. Independents can’t afford long litigation.

        1. tegnost

          +1, and the tpp makes this all worse by extending patent protections (that’s protection as in protectionism for all the “free traders” you stumble over in your daily life…)

      2. John Wright

        The inventor class, at least the small inventor class, may not be aided much by the patent system as defending their patents may require large expenditures of time and money when a valuable patent is unfairly used by a large corporation.

        The below examples may instead illustrate the manipulative power of large institutions of the current patent system.

        Edwin Armstrong (FM radio) vs RCA, https://en.wikipedia.org/wiki/Edwin_Howard_Armstrong
        This has “After his death, a friend of Armstrong estimated that 90 percent of his time was spent on litigation against RCA”

        The Wright brothers (aircraft flight control patent 821,393)

        The previous suggests the Wright patent fight may have “retarded the development of aviation.”

        The pushbutton ratchet patent vs Sears Roebuck, a 20 year dispute.

        1. stephen rhodes

          . . . The key paragraph on the Wright brothers (cited above):

          In 1917, the two major patent holders, the Wright Company and the Curtiss Company, had effectively blocked the building of new airplanes, which were desperately needed as the United States was entering World War I. The U.S. government, as a result of a recommendation of a committee formed by Franklin D. Roosevelt, then Assistant Secretary of the Navy, pressured the industry to form a cross-licensing organization (in other terms a Patent pool), the Manufacturer’s Aircraft Association.

        2. Procopius

          The Wright Brothers never got rich from their aircraft because they kept putting all their profits from manufacturing back into law suits defending their patents. They would have been a lot better off ignoring the patent violations and just reinvesting their revenue in their plant.

      3. zapster

        Strong patents leading to patent trolling, and inventors rarely being able to profit from their own inventions because they have to take on investors that can manipulate them so they lose all their rights, and lots of other scams.

        What good are they when the only funding is from predatory finance?

  3. scott 2

    A simple executive order: No publicly traded company can buy back their own stock if they have closed/moved a plant or had a layoff of more than, say 50 people, for two calendar years. Every thousand jobs eliminated above a certain level adds 1 more year to this moratorium. Jobs added to R&D can offset this number.

    If a company wants to issue debt to buy back their own stock, they need to have met the above AND have given a COLA raise to every employee in the past year and to maximum compensation ratio of the company cannot have exceeded 200:1.

    Watch this buyback crap stop.

    1. HotFlash

      Hmm, something like this might very well work. Worth a try, or at least a rigorous simulation.

      1. Dave

        How about
        “No company can sell their products to any government agency if they have moved production offshore”.

        1. HotFlash

          Which is why we have to make sure that we don’t get stuck with the TPP, under which no signatory could make such a law.

    1. Eddie Torres

      David Dayen — ‘SEC Admits It’s Not Monitoring Stock Buybacks to Prevent Market Manipulation’ (8/13/15): “…under SEC Rule 10b-18, adopted in 1982, companies receive a ‘safe harbor’ from market manipulation liability on stock buybacks if they adhere to four limitations: not engaging in buybacks at the beginning or end of the trading day, using a single broker for the trades, purchasing shares at the prevailing market price, and limiting the volume of buybacks to 25% of the average daily trading volume over the previous four weeks… [but] the SEC doesn’t collect data that would let it know whether companies breach even these generous limits.”

      1. Stephen Rhodes

        from his final column in the WaPo
        10b-18: How to End the Stock Buyback Deluge

        . . . One elected official who’s been following this particular trail of money with justifiable concern is Democratic Senator Tammy Baldwin of Wisconsin, who has sent several letters to Securities and Exchange Commission Chair Mary Jo White asking the agency to investigate the consequences of its rule and the buyback deluge on corporate investment and the broader economy. Clearly, one consequence of the rule has been to facilitate the rise of shakedown artists (excuse me: activist investors) who buy a chunk of company stock and then threaten the executives with a shareholder revolt that could cost them their jobs unless they buy back shares.

