On September 2, 2014, Russ Britt writes on Market Watch:
Bloomberg
As major stock indexes touch new highs on a regular basis, one academic says those profits are here courtesy of massive share buyback initiatives throughout the bulk of corporate America — and could come back to haunt the markets at some point.
Writing in September’s Harvard Business Review, University of Massachusetts economics professor William Lazonick says corporate buybacks are lining executives’ pockets, but are coming at the expense of productivity as well as overall prosperity. That could cost many companies their futures, as a number of businesses are forsaking investments in coming up with new products. They’re also not compensating employees more.
Lazonick says the 449 companies on the S&P 500 that were public from 2003-2012 spent 54% of their earnings on stock buybacks in the last decade, while dividends ate up another 37%. That left little for investments in new products or raises for workers.
“Corporate executives give several reasons, which I will discuss later,” Lazonick writes in his piece.
“But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices.”
He says executives made, on average, $30.3 million each, with 42% stemming from stock options and 41% from stock awards.
Some of the more pronounced examples include ExxonMobil’s XOM, +0.15% failure to invest its own money in alternative energies, but to spend $21 billion a year on stock buybacks, Lazonick says. The energy giant, along with Microsoft Corp.MSFT, +0.41% and General Electric Co. GE, -0.58% , have lobbied the U.S. government to boost its investments in alternative energies though none have done their own investing and have bought back significant chunks of stock.
Also mentioned is Intel Corp. INTC, -0.41% , which is calling for greater U.S. investment in nanotechnology, though its own buybacks were quadruple that of government spending on the initiative.
And Pfizer Inc. PFE, -1.36% , along with other drug makers, is taken to task for charging higher prices for medicines in the U.S., while spending nearly three-fourths of its income on buybacks. Pfizer, Lazonick says, justifies its higher U.S. prices on research and development costs.
Lazonick quotes Laurence Fink, chairman and chief executive of asset manager BlackRock , who said in an open letter to corporations: ““It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies.”
An end to open-market buybacks, the reining in of stock-based compensation and reforming boards so that they’re not inclined toward doling out share packages to executives would be good steps, Lazonick says.
William Lazonicks says that 54 percent of the earnings of public companies on the S&P went to stock buy backs. Total corruption. This should be illegal. Corporate boards need guidance and guardrails that limit their ability to use retained earnings (profits) for stock buybacks 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 products or raises for workers. Combined with debt financing, retained earnings and stock buybacks further enrich the wealth 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 banks would issue insured, interest-free capital credit loans repayable with future earnings on the growth investments.
The Federal Reserve should be required to stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable 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 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 companies 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 is 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 our only legitimate social monopoly –– the State –– and whatever elite controls the coercive powers of government.
