“Challenging the Status Quo: Should Stock Buybacks Face a Ban to Tackle Wealth Inequality?”
Stock buybacks have emerged as a major contributor to wealth inequality and a hindrance to innovation in the United States, prompting discussions on whether they should be outright banned, especially when executed as open-market repurchases.
William Lazonick, a prominent figure from the University of Massachusetts Lowell and President of the Academic-Industry Research Network, firmly supports this stance. Lazonick, a vocal critic of corporate share buybacks, has recently released a comprehensive book titled “Investing in Innovation: Confronting Predatory Value Extraction in the U.S. Corporation.” This book argues that stock buybacks are a central aspect of what he terms “predatory value extraction.”
The concept of predatory value extraction revolves around the practice wherein senior executives, Wall Street bankers, and hedge fund managers extract significantly more value from corporations in which they hold shares compared to their contributions to value creation within those companies.
However, the concerns extend further. These buybacks have also rendered U.S. companies more vulnerable to foreign competitors in crucial sectors like aviation, communications, semiconductors, and alternative energy – areas vital to national security and productivity. This vulnerability results from businesses opting for buybacks instead of investing in infrastructure and innovation. Consequently, these companies purchase these necessary technologies from foreign counterparts, predominantly Asian.
In the era preceding the popularity of buybacks in the 1980s, companies commonly reinvested the majority of their corporate profits to foster their growth or reward employees for their role in value creation.
This paradigm shifted when companies adopted widespread stock buybacks as a means to elevate share prices by reducing the number of outstanding shares. Between 2012 and 2021, the 474 companies in the S&P 500 (as of January 2022) channeled a staggering $5.7 trillion into the stock market through buybacks, equivalent to 55% of their combined net income. Additionally, $4.2 trillion was paid out as dividends, consuming another 41% of net income.
While dividends benefit all shareholders, buybacks primarily favor those selling shares, including senior managers whose compensation often includes stocks and hedge fund managers who aim to time stock market transactions.
Lazonick’s book delves into numerous examples illustrating the shift from a strategy of “retain and invest” to “dominate and distribute,” and its impact on the workforce.
The table below highlights the top 20 purchasers of their own stock from 2010 to 2019, along with distributions made during pandemic years.
Eleven companies pursued a “dominate and distribute” approach pre-pandemic, including giants like Apple, Oracle, Microsoft, Cisco, Walmart, Intel, Home Depot, Johnson & Johnson, Amgen, Qualcomm, and Gilead. These companies employed profits from their dominant market positions to buoy stock prices.
Seven firms, including Exxon Mobil, IBM, Procter & Gamble, General Electric, Merck, McDonald’s, and Boeing, adopted a “downsize and distribute” stance, disseminating funds to shareholders as they downsized their workforces.
The remaining two, Pfizer and Disney, ceased buybacks in 2019 to revert to a “retain and invest” strategy.
Lazonick emphasizes that companies like Disney, Home Depot, McDonald’s, Procter & Gamble, and Walmart employ a substantial number of low-wage workers. These workers could have benefited from considerable pay raises funded by the capital allocated to buybacks. Enhancing the wages and benefits of low-paid workers at profitable firms can elevate incomes across the broader economy.
Even the pharmaceutical sector, represented by companies like Amgen, Gilead Sciences, Johnson & Johnson, Merck, and Pfizer, confronts scrutiny. Despite arguing that high drug prices are essential to support research and development, these firms distributed a significant 110% of their net income to shareholders and share sellers between 2012 and 2021. Buybacks alone accounted for 55% of net income, surpassing other sectors.
Lazonick also draws attention to the technology sector, citing Cisco Systems as an example of a company favoring buybacks over investments in learning that fuels innovative communication-infrastructure products.
Cisco’s management has allocated a staggering $159.7 billion to buybacks since 2001, equivalent to 93% of net income. In parallel, the U.S. has lagged behind global competitors in areas like 5G and the Internet of Things.
Apple’s story reflects a similar narrative. Initially relying on Samsung Electronics to fabricate chips for iPhones, Apple’s shift to TSMC for outsourcing catalyzed the latter’s rise to prominence in advanced nanometer chip fabrication.
Lazonick identifies five steps necessary to curtail predatory value extraction:
- Ban buybacks executed as open-market repurchases.
- Redesign executive compensation to prioritize value creation over extraction.
- Integrate employee and taxpayer representatives onto corporate boards, excluding value extractors.
- Reform the tax system to incentivize innovation.
- Support investment in “collective and cumulative careers” that provide enduring, rewarding employment opportunities for workers.
The stakes are significant. A report by Oxfam revealed that, by 2022, inflation had eroded the earnings value for 32% of the U.S. labor force, leaving them with hourly wages of $15 or less.
In his 2022 State of the Union address, President Joe Biden proposed a 4% tax on buybacks. However, Lazonick argues that this is insufficient. If the administration opts for taxation over an outright ban, Lazonick suggests a 40% surcharge, accompanied by a prominent message on the corporate repurchaser’s website: “STOCK BUYBACKS DESTROY THE MIDDLE CLASS.”