The "Share Buyback" Looting of American Business
How CEOs pulled off their coup, ending the Golden Age of growth for the middle class while beginning the current era of the CEO as modern-day superyacht-owning Emperor…
Want to get rich without doing much work? Insanely, fabulously rich? Private yacht, country estate, private jet rich? So do America’s CEOs.
They began hustling for an old-time scam to accomplish this when Ronald Reagan was elected president in 1980. Soon thereafter, they got their way. This is the story.
Corporations buying back their own shares was a crime for which corporate executives could go to prison until 1982. It was outlawed after wild manipulation of the stock market led to the Great Crash of 1929 and the subsequent Republican Great Depression. Joe Kennedy (JFK’s father), in fact, was the guy who made it a crime.
President Franklin D. Roosevelt created the Securities and Exchange Commission in the wake of that Great Crash, and put Kennedy in charge of it. As FDR told Gloria Swanson at the time, “It takes a crook to catch a crook.”
Kennedy and his Wall Street buddies at the SEC knew the tricks companies would use to manipulate the price of their stock, and was intimately familiar with the old trick of shrinking the number of shares a company had outstanding just to jack up share prices.
Here, in super-simplified form, is the backstory of how CEOs pulled off their coup, ending the Golden Age of growth for American corporations and the middle class while beginning the current era of the CEO as modern-day Emperor.
Say you work for a company that is worth $1 million and has 100,000 shares of stock out there circulating in the marketplace. Each share of stock is worth roughly $10 ($1 million company value ÷ 100,000 shares = $10 per share).
Historically, when a company wants to increase the value of their stock, there are really only two paths, one legal and appropriate, the other once considered an outright stock manipulation scam until Reagan changed the rules.
The first and legal way to increase the stock price is to grow the company, to “increase business activity.” Develop new products, build new factories, open new sales territories, hire new people, open new locations in other parts of the state or parts of the country.
As the company grows, so does its value. If you could double the size of the company this way so it’s now worth $2 million, its stock value will have doubled.
Assuming there are still only 100,000 shares of stock issued, each share is now worth $20 ($2 million company value ÷ 100,000 shares = $20 per share) instead of the original $10.
This is how and why American business grew so quickly and in such a healthy fashion from the creation of the SEC in 1934 until the Reagan Revolution of the 1980s. We led the world in business growth, creating real value that increased the wealth not only of shareholders but of the entire country as new products, new employment, and new industrial efficiencies were continuously brought to life by American businesses.
But what if the CEO doesn’t want to go through all that hard work of building the business, but still wants to jack up the price of the shares? What if he’s really a bit of a grifter and doesn’t like the hard work of running the company, but just wants to manipulate its share price to enrich himself and his drinking buddies in the executive suite?
This would not be good for the company or the country because it wouldn’t grow the company, expand new products, or increase employee pay. But it would make an instant profit for the shareholders, and companies have, for centuries, compensated their most senior executives with stock packages, typically on an annual basis.
So the CEO and his buddies are sitting on piles of stock they got as part of their compensation packages and they want the price of that stock to go up. But, at the same time, they don’t want to use the company’s profits and cash-on-hand to grow the company (“that’s too much work”) and don’t want to increase pay and benefits to workers (“who cares about them?”).
So what can they do with those profit dollars that will jack up their stock’s value with no work or effort on their part? How can they basically transport that profit directly out of the company and into their own pockets — without having to use much of it to keep the company in good shape or even grow the business?
This question leads us to the second strategy to increase a company’s stock price, one that the SEC functionally outlawed in 1934 when they made “stock price manipulation” a crime.
If you’re the CEO of this imaginary company and are sitting on 1000 shares of the company’s stock — worth $10,000 (at $10 a share) — and wanted to jack up the price of your stock so you could sell it and make an instant profit for yourself, the way you can do this today is pretty simple.
Just have the company go into the marketplace — the stock market — and use the money from its profits (that would usually go to expanding the company or increasing employee pay and benefits) to buy up, say, 50,000 shares out of the 100,000 issued, then “retire” them (basically, just destroy them).
The company is still only worth $1 million, but now there are only 50,000 shares in circulation, half as many as before, meaning that every share is now worth twice as much: $20 each instead of the former $10.
Your 1000 shares that were worth $10,000 the day before your company bought back and retired its shares are now, the day after the share buyback, worth $20,000.
Your company hasn’t made an extra penny. It hasn’t invented a single new product or opened a single new sales territory. It hasn’t created a single job or done anything else productive for the community.
But you, as the CEO and a major shareholder, just personally made a $10,000 profit on your stock in a single day, as did your other senior executives who get annual stock shares as part of their compensation packages.
Not only that, instead of paying regular income taxes on that money you make from selling your stock, you only pay capital gains tax, a much, much lower rate.
To double down on this strategy, imagine that you set up the rules for your regular paycheck to be a function of the company’s stock price, too. When the company’s stock price goes up, your salary automatically goes up as well.
