By William Lazonick, Professor of Economics, University of Massachusetts Lowell. Originally published at the Institute for New Economic Thinking website
For over three decades, trillions of dollars in corporate stock buybackshave contributed to unstable employment, inequitable income, and diminished innovation in the U.S. economy. Enabling, and even encouraging, this “legalized looting of the business corporation”is SEC Rule 10b-18, adopted in November 1982. Reflecting Ronald Reagan’s “free market” agenda, Rule 10b-18 became integral to the implementation of shareholder-value ideology, with extreme income inequality as the result.
In a recent New York Times op-ed, Senators Chuck Schumer (D-NY) and Bernie Sanders (I-VT) announced a bill that seeks to rein in stock buybacks and improve labor conditions, all in one fell swoop. Specifically, they state that their bill “will prohibit a corporation from buying back its own stock unless it invests in workers and communities first, including things like paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.” While the impulse behind the Schumer-Sanders bill is laudable, the proposal to confront corporate financialization and fair labor standards in one piece of legislation displays a certain immaturity of the Democratic Party in confronting issues of corporate governance and regulation that have for all too long been ignored.
Although the problem of buybacks dates back to the mid-1980s, it appears that prior to late 2014 Congress discussed it only once: in July 2008 when Schumer, along with Senator Robert Menendez (D-NJ) and Representatives Rahm Emanuel (D-IL) and Ed Markey (D-MA), took aim at buybacks by the big oil corporations following Exxon Mobil’s announcement that $8.8 billion of its record-setting $11.7 billion in second-quarter profits would go to buybacks. The Congressmen asked oil executives to reduce buybacks for the sake of increasing oil production and alternative-energy R&D. There is no evidence that their plea received any attention.
In the 2008-2009 financial crisis, Congress bailed out banks and insurersthat had done massive buybacks in prior years. Yet discussion of buybacks was entirely absent from the policy debates that resulted in the 2010 Dodd-Frank Act. Four years later, the publication of my Harvard Business Reviewarticle, “Profits Without Prosperity: Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off,” helped to break this Congressional silence.
Sen. Elizabeth Warren (D-MA) was first out of the blocks, recognizing in a Senate hearing on income inequalityin September 2014 that since the 1980s distributions of corporate cash to shareholders as buybacks, on top of ample dividends, had put an end to “shared prosperity” in the United States. This perspective on corporate financialization motivated her Accountable Capitalism Act, put forward in August 2018, with a House versionof the bill introduced in December. This Act would create, for the largest corporations, national charters that would, among other things, regulate stock-based executive pay and provide workers with board representation.
Since 2015, Sen. Tammy Baldwin (D-WI) has been Congress’s most persistent critic of stock buybacks, opposing them in lettersto the SEC, confronting pharmaceutical companiesfor using high drug prices to increase distributions to shareholders, and questioning SEC nomineeson their positions on buybacks. After joining with Schumer and other Senate Democrats in the “#GOPTaxScam”campaign that predicted—correctly—that corporations would use the gift of lower taxes to increase buybacks, Baldwin took the lead in writing a letter to SEC Chair Jay Clayton, signed by 21 senators including Schumer and Warren, requesting a period of public comment on Rule 10b-18. Of most significance, in March 2018 Sen. Baldwin introduced the Reward Work Act, which by rescinding Rule 10b-18 would make open-market repurchases, those to which Rule 10b-18 applies, subject to manipulation charges, while allotting seats on corporate boards to workers’ representatives.
For his part, Sen. Sanders published a 2015Boston Globeop-ed, “The war on the middle class,” in which he recognized that repurchases come at the expense of workers and argued: “We must demand an end to stock buybacks.” That’s very different from the argument in the Schumer-Sanders bill. To sanction buybacks for companies that meet certain labor standards is analogous to permitting a burglar to rob your house as long as he gives you a kickback from the proceeds. There is a straightforward way to limit stock buybacks: Rescind the ill-conceived Rule 10b-18.
As for the improved wages and benefits that Schumer and Sanders propose, let’s elect more members of Congress who will support appropriate amendments to the Fair Labor Standards Act, in force since 1938. For example, in October 2018 Representative Rosa DeLauro (D-CT) and Senator Patty Murray (D-WA) co-sponsored the Healthy Families Act, which would provide sick leave to employees. The Schumer-Sanders proposal puts a spotlight on the task of reversing more than three decades of vulture capitalism. There is, however, no need to try to kill two malignant birds with one legislative stone.
“To sanction buybacks for companies that meet certain labor standards is analogous to permitting a burglar to rob your house as long as he gives you a kickback from the proceeds.”
Right THERE is the problem with the Democrat party.
This reminds me of “Medicare for All” with the retention of private insurers. Same deal.
