On July 3, 2019, Luisa Galvao and Porter McConnell write on Popular resistance.org:
It’s Time To End Them.
Over the last 15 years, 94 percent of corporate profits have gone to shareholders in the form of buybacks and dividends, instead of to workers and their families.
The eighties brought us permed bangs, acid wash jeans, and Gordon Gecko’s “greed is good” mantra. So it’s not surprising that in 1982, among other bad ideas, the Securities and Exchange Commission put into effect something called Rule 10b-18, which granted a “safe harbor” (read: free pass) to company executives who wanted to buy back their own stock to raise its price. The SEC promised it would no longer accuse executives who bought back their own stock of market manipulation, rewarding corporate greed.
What exactly is a stock buyback? Stock “buybacks” are when companies buy back their own stock from shareholders on the open market. When a share of stock is bought back, the company reduces the number of shares left in the market, which raises the price of remaining shares.
Company executives have every incentive to buy back stocks, since most of their compensation today is paid in the form of stock, and a higher stock price makes them personally richer. Executives push companies to buy back billions of dollars of their own stock, juice share prices, and pass on cash to themselves and wealthy shareholders. (If you’re curious about the mechanics, check out this short visualization of how it works, or Rep. Alexandria Ocasio-Cortez’s explainer at a recent House hearing.)
Over the last 15 years, 94 percent of corporate profits have gone to shareholders in the form of buybacks and dividends, instead of to workers and their families.
Stock buybacks benefit people who already have wealth, and those people are more likely to be White, and more likely to be male. Most Americans are not shareholders. Less than half of American households own stock, either directly or through a retirement account. But 94 percent of households in the top 1% own stock.
Even fewer Americans of color are included in the term shareholders. While 60 percent of white households have retirement accounts or hold direct equity in the stock market, only 34 percent of Black households, and 30 percent of Latinx households, have retirement accounts.
The practice of corporate stock buybacks doesn’t just drive inequality — it drains resources for investment in workers, research and development, and the long-term growth of companies. The impact of executives and investors hoarding wealth for themselves is not just widespread inequality — it can also be deadly.
When two Boeing Max 737 planes crashed within five months of each other, we learned Boeing had recently authorized a massive $20 billion in stock buybacks at the expense of testing and safety investments. Rather than take responsibility for a faulty anti-stall system, Boeing officials, along with the head of the Federal Aviation Administration and several Republican Congressmembers, blamed the 737 MAX crash alternately on “foreign pilots” and bird strike, hoping that racism would serve as good cover for a broken and self-dealing corporate culture that was more likely to blame.
And it’s not just our ability to travel safely — stock buybacks also make our healthcare so expensive that sick people can’t afford it. According to a recently released Roosevelt Institute report, 7 out of 10 leading pharma companies spent over 100 percent of their net income on payments to shareholders. In other words, beyond just distributing the profits, they actually borrowed or spent company reserves to enrich shareholders.
In fact, the amount pharma companies spent on stock buybacks was bigger than the entire amount they spent on research and development. One company, Pfizer, bought a drug company that makes cancer treatment drugs that costs cancer patients $22,000 a month. Then Pfizer spent $12.2 billion of its profits to buy back its own stock in 2018 to enrich executives and shareholders.
This corporate “shareholder first” model has broken corporate incentives, putting short-term profits for executives and high-end investors ahead of the long-term growth of companies, living wages for workers, and healthy communities.
But we can put a stop to this self-dealing and market manipulation in a few ways. Sen. Tammy Baldwin and Rep. Chuy García led a group of lawmakers, including Alexandria Ocasio-Cortez, Ro Khanna, and Rashida Tlaib, to introduce legislation — the Reward Work Act of 2019 — to ban stock buybacks on the open market and require a third of corporate boards to be elected directly by workers.
Because the bill isn’t likely to get signed into law by President Trump, a coalition is petitioning the Securities and Exchange Commission to revise Rule 10b-18 to curb stock buybacks even before legislative action.
The “greed is good” ethos of the 1980s may have gotten us where we are today, but it is by no means inevitable. Laws can be changed, and regulations can be enforced. We can fix the broken corporate incentive structure and put and end to Wall Street’s reign. We just need to educate ourselves, organize, and fight back.
Gary Reber Comments:
For-profit “public” corporation who buy back their previously issued stocks, which were purchased by others –– individuals and institutions –– are consolidating and concentrating their ownership among those who remain as owners of the corporations –– the most wealthy stock owners who own controlling stock and executive owners.
The most wealthy owners of large companies are buying back shares while laying off workers, closing stores and shuttering factories as they move their production out of the United States. Last year, more than $1 trillion of corporate share buybacks were announced.
Corporations offer current stockowners to sell back to the owners who want to concentrate their ownership holdings. People who buy stock in the first place are looking to benefit from selling their stock at a higher price than they bought and thus reap a ”capital gain” in earnings. This is the speculative gambling casino operation that is the stock market.
Corporations do not pay any substantial dividends from their earnings to their owners. They should pay out all their earnings, after the costs of operation, to their owners.
A public, for-profit corporation, as a legal entity, engaged in “stock buybacks” is total corruption. This should be illegal. We should prevent corporations from buying back their own shares.
Corporate boards need guidance and guardrails that limit their ability to use retained earnings (profits) for stock buy-backs that disproportionately benefit the executive suite and mega-shareholders by further concentrating their ownership and earnings interests. Retained earnings and stock buybacks leave little for investments in new productive capital assets to manufacture new products, provide raises for employees, and opportunities for employees to gain ownership stakes in the corporation they are employed. Combined with corporate debt financing, retained earnings and stock buybacks further enrich the wealthy capital asset ownership class.
What is needed is a reform of State statutes with respect to incorporation rules (the legal authority to operate as a “corporation”) that would effectively prevent retained earnings and debt financing and replace these concentrated ownership mechanism with corporations issuing and selling new stock to their employees and to other American citizens.
The new issues of stock would be purchased with Federal Reserve-issued money to local banks to be specifically used to finance corporate growth among those companies growing the economy. The local commercial banks would issue interest-free capital credit loans solely repayable with future earnings from the growth investments. Risk of default, due to non- or incomplete earnings performance, on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance.
We need reforms to incentivize though tax reform (putting a 90 percent tax on corporations with dividend payout full deductible) or require through corporate statutes to payout fully their earnings and to issue and sell new stock for the purpose of investment in future technological advancements in the non-human means of production and developing viable new investment projects, whose future earnings will pay for the investment cost.
At the same time, we need to empower EVERY child, woman and man, using insured, interest-free financial mechanisms to purchase the new full-dividend-paying stock issues using interest-free capital credit, without the requirement of past savings to purchase, or any other requirement except for the requirement of United States citizenship,
In this way, we can begin to create an ownership society and significantly reduce economic inequality in the short term and completely in the long term.
One such solution for aOne such solution for accomplishing this goal is to enact the proposed Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/. And The Capital Homestead Act brochure, pdf print version at http://www.cesj.org/wp-content/uploads/2014/11/C-CHAflyer_1018101.pdf and Capital Homestead Accounts (CHAs) at http://www.cesj.org/learn/capital-homesteading/ch-vehicles/capital-homestead-accounts-chas/.
The Federal Reserve should be required to create new asset-backed money annually issued to EVERY child, woman and man to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to be used exclusively to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in corporations, both established and viable start-ups, needing funds for growing the economy and private sector jobs for local, national and global markets, The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable goods and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares.
The end result would be that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