        Another consequence of 10b-18, to which White obliquely alluded in her response to Baldwin’s first letter, is that the kind of investigation the senator requested is rendered almost impossible by the rule, which forbids the data collection one would need to do to ascertain if stock prices are being manipulated.

  4. normal

    First, let’s not be naive – a corporation’s purpose is to return value to shareholders.

    Second, let’s not be naive – buybacks are ALWAYS done with the benefit of inside information. It’s simply impossible for a corporation NOT to have inside information.

    1. John Wright

      While insider information may well be true, it may not be a significant factor.

      A corporate executive may view themselves as a supplier of their company’s stock (via stock options or holdings) and naturally wants a higher price for their stock position.

      These executives may have an incentive to have the company buy high in the market and sell low (via options) to the executives.

      Companies SHOULD be embarrassed to announce a stock buyback program. In a sense, a buyback program telegraphs to the world some possibilities: perhaps an aggressive and inefficient executive stock option program is in place that will significantly increase the number of shares unless some shares are bought back, perhaps the buyback illustrates a lack of suitable opportunities to use the cash in other ways: more product development through R&D, increased employee training, improved physical plant, or growth opportunities for the company via buying intellectual property or other company acquisitions.

      If the executives view the stock as priced too low, the senior executives can buy for their own portfolio from the market.

      Furthermore, from inside a corporation, the buyback program may not be a morale booster for the working stiffs who lack a large stock position as they know the money comes from somewhere and makes their future employment somewhat less likely when the piper must be paid.

      Stock buybacks were viewed as stock manipulation prior to 1982, the years after this may show that is indeed what it is.,

    2. tegnost

      I’m with John Wright here, generally, and think you’re naive if you think the talking point that shareholder value is the “purpose” of a corporation. If we go bare bones the purpose of a corporation is to spread liability.and to create a “life” beyond the scope of it’s founders lifespan. I would be interested in other opinions on this, but shareholder value is just a meme. And as I’ve learned from Prof. Black, Wall St. is a criminogenic environment and insider trading is Standard Operating Procedure

      1. readerOfTeaLeaves

        Your comment is a better synthesis that I’ve come up with — hope I can reuse it ;-)

        Here was one post that that helped me understand that ‘shareholder value’ is a relatively modern, business school notion that has caused no end of economic havoc the past few decades:

        Also, David Stockman (of all people!) has eloquently explained, as has Yves, how the ‘shareholder value’ and ‘stock buybacks’ skullduggery is actually cannibalizing what were once good companies.

        google ‘stockman stock buybacks’.
        Here’s a start:

      2. inode_buddha

        Indeed, this is why I argued for years on Groklaw.net (now defunct) that corporate limited liability needs to have a few holes poked in it. In other words, incorporation is now being abused such that liability isn’t just limited, it is completely eliminated. There needs to be a way for the general public to pierce the corporate veil and hold the decision-makers directly and personally accountable. After all, a corporation is just a legal construct – a person within it made the decisions. And *nothing* of the evils in our society will change until those who hide behind the curtain are brought out into the light.

    3. Synoia

      First, let’s not be naive – a corporation’s purpose is to return value to shareholders.

      Read the articles of any corporation, and you will find that is not true. There are a number of goals for a corporation.

    4. Yves Smith Post author

      That’s utterly untrue. You are spouting a theory of governance first articulated (and pretty incoherently) by Milton Friedman in a 1971 New York Times op-ed, which didn’t become conventional wisdom until the 1990s. This is a theory made up by economists, with no legal underpinnings.

      And if companies were so good at making use of inside information, and wisely buying their stock when it is undervalued, why have studies of buybacks found that they are money-losing as investments?

    5. Thure

      Indeed – let’s not be naive.

      A corporations purpose is decidedly not “to return value back to shareholders”. Particularly since they haven’t participated in the original risk taking required to build a corporation nor invested in any creative development or value building.

