Buybacks and Corporate Responsibility to American Workers

By: Senator Chuck Schumer

This month, Senator Bernie Sanders and I wrote an op-ed that suggested that companies be obligated to invest more in their workers and their communities prior to buying back excessive amounts of their own stock. This is an increasingly common practice that is designed to inflate share value, and it overwhelmingly benefits shareholders and corporate executives. It has also helped lead to a surge in the divergence between CEO pay and that of average workers. In fact, the CEO-to-worker compensation ratio has climbed to more than 300 to 1 when comparing CEO compensation to average salaries in America’s largest companies.

We argued that corporations should not be beholden only to the interests of shareholders, and that it might be better for our country and our economy if corporations also had a greater incentive to invest in their workers and their communities as was more prevalent in the 1960s and 1970s.

Our op-ed was in part motivated by the Republican tax bill. After its passage, we saw companies approve a record $1 trillion in stock buybacks, instead of the massive investment in worker raises and benefits the tax law’s backers promised.

In fact from 2008 to 2017, 466 of the companies on the S&P 500 rewarded corporate executives and shareholders with more than 52% of profits in buybacks and 40% of profits in dividends. That seems excessive. I wonder if our critics believe that 92 cents of every profitable dollar that the largest companies make should go to their shareholders. Perhaps business leaders should consider — in addition to raising wages and salaries — using some of these profits to increase compensation for employees by giving them stock or stock options, allowing them to directly share in the company’s success.

Not surprisingly, the ideas annunciated in our op-ed have led some critics to question the wisdom of our proposal.

I’ve heard criticism both publicly and privately that suggests that — when corporate executives and shareholders are given free rein to decide how to appropriately reallocate capital offered through stock buybacks and dividends — it works out best for society.

Our solution curtailing buybacks may not be the only one or even the best one. But the problems of a dramatic skewing of wealth and income distribution over the last few decades must be addressed.

I’d ask our critics what solutions they’d offer to the following facts of the economic reality in America today:

FACT #1:

Income inequality has grown dramatically over the past several decades as the distribution of wealth and income has skewed more and more to the top.

Cumulative percent change in real annual wages, by wage group, 1979–2017 (Chart by the Economic Policy Institute)

FACT #2:

Workers’ wages have not kept up with productivity.

Workers’ wages have not kept up with productivity. (Chart by the Economic Policy Institute)

FACT #3:

The emergence of new businesses has declined across industries in recent years. Given that the rates of buybacks and dividends are going up, you would think that the rates of new businesses would be consistently going up, too, if shareholders were actually using capital from these buybacks to reinvest in new ventures.

The emergence of new businesses has declined across industries in recent years. (Chart by Moody’s Analytics)

I simply do not believe that American capitalism is so weak that the balance between return on capital and return to workers must stay as it is. In fact, I would argue that a capitalist system that provides workers a fair share of their productivity gains should be our goal as a country, rather than something to fear.

Most importantly, I’ve asked what solutions our critics have to the three facts in the charts presented here which have created such pessimism, fear, and even anger in most of working America.

I’d ask them to think about how the market has dealt with these issues to date and how markets ought to change.

Some have argued that it is not government’s job to tell corporations how to allocate capital. They would argue rather — once corporations do allocate capital — that it is government’s job to pass laws to deal with the issues of income inequality and productivity mentioned in the three facts above.

However, that argument ignores our political reality. Many of these very same corporations and powerful special interests who say ‘leave us alone’ have, over the last decade, fought very successfully against government doing anything to solve these problems. Witness the massive tax cuts skewed to the wealthy and corporate America, or the efforts to undo the Affordable Care Act, both supported by the vast majority of the business community. Pro-business lobbying efforts almost always march in lock step with candidates and judicial nominees who skew the political system to diminish the influences of average workers and voters. Witness Citizens United v. FEC which allowed the wealthy to dominate political donations, Shelby County v. Holder which dramatically cut back on voting rights, and Janus v. AFSCME which limited the power of unions.

To me, this poor income distribution and the ensuing and uncharacteristic lack of hope it creates in the American working class is — along with climate change — the greatest problem America faces. We need solutions, not glib answers.

Again, our solution may not be the only one or the best one, but it is intended as a wake-up call to corporate America that they must be part of the solution, not part of the problem.

I am asking our critics what their solutions are to the facts mentioned above. I welcome their feedback.