The Stock-Buyback Swindle
American corporations are spending trillions of dollars to repurchase their own stock, Jerry Useem reported in August. The practice is enriching CEOs—at the expense of everyone else.
I was an institutional investor in the 1980s and ’90s. Share repurchases were a fraud then and they are a fraud now. When companies take cash away from good investment opportunities, it is a sin. When they use debt to finance share repurchases, it is even worse.
American companies would have a bright future if they put money into innovation and research and development, invested in their workforce instead of pushing real wages down, and took responsibility for how their business affects the community. It’s unfortunate that many companies would not spend a dime to ameliorate the negative impacts they have on their community—polluting the environment, failing to create jobs while demanding tax breaks, and putting strains on infrastructure.
Future economic historians will look back on this period as one when greed combined with really bad financial engineering led to a decline in America’s economic strength.
The way I was taught long ago is that when there are no better uses for a company’s excess capital and the price of the company’s stock is “undervalued,” it’s okay to repurchase company shares, especially by a company in the mature stage of its product life cycle. Given the rise in stock prices, it’s disturbing to see so much stock-buyback activity.
Are opportunities for reinvesting earnings in the future development of a company dwindling?
Rex O’Steen III
I worked for Equifax for five years and left before the data breach. One year, the company “invested” more than $500 million, which was roughly one-fifth of its annual revenue, in buybacks. When asked after leaving about the data breach, I always said that one-tenth of the amount invested in buybacks—about $50 million—would have gone a long way to secure consumer data.
I got my M.B.A. in 1972, and “shareholder value” was the mantra back then. In no way was it an invention of the 1980s. It’s tempting to blame the emphasis on shareholder value on Ronald Reagan or modern corporate profit-driven culture, but that’s a canard. The phenomenon is really all about the stock market and short-term results. There isn’t anything intrinsically wrong with share buybacks, although they do illustrate that corporations don’t have enough internal investment opportunities and certainly didn’t need a huge tax reduction like the one passed in 2017, given that they cannot figure out how to profitably invest the money already in their coffers. But that’s a different story of greed from the one being told.
Christian Y. Wyser-Pratte
I find no fault with the buyback option. The stated purpose of buybacks is to raise share value, for all shareholders. I care not if executives profit along with every other shareholder. (I care a lot if they profit and the company’s share value lags or declines, as was the case with Yahoo.) A reduced share count translates into retained earnings. That can find a home in R&D or facilities planning.
Jerry Useem states that Home Depot employees could have earned an additional $18,000 a year had buybacks been directed to that end. This raises a question: Are those employees worth that additional income? Rising stock prices lift all boats. Individuals need to get theirs in the water.
A share repurchase is a simple distribution of profits to a business’s owners, in the form of an equity purchase. Partners in partnerships are bought out all the time. Is this a scandal? No, it’s just how businesses pay people who invest in them.
To improve management incentives, stop giving away the equity and make managers buy it on the open market, like the rest of us. Then require that they hold it as long as they work for the business. This way they’ll have real skin in the game, which means they’ll share as much downside risk as upside potential.
Jerry Useem replies:
Adopting Daniel Ferris’s last recommendation—require that executives hold their shares “as long as they work for the business”—would go a long way toward addressing the iniquities of stock buybacks. Because Christian Y. Wyser-Pratte is right: There isn’t anything intrinsically wrong with buybacks per se.
The problem is in their usage, which rewards inside share-sellers at the expense of outside shareholders and propagates the lack of long-term investment that Nancy Langwiser-Kear rightly warns of. Ban buybacks (a move I’m not proposing), and managers would likely revert to their former habit of using excess cash to acquire unrelated businesses. But at a minimum, regular investors should have an easier way of knowing who is profiting and when. That way they can make an informed decision about whether executives are investing for the long haul—and whether they should too.
In August, Rene Chun wrote about New Zealand’s newly popular “coffin clubs.”
This article reminded me of my friend Dudley, who made his own coffin in the ’90s. Dudley was a skilled carpenter and carver, so the coffin was really a work of art. My favorite embellishment: along the bottom rail of the coffin were carved the words handmade by occupant.
L. W. Bower
Measles as Metaphor
In August, Peter Beinart showed what the disease’s return says about America’s ailing culture.
I retired recently after 29 years of training and practice in primary-care pediatrics. I take exception to the notion that pediatricians do not spend time reassuring patients about vaccine safety because reimbursement is inadequate. My colleagues and I routinely stayed past the allotted 15 minutes per patient to explain to parents why their beautiful baby would be vulnerable to meningitis, pneumonia, whooping cough, and severe diarrhea if not immunized. Parents who simply have questions usually are reassured by thoughtful conversation. However, my experience is consistent with research that has shown that no amount of counseling and accurate information sways parents who are dead-set against immunizations. These encounters are deeply distressing for pediatricians, because prevention is at the heart of our mission, and we value the trust of parents more than any compensation.
True empowerment of physicians would include reinforcement by government, schools, and child-care facilities through exclusion policies of children unvaccinated for diseases that are contagious (in the absence of a medical contraindication). Insurance companies could increase premiums for families that willingly choose not to vaccinate, to reflect a higher-risk category. If greater society does not value the public-health role of vaccines, parents suspect that doctors push them for profit.
Elise Thomas, M.D.
“The Stock-Buyback Swindle” (August) stated that Craig Menear, the chairman and CEO of Home Depot, sold 113,687 shares of his company’s stock the same day as a conference call with investors. He sold the shares the next day.
Due to an editing error, “What Happened to Aung San Suu Kyi?” (September) indicated that Wai Wai Nu is a man. In fact, Wai Wai Nu is a woman. We regret the error.
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