      Its way more complex and interesting than that.

      I suggest a little reading.

      Start with Edith Penrose and Alfred Chandler.

  5. Marc Andelman

    Yet from 2011 through 2015, Pfizer spent an equivalent of 71% of its profits on buybacks while also distributing 52%

    How does this add up to over 100%? Are they borrowing money to buy back shares?

    1. diptherio

      Keep reading…

      seeing its annual revenues shrink from $67.4 billion to $48.9 billion, Pfizer distributed as buybacks and dividends an amount equal to 124% of profits.

      This is what we call “looting the company.”

      1. divadab

        Ya it’s a fucking management club – pumping up the share price so senior management can cash out and retire richer and the devil take the hindmost.

        I always sell my stocks that have buyback programs – it’s the worst sort of short-termism, utterly irresponsible, and bad for the long-term health of the company.

        This kind of corruption and stupidity is wrecking the economy. Off with their silver-backed heads, the greedy scum!

      2. nom de clavier

        And, to note: all dividends are not created equal, c.f., Medtronics (now plc, formerly inc) dividends are a mix of profit and return on capital.

      3. TiPS

        I think looting is a bit extreme. From what I can tell, it looks like a company that has done very little innovation for awhile, and is using its rent to acquire innovations, sometimes selling off assets, and disgorging its cash through buy-back and dividends. Measured profits are not the same as cash flows, and their cash flows from operations have been sufficient to cover their buy-backs.

        They’ve been doing the same thing as many other corps in an era of stagnation and no growth opps–use their cash on buy-backs and mergers.

        1. tegnost

          nice apologia, they’re not making any money selling stuff (remarkable in itself considering drug prices and o care) they use market power to acquire competitors (you know, so they don’t have to compete, because that’s not the biz they’re in, they’re in the financial shenanigan biz) which leads to selling assets (otherwise known as asset stripping, or in some cases “looting” h/t diptherio) then “disgorging” (hmmmm) cash through gimmicks such as buy backs and dividends (the process by which financial shenanigans complete the cycle of looting, and back to the start) Cash flows from apparently legacy operations (since they don’t innovate, right?) are engineering a rise in value through buy back. But it’s ok because everyone is doing it? See criminogenic environment for concise explanation of that canard.

          1. TiPS

            It wasn’t meant as a defense. The main point was the question about how they could spend more on div + buy-backs than profits generated.

            My additional comments were meant to acknowledge this is what corps have done in the financialization accumulation regime that’s been dominant since 2000–financial transactions dominate over real.

            Saying Pfizer is no different is not trying to excuse them, it’s recognition of standard Corp behavior in this day and age. If that’s what’s known as looting, then my mistake.

            1. tegnost

              point taken as to the state of affairs description of the accounting mechanism, and according to the link yves put in lower downthread it seemed to have gotten going in the ’90’s.

        2. diptherio

          “Awhile” is 11 years… and referring to the monopolizing of the sector as “acquiring innovations” is a nice bit of PR. Almost sounds admirable. And you do know, don’t you, that just because everyone is engaged in the financial engineering and stripping of their companies, that doesn’t mean it’s right, or something we should quietly accept.

          Pfizer’s CEO is apparently making $80M per annum in compensation. The average pharmacologist makes $84,000/yr, or about $3.5M over a 40 year career. Let’s be generous and say $4M. So, in order for the CEO’s salary to be justified from a value-creation standpoint, we have to assume that the CEO creates more value in one year than an actual pharmacologist creates in 20 lifetimes. Really now….

          The executives are looting the company by paying themselves far, far, far more than they could ever possibly be worth. I know, everybody does it. That doesn’t make it right.

  6. Bud in PA

    And third – buybacks are the direct result of the disastrous prolonged Fed zero interest rate policy…i.e. free money to Wall Street casino.