Or supporting a constitutional amendment that would overturn Citizens United while leaving in place the 130+ years of court decisions that led directly to Citizens United.
Typical. Thanks for this piece.
Speaking as a burglary victim, I strongly agree.
I don’t want a kickback. I want burglar(s) to stay the [family blog] away from my house and the contents within.
The Democrat party will always choose the technocratic solution over the simple solution. The technocratic solution, invariably, will alleviate the symptom while not addressing the disease. Adding more complexity isn’t the answer here.
If stock buybacks are the problem, just frickin’ get rid of buybacks.
I fail to see how a constitutional amendment to overturn Citizens United would be a half measure. On the contrary, it would be the strongest possible remedy. If worded properly it would overturn the related court decisions.
Courts have always been a tool of wealthy private interests. Judges and “justices” take refuge in supposed literal readings of the law when it benefits them and vastly overreach otherwise. However, they’re supposed to follow the Constitution, so an amendment is ultimately the only way to reign them in when they pretend that money = speech under the Constitution.
Here you go…
Move to Amend
“Corporations are not people; money is not speech.”
…wash, rinse, repeat
“The Corporation has no rights which a Natural Person is bound to respect”.
So, I’m old enough to remember when big money in politics and illegitimate corporate constitutional rights were taking over our political system back in, say 2009, when Obama invited everybody but Single Payer to the table to plan Obamacare. The passage of Citizens United on January 21, 2010 definitely made things worse — but it in no way created the problem. Why waste a constitutional amendment on something that won’t address the fundamental issues? And thanks, chuck roast, for chiming in below.
Excuse me, chuck, above!
The problem with the Democratic Party is that they used to get a huge chunk of their support and money from Labor. They stood by and let corporations and robber barons and the courts slowly grind labor to dust with the resultant loss of support and money. Bill Clinton looked around and with his “triangulation” went after corporate money just like Republicans and this is the situation you have today. The two parties are at the same corporate trough.
So we’ll go back to tender offers instead of buybacks as we had before 1982? How does that affect the problem we’re trying to solve, if at all?
Right-out-of-the-block Liz is stumping madly with wild gestures and emphatic speech reminiscent of Theresa May that we don’t need any more little socio-economic “adjustments around the edges” – we need “big structural changes”. I’m waiting in breathless anticipation to hear what she means by “big structural changes.” I feel reasonable confident she will paraphrase Theresa by saying “structural changes are structural changes.” The more I see her the more tiresome she gets.
Another interesting aspect of buyback programs is they are now a perpetual component of corporate strategy. Company buyback programs now persist without correlation to profits, or to revenues, and continue in both strong and in weak business environments alike. One result of this is that companies will often layoff thousands of employees, citing an urgent need for cost reductions, while at the same time buying back billions per year in company stock. A few years ago Cisco announced it was terminating 8% of its workforce, to potentially save $600 million in annual compensation, while at the same time spending $1.5 billion on a stock buyback program. IBM has been balancing thousands of layoffs with billions in buybacks for years. I shouldn’t single out these two names, because many other companies do the same.
The big problem with buybacks is they are an incentive to drain a companies resources, and diminish its businesses, in order to artificially support a companies stock price and boost the performance based compensation of its management.
I noticed that the author is from a small state university that is more known for its engineering programs than social sciences (it’s part of the UMass system, but the different “campuses” are largely independent as with most state university systems). I think I see a pattern with other NC economists from less well-known universities.
Would it be accurate to say that the less prominent economics departments are more open to left-leaning economists?
Could be, I’ve heard others conclude similarly. Being located in blue-collar Lowell MA where there is such a long & rich history of labor and worker issues might be part of it too. Perhaps they are related…
Structuring management bonuses based on total value of public equity* rather than stock price or EPS could help disincentivise buybacks as a motive to goose your compensation.
Part of the problem is that stock price and EPS are so ingrained as the ‘success metrics’ by which we judge companies/management and both are short term and have a playbook for manipulation. I don’t see how that could happen without a ban on certain executive compensation structures though.
*instead of public equity metric something like ‘fair value of net tangible assets’ would seem to be even better aligned. But as every analyst knows, any metric can as manipulated with enough disregard
I’m confused. Approximately 5 years ago, I questioned Senator Sanders about the Fair Labor Act in relation to the carved out niche for no overtime pay for I.T. workers, and if the senate could do anything about it. He said a change would first have to come from the House, and that “ain’t gonna happen”. My question was on the behalf of the grunts in I.T. who had been laid off due to age discrimination, their jobs outsourced, and rehired as contract workers paid on an hourly basis. At that time, some of those workers were sleeping under their desks, and the practice continues to this day.
===displays a certain immaturity of the Democratic Party in confronting issues of corporate governance and regulation that have for all too long been ignored.===
Absolutely priceless! And that applies to both parties at both the state and federal level!