So when the stock price goes up, not only do you get rich from cashing in your stock, but your regular paycheck also goes up. It’s a twofer!
And you didn’t have to invent a single new product, build a single new factory, or even maintain your existing business by fixing leaking gas pipelines or upgrading your factories.
As mentioned, this scam was made illegal in 1934, bringing the whole concept of companies buying back and retiring their own shares to a screeching halt after the Republican Great Depression. It was that way for the 48 years that coincide with the most rapid and healthy business growth in American history.
Those decades of the 1940s, 50s, 60s, and 70s were the only decades in American history where we continuously had over 3% annual GDP growth. It was the time of greatest prosperity in this country for the American working class, and quite literally created the American middle-class. Stock market investors did well, but didn’t get fabulously rich.
The bankers and big stock brokers who helped bring Ronald Reagan to power wanted to go from individually making a few million dollars a year in 1980 to individually making hundreds of millions or even billions of dollars a year — as they are doing today.
Bowing to their wishes, Reagan gave his fatcat campaign donors a path to riches at the level of ancient pharaohs and European kings.
One of the most consequential outcomes of the Reagan Revolution was Reagan’s putting John Shad— the Vice Chairman of the monster investment house E.F. Hutton — in charge of the SEC, which regulates monster investment houses.
Shad wasted no time in deregulating stock buybacks, instituting in 1982 what’s now known as “Rule 10b-18” that made stock buybacks explicitly legal for the first time since 1934.
Since then, share buybacks have become the most personally profitable business scam CEOs and senior executives can run against their own companies and communities.
When Reagan and Shad made this change in 1982, the average compensation of CEOs was around 30 times that of their average employee. CEO’s often lived in the same communities as their workers, or in a just slightly more upscale part of town.
Today CEO compensation is between 254 and 1000 times the average employee, depending on the industry, and CEOs live in palatial estates with servants’ quarters and private jets; much of that increase in their annual income is the result of their companies repeatedly executing stock buybacks over the past 40 years.
Corporate CEOs call this “maximizing shareholder value,” and it accounts for much of the 40-year explosion in the price of publicly traded stocks. Investors don’t complain because they’re making out well, too (and remember that 85+ percent of all stock in America is owned by the top 10 percent of Americans).
It’s also why so much of America’s corporate infrastructure is rotting, from leaking methane from oil rigs to toxic spills from chemical factories to industrial waste being discharged into our environment instead of being cleaned up.
After all, why spend money on improving the company — or even on routine maintenance and safety — when you can personally cash in just as effectively by simply using your company’s revenues to engineer a stock buyback scheme every year?
As William Lazonick wrote for The Hill in 2018:
“Most recently, from 2007 through 2016, stock repurchases by 461 companies listed on the S&P 500 totaled $4 trillion, equal to 54 percent of profits. ... Indeed, top corporate executives are often willing to incur debt, lay off employees, cut wages, sell assets, and eat into cash reserves to ‘maximize shareholder value.’”
You’d think that if a company’s stock was going up in value that would indicate it is doing well and could even would pay its employees better. In fact, the CEOs of companies need cash to do these buybacks, and to get that cash they often lay off workers and even cut back on their main business just to enrich themselves and their senior executives.
As Emily Stewart wrote that same year for Vox:
“The thing is, when companies are investing in stock buybacks and dividends, they’re spending money they could use on something else.
“The Roosevelt Institute in May released a report estimating that Walmart, for example, could boost hourly wages to more than $15 an hour with the $20 billion it was using for a buyback. A separate study from the Roosevelt Institute released in July found that companies spent nearly 60 percent of net profits on buybacks from 2015 to 2017. It estimated that with the money allocated to buybacks, companies such as Lowes, CVS, and Home Depot could give each of their workers a raise of at least $18,000 a year [on top of their current income!].
“Harley-Davidson in February announced a nearly $700 million stock buyback plan just days after saying it would close a plant in Kansas City. Wells Fargo is spending $25 billion on buybacks and is at the same time laying off workers in multiple states.”
Share buybacks have replaced growing a business as the main way CEOs jack up their compensation to buy a new mega-yacht or ski chalet in Switzerland. And its just as much of a scam today, and just as destructive to working people and our nation, as it was in 1929 when it helped crash the market.
Consider: if the CEO can use his company’s operating revenues to purchase, say, $200 million worth of stock, then, depending on how much stock the CEO holds, that $200 million expense to the company may all end up flowing, essentially, into the CEOs pocketbook based on the increased value of his stock.
And he really doesn’t have to work an extra day to make all that money. It’s far more than he could ever make in salary, plus he pays a much lower tax rate on the income than do working people.
Senators Bernie Sanders and Elizabeth Warren have been shouting about this from the rooftops for decades. Hillary Clinton brought it up in her 2016 campaign for president, something that no doubt cost her some CEO support.