    1. Ishmael

      Most on point comment here. Most companies are borrowing money to perform the buybacks. If debt was properly priced this would not be occurring! The Fed is the real culprit!

    2. Skippy

      Disagree…. the Jenson shareholder meme stated the whole thing …. which in turn facilitated equities becoming a dominate form of moeny for c-suite bonuses and M&A activity’s…

      Skippy…. for some the Fed causes all problems, funny how some stripes loved the Fed during Greensplaines Chair…. fickle lovers I guess…

  7. JCC

    I’m curious, how do people find out the total subsidies paid out to companies like Pfizer by the NIH? I looked at their site and couldn’t find a thing about $958 billion (in 2015 dollars). That amounts to an average of over $14 billion a year!

    All I could find was lots of PR crap but nothing solid concerning numbers by company.

  8. cnchal

    . . . For example, not one product originated and developed in Pfizer’s own labs after 2005 has generated significant revenue for the company.

    And between 2011 and 2015 . . . The $77.6 billion that the company devoted to “enhancing shareholder value” was twice the amount spent on R&D during the period, raising the question of how many new drugs Pfizer’s labs will be capable of putting onto the market going forward.

    I smell accounting bullshit. Pfizer invests $7.7 billion per year in R&D and comes up with zeroes, the question becomes how much of that expense is truly R&D. During this time of zeroes, the CEO in charge rakes in nearly $80 million. Would that be merit pay?

    It’s clear the criminal minds of finance have infected every area of business where financial engineering, using cheap debt available only to them, results in value extraction.

    Share buybacks should have never been permitted.

    The whole pharma – medical business is a gargantuan racket. Cheap debt enables the consolidation of an industry in so few hands that they can raise drug prices overnight by multiples, and if you need it to live it’s extortion, which is still a crime for the little people.

    The anti trust laws have apparently been sent to the shredder. The criminal minds of finance have infected government.

      1. weinerdog43

        I’m genuinely curious. How? The patients still have to pay. The doctors are not paid anything extra. The hospital administrators don’t receive anything extra. Is it the tabulating and analyzing of the data?

        1. Lyle

          A drug trail will require specialized medical exams that are paid for by the drug companies, Here is a quote from wikipedia on what a drug company pays for a trial:”The costs to a pharmaceutical company of administering a phase 3 or 4 clinical trial may include, among others:

          manufacturing the drug(s)/device(s) tested
          staff salaries for the designers and administrators of the trial
          payments to the contract research organization, the site management organization (if used) and any outside consultants
          payments to local researchers (and their staffs) for their time and effort in recruiting patients and collecting data for the sponsor
          study materials and shipping
          communication with the local researchers, including on-site monitoring by the CRO before and (in some cases) multiple times during the study
          one or more investigator training meetings
          costs incurred by the local researchers, such as pharmacy fees, IRB fees and postage
          any payments to patients enrolled in the trial (all payments are strictly overseen by the IRBs to ensure the patients do not feel coerced to take part in the trial by overly attractive payments)
          So the drug companies pay for extra medical interventions, tests etc, that the trial may require. They don’t pay for other health care for participants of the trial.
          In addition they have to pay the costs for rolling up the information from the trial to final reports. So while the patients have to pay for other medical costs the costs of the trial are paid by the company sponsoring the trail.

    1. Chauncey Gardiner


      Very well said: “Share buybacks should have never been permitted… Cheap debt enables the consolidation of an industry in so few hands that they can raise drug prices overnight by multiples…

      The anti trust laws have apparently been sent to the shredder. The criminal minds of finance have infected government.”

      I’m sure the FTC is all over this on anti-trust grounds.

  9. Chauncey Gardiner

    Meanwhile, the so called “smart money” vultures are circling and salivating over the “coming opportunities in distressed assets” as the debt binge to fund corporate stock buybacks and dividend payouts (and to maximize C suite stock options and bonuses) at many marquee corporate names nears conclusion and economic pressures that have to date been largely concentrated in the commodity and energy sectors surface in the broader economy and drive “restructuring”.

