News Journal:Time for reasonable curbs on stock buybacks

Income inequality is a hot subject. The statistics are stark and undeniable; nobody really argues against the fact that the disparity of income between the top 1 percent and the rest of the working population has dramatically increased in the last three decades. The debate is about why it has happened and what can or should be done about it.
A recent Harvard Business Review article called “Profits without Prosperity” by William Lazonick, professor of economics at the University of Massachusetts, Lowell, found that one of the major causes not only of income inequality, but also wage stagnation, is the incredible growth of what are called “stock repurchases” or “stock buybacks” by publicly traded corporations.
Historically, a corporation bought back its own stock when its board felt it was undervalued. What has changed in the past 30 years (the same period when income inequality suddenly and dramatically increased) is that today, most of the compensation for corporate executives is directly linked to the growth in their companies’ stock prices.
Lazonick sums up the results of his study by saying, “Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1 percent of income recipients – which include most of the highest-ranking corporate executives – reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.
“The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54 percent of their earnings – a total of $2.4 trillion – to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37 percent of their earnings.”
These are mind-boggling statistics. In this period, only 9 percent of the profits of S&P 500 corporations were left to be invested in the future of the companies. Hardly any money was left at all for things like new plants and equipment, research and development, or – no surprise – raises for employees.
Harold Meyerson of The Washington Post is one of the few pundits who has drawn any attention to stock buybacks. In December, noting the outsized Christmas bonuses being received by top executives, he wrote, “As late as 1981, corporations directed a little less than half their profits to shareholders, but the shareholders’ share began rising in 1982, when Ronald Reagan’s Securities and Exchange Commission removed any limits on corporations’ ability to repurchase their own stock …
“Buybacks really came into their own during the 1990s, when the pay of corporations’ chief executives became linked to the rise in the value of their company’s shares… For a CEO, getting your company to use its earnings to buy back its shares might reduce its capacity to research or expand, but it’s a sure-fire way to boost your own pay.”
Some specific examples from Lazonick’s study: Exxon Mobil devoted 83 percent of its net income to stock repurchases and dividends; 73 percent of the pay received by its CEO was based on its stock price. Cisco Systems devoted 121 percent of its net income to buybacks and dividends; 92 percent of its CEO’s pay was based on its stock price.
Drug companies famously defend high prices by citing the enormous resources they put into research and development. Perhaps Pfizer has had little success recently in developing profitable new drugs because between 2003 and 2012, the company cut way back on research and development, while 71 percent of its profits went into buybacks.
Back when we were debating the Stimulus Bill in 2009, the major argument against it was that we should allow corporations to be the driving force to re-energize the economy. As their profits grew, they would reinvest them to expand and hire new employees. That never happened. Instead, the huge growth in profits over the past five years has been used for stock buybacks and dividend increases instead of raises and new investments in the economy.
It is way past time for the SEC to re-evaluate its 1982 decision and reinstate reasonable restrictions on stock buybacks. We now know that they are great for the top earners but hurt overall economic growth and exacerbate income inequality.
Ted Kaufman is a former U.S. senator from Delaware.