At the time, Financial Times US National Editor Ed Luce wrote, in an article titled Hillary’s War on Quarterly Capitalism:
“The case for reforming shareholder capitalism is strong. The level of US investment [in actual business activity] is at its lowest since 1947. Last year, according to Goldman Sachs, S&P 500 companies spent more than $500bn on share buybacks. This year it is expected to hit $600bn.”
That was in 2015. Just so far this year:
Macys bought back 28.9% of their shares spending $2 billion they could have otherwise used to expand the business or raise workers’ pay.
Chesapeake Energy bought back 20.6% using $2 billion.
Diamondback Energy spent $4 billion to buy back 17.9 percent of their own shares.
For Morgan Stanley it was 14.8% of shares at a cost to the company of $20 billion.
The entire list — hundreds of billions in share buybacks just in the first few months of this year — is on this Marketbeat site.
When the biggest oil companies in America reported record profits, ripping off American drivers with sky-high gas prices, Reuters reported on April 29 of this year:
“Exxon earlier this year more than doubled its projected buyback program to $30 billion through 2022 and 2023. Shell said it would buy back $6 billion in shares in the current quarter, while Chevron boosted its annual buyback plans to a range of $10 billion to $15 billion, up from $5 billion to $10 billion.
“Exxon shares rose 4.6% to $96.93. Chevron shares rose almost 9%, closing at $163.78.”
“Apple started to pay quarterly dividends and repurchase its shares in March 2012. Since then and through last summer, Apple has spent over $467 billion on buybacks, according to S&P Global Market Intelligence, which calls the iPhone maker the ‘poster child’ for share buybacks.”
Facebook, which apparently doesn’t have enough cash to hire people to keep Nazis off their platform, has made its top stockholder, Mark Zuckerberg, the richest millennial in America in part through share buybacks, announcing in their third quarter 2021 earnings report:
“We repurchased $14.37 billion of our Class A common stock in the third quarter and had $7.97 billion remaining on our prior share repurchase authorization as of September 30, 2021. We also announced today a $50 billion increase in our share repurchase authorization.”
Many Democratic politicians have been working for years to try to end this corrosive practice. Senator Tammy Baldwin wrote in a 2015 letter to the SEC’s chair:
“Stock buybacks use profits to purchase a company’s own stock instead of investing in the worker training, research, or innovation necessary to promote long-term growth. ... In the past, this money went to productive investments in the form of higher wages, research and development, training, or new equipment. Today, cash is being extracted from companies and placed on the sidelines. Buybacks are now undermining the stock market’s role in capital formation.”
Senator Elizabeth Warren noted:
“Buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that.”
In 2019, Senators Bernie Sanders and Chuck Schumer co-authored an article for The New York Times in which they told America:
“Between 2008 and 2017, 466 of the S&P 500 companies spent around $4 trillion on stock buybacks, equal to 53 percent of profits. An additional 40 percent of corporate profits went to dividends. When more than 90 percent of corporate profits go to buybacks and dividends, there is reason to be concerned.
“First, stock buybacks don’t benefit the vast majority of Americans. That’s because large stockholders tend to be wealthier. Nearly 85 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. Of course, many corporate executives are compensated through stock-based pay. So when a company buys back its stock, boosting its value, the benefits go overwhelmingly to shareholders and executives, not workers.”
Pointing out that share buybacks inflate the wealth of the top 10% of Americans who own most of this nation’s stocks — increasing inequality — while generally screwing the people who work for those companies, they added:
“[W]hen corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest profits more meaningfully in the company in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining.”
It’s time to declare the 42-year Reagan Revolution’s neoliberal experiment a failure, and share buybacks are one of its most visible examples. Joe Kennedy knew what he was talking about when he criminalized them, even if he was a crook.
A first step toward restoring vitality to America’s business sector and providing much-needed funds to return America to our position as the world’s innovator — with the world’s most prosperous middle class, as we were before 1982 — is to once again outlaw stock buybacks.
What few people appreciate is the extent to which the tax code and related laws are written by lobbyists working for the rich. Books have been written about all the corporation specific loopholes that were written into the tax code under the Reagan administration.
Executive pay has nothing to do with their actual performance. Golden parachuts are written into their contracts before the assume their duties. Someone like Carley Fiorina can reduce the value of a company like Hewlett Packard by 75% and still exit with a $27 million dollar payout.
Very few CEO's add any value to the companies they head. For every Steve Jobs or Larry Ellison there is a Steve Balmer or a Lou Gerstner or a Tim Cook. Their compensation is not tied to the performance of the company but rather the stock price so profits are used not for rewarding the people who actually do the work or for new research and development but instead to buy back stock and artificially increase its price and generate false profits for shareholders and nice bonuses for executives.
This is an absolute must read by everyone. It will make perfectly clear why our economy is in the disastrous state that it is now.