    All done due to the “I’ll be gone, You’ll be gone” mindset of maximizing short-term personal gain. Another banquet of consequences to be paid for by the innocent.


      1. Chauncey Gardiner

        As you asked in your excellent 4/7 comment regarding perpetual war… “for what?”

        Thank you for that.

  10. Paul Tioxon

    “It’s clear that Pfizer, like far too many US corporations, has left behind the business of making products for the business of making money. Under the cover of “enhancing” or “maximizing shareholder value” — a slogan that allows executives to inflate their stock-based pay while fulfilling a pretend legal obligation — these companies are not only imperiling their own futures, but they’re also transferring money from the pockets of ordinary Americans to those of an elite few.” The final paragraph by Mr Lazonick………………..

    The business has always been making money, any commodity is the means to the end, for any for profit business. And the corporate franchise granted by the state is redistribution of wealth from the demand side, a function of the state before the capitalist mode. For the most part, a commonwealth was the basic understanding of just about any civilized social order. A place for everyone and of course, everyone in their place, subject to the rule of the king. The social obligation to provide for the subjects, noblesse oblige, was redistribution, in lieu of a market mechanism to provide for the food and shelter and what not. This sense of the powerful, in the their divinely ordained position required them to maintain the social order, because it simply was not up to the passive subjects to make decisions. And there was no point in dealing with Mr In-Betwee, the middle class, you directly spent the time of the labor force on what was needed or wanted for the higher ups, there was no sense of making something only to resell it. You made it because you had a use for it, and the use was not in making money. Today of course, any deviation from the capitalist model M-C-M’ or in the financialized phase, M-M’, result is the same, anything you produce is produced for its money making potential, not because YOU want or need it. Some else does and they will just have to pay cash on the barrel for it.

    1. Yves Smith Post author

      That is not correct. You’ve bought into corporate revisionist history. The old model for most companies was if you had a good product and served your customers well, the money would take care of itself.

      From John Kay in the Financial Times:

      If you want to go in one direction, the best route may involve going in the other. Paradoxical as it sounds, goals are more likely to be achieved when pursued indirectly. So the most profitable companies are not the most profit-oriented, and the happiest people are not those who make happiness their main aim. The name of this idea? Obliquity…

      Obliquity is equally relevant to our businesses and our bodies, to the management of our lives and our national economies. We do not maximise shareholder value or the length of our lives, our happiness or the gross national product, for the simple but fundamental reason that we do not know how to and never will. No one will ever be buried with the epitaph “He maximised shareholder value”. Not just because it is a less than inspiring objective, but because even with hindsight there is no way of recognising whether the objective has been achieved.

      For most of the 20th century, ICI was Britain’s largest and most successful manufacturing company. In 1987, ICI described its business purpose thus: “ICI aims to be the world’s leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science.

      “Through achievement of our aim, we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities which we serve and in which we operate.”

      ICI’s corporate portfolio had evolved over the decades – the company’s traditional strengths had been dyes and explosives, but its chemical expertise had taken it into other industrial feedstocks and agricultural fertilisers. After the second world war, the management of ICI concluded that in future “the responsible application of chemistry” was most likely to be found in pharmaceuticals. ICI recruited a team of able, young, academic scientists but the team was slow to bring returns.

      The pharmaceutical division was a drain of ICI resources until, in the 1960s, the discovery of beta-blockers gave the company the first effective drug for controlling hypertension. More discoveries followed and, by the 1980s, pharmaceuticals had become the growth engine of the company.

      In 1991, Hanson, the predatory UK conglomerate that had successfully acquired and reorganised sluggish British manufacturing businesses such as Ever Ready and Imperial Tobacco, bought a modest stake in ICI. While the threat to the company’s independence did not last long, the effects were galvanising. ICI restructured its operations and floated the pharmaceutical division as a separate business, Zeneca. The rump business of ICI declared a new mission statement: “Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base.”

