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Fri Aug 24, 2018, 08:42 AM

End Stock Buybacks, Save the Economy

Since the 1980s, corporate boards in the United States have embraced as dogma the position that companies should be run primarily for the benefit of their shareholders. The stranglehold of this doctrine of “shareholder-value maximization” over corporate decision making has been a leading cause of inequitable incomes, unstable employment, and sagging productivity.

The principal tool for extracting value from companies and handing it to shareholders is the stock buyback, which usually boosts a company’s stock price. Buybacks are favored by top executives, who are paid primarily in stock options and stock awards, and encouraged by ever-more-powerful hedge-fund activists. From 2008 to 2017, 466 S.&P. 500 companies distributed $4 trillion to shareholders as buybacks, equal to 53 percent of profits, along with $3.1 trillion as dividends.

...Corporations already had a way to provide a yield to shareholders: dividends. But by 1997, stock buybacks had surpassed dividends as a mode of distribution to shareholders.

To understand the magnitude of this shift, we analyzed financial data from 232 companies in the S.&P. 500 Index that were publicly listed in 1981, before the rule, and were still public through 2016. We found that from 1981 to 1983, these companies spent 4.3 percent of profits on buybacks. In comparison, from 2014 to 2016, these same companies spent 59 percent of their profits buying back their own stock. Dividends absorbed just under half of profits in both periods.

...Defenders of buybacks contend that they do no harm because the funds are reallocated through financial markets and used elsewhere in the economy. A company’s profits are, however, the financial foundation for investments in productive capabilities, first and foremost in employees. Investment in training and retaining employees is the key to productivity growth and innovation, for individual companies and for the economy. According to our research, when trillions of dollars of corporate cash are extracted from companies through buybacks, on top of dividends, the result is a dramatic concentration of income among the richest American households and the destruction of middle-class employment opportunities...


Some perspective via a reader comment:

Let me see if I understand this. From 1981 to 1983 4.3 per cent of profits went to buybacks and "just under half" to dividends. Let's throw a dart and call that 40 per cent. So, companies had a fair amount of profit (50-ish per cent?) left to spend on other things, like investing in R&D, modernizing equipment and facilities, rewarding employees, etc. In the 2014 to 2016 timeframe, stock buybacks had ballooned to 59%. Using that same somewhat arbitrary 40 per cent figure for dividends (would it have killed the authors to publish the actual numbers here?), corporations had leftover profits down in the single digit range. So, we are left with flat wages, aging machinery, and very little R&D, but very handsome executive benefit packages. Kinda makes you wonder what the SEC was thinking.

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Reply End Stock Buybacks, Save the Economy (Original post)
BeyondGeography Aug 2018 OP
beachbum bob Aug 2018 #1
BeyondGeography Aug 2018 #2
beachbum bob Aug 2018 #3

Response to BeyondGeography (Original post)

Fri Aug 24, 2018, 08:49 AM

1. throw in eliminating stock options and we go a long ways to restore the purpose of a corporation


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Response to beachbum bob (Reply #1)

Fri Aug 24, 2018, 09:12 AM

2. This stuff is nauseating

In 2020, reforming American capitalism needs to be at the top of our campaign agenda.

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Response to BeyondGeography (Reply #2)

Fri Aug 24, 2018, 09:46 AM

3. not a top issue but in top 10, starts with reform of IRS taxcode and US tax structure


little chance of happening until "Citizens United" issue is eliminated thru FEC law

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