      While the National Parks Service had moved from a narrow, focused objective to a broader holistic view of forest management. ICI made the opposite shift – from a grand vision of the responsible application of chemistry to a narrow concentration on established, successful activities. The aim of bringing benefit to a wide range of stakeholders was replaced by the specific objective of creating shareholder value from narrowly focused operations. The company translated this into an operational strategy by disposing of the company’s interests in bulk chemicals to acquire a niche group of speciality businesses: ICI, once the main supplier of chemical products to one third of the world, was reinvented as a smells company.

      The outcome was not successful in any terms, including those of creating shareholder value. The share price peaked in 1998, soon after the new strategy was announced. The decline since then has been relentless. After two successive dividend cuts the company was ejected in early 2003 from the FTSE 100 index, the transition from industrial giant to mid-cap corporation had taken only 12 years.

      ICI is not the only company for whom greater emphasis on corporate financial goals led to less success in achieving them. I once said that Boeing’s grip on the world civil aviation market made it the most powerful market leader in world business. Bill Allen was chief executive from 1945 to 1968, as the company created its dominant position. He said that his spirit and that of his colleagues was to eat, breathe, and sleep the world of aeronautics. “The greatest pleasure life has to offer is the satisfaction that flows from participating in a difficult and constructive undertaking,” he explained.

      Boeing’s 737, with almost 4,000 aircraft in the air, is the most successful commercial airliner in history. But the company’s largest and riskiest project was the development of the 747 jumbo jet. When a non-executive director asked about the expected return on investment, he was brushed off: there had been some studies, he was told, but the manager concerned couldn’t remember the results.

      It took only 10 years for Boeing to prove me wrong in asserting that its market position in civil aviation was impregnable. The decisive shift in corporate culture followed the acquisition of its principal US rival, McDonnell Douglas, in 1997. The transformation was exemplified by the CEO, Phil Condit. The company’s previous preoccupation with meeting “technological challenges of supreme magnitude” would, he told Business Week, now have to change. “We are going into a value-based environment where unit cost, return on investment and shareholder return are the measures by which you’ll be judged. That’s a big shift.”

      The company’s senior executives agreed to move from Seattle, where the main production facilities were located, to Chicago. More importantly, the more focused business reviewed risky investments in new civil projects with much greater scepticism. The strategic decision was to redirect resources towards projects for the US military that involved low financial risk. Chicago had the advantage of being nearer to Washington, where government funds were dispensed.

      So Boeing’s civil orderbook today lags that of Airbus, the European consortium whose aims were not initially commercial but which has, almost by chance, become a profitable business. And the strategy of getting close to the Pentagon proved counter- productive: the company got too close to the Pentagon, and faced allegations of corruption. And what was the market’s verdict on the company’s performance in terms of unit cost, return on investment and shareholder return? Boeing stock, $48 when Condit took over, rose to $70 as he affirmed the commitment to shareholder value; by the time of his enforced resignation in December 2003 it had fallen to $38….

      ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations.

      Merck and Pfizer was one such comparison. Collins and Porras compared the philosophy of George Merck (“We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been”) with that of John McKeen of Pfizer (“So far as humanly possible, we aim to get profit out of everything we do”).

      Collins and Porras also paired Hewlett Packard with Texas Instruments, Procter & Gamble with Colgate, Marriott with Howard Johnson, and found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

  11. Chauncey Gardiner

    There is another aspect to these stock buybacks and dividend payouts that has received scant attention. That is the large aggregate amounts of federal, state and local subsidies and tax forbearances many of these corporations are receiving under various provisions of the tax codes; and for locating offices, plant and distribution facilities in a particular state or community. In some cases these exceed the amounts of their corporate stock buybacks and dividend payouts.

    Why should the public subsidize these buybacks and payouts? Cui bono?

Comments are closed.