Profits for Shareholders But Not Workers
Wall Street’s War on Workers
American workers are working harder than before but have little to show for it. The average worker experiences significant economic insecurity, and 44 percent of U.S. adults still cannot afford an emergency expense of $400. In contrast, the wealth of Wall Street continues to increase and CEOs’ salaries are 271 times greater than workers’ pay. Wall Street’s focus on wealth accumulation for the rich is often by explicit design and comes at the direct expense of American workers. This series of papers will explore in periodic installments the ways in which Wall Street undermines U.S. workers and changes that must be made in the U.S. economy to grow the middle class and restore the value of work.
Chapter 3: Profits for Shareholders but not Workers
Chapter 1 explored Wall Street’s opposition to workers’ raises. Chapter 2 examined why corporations lay off workers to satisfy the demands of Wall Street. In Chapter 3, we will examine an increasingly popular method corporations use to withhold profits from the workers that create them and redirect those profits to Wall Street and CEOs.
In this essay series, we’ve discussed the phenomenon called short-termism, when companies’ main goal is to increase stock prices to satisfy Wall Street investors in the short-term, rather than focus on the long-term success of the company and its workers. Increasingly, companies do this is by repurchasing their own stock. These purchases — also called stock buybacks — drive up the price of the company’s stock and, in turn, enrich the individuals and financial firms on Wall Street who own shares in the company. In this chapter, we’ll look at the extent to which stock buybacks are made at workers’ expense and exacerbate the inequality between Wall Street and workers. We’ll also discuss how to rein in this latest example of corporate greed and make sure workers share in the profits they create.
First, let’s dig into what stock buybacks are. A stock buyback is exactly what it sounds like: a public corporation buying shares of its own stock. Because there are a finite number of company shares at any given time, purchasing shares will decrease the number of shares available to investors and, therefore, drive up the value of the remaining shares. Existing shareholders will see their stock value increase, and the company’s earnings per share metric — a key shareholder metric of a company’s investment value — will improve.
Stock buybacks are one way publicly-traded corporations redirect money from workers to their shareholders. Another way is dividends. Dividends are cash payouts made on a regular basis to shareholders, but they are taxed differently from stock buybacks. Stock buybacks offer some advantages to corporate executives. Unlike dividends, they are more flexible. Buybacks do not occur with the same regularity as dividends, and buyback plans do not always track with the original announcement. In addition, shareholders’ income as a result of the buybacks is not taxed until the shares are sold.
So why do companies return cash to their shareholders rather than invest in workers or developing new products? The simple answer is a toxic combination of short-termism and the shareholder-wealth-maximization principle. As we discussed in Chapter Two, since the 1980s, corporate America has become increasingly focused on quarterly profits and shareholder value as the two most important metrics of success, and maximizing shareholder value as a company’s primary purpose. As a result, corporate objectives have become increasingly divorced from the interests of workers and communities, and workers are paying the price in layoffs and stagnating wages. It’s important to remember, too, that corporate executives’ compensation packages include shares of the company, and in many cases are tied to earnings per share results. So when corporate executives make a decision to buy back stock, they’re essentially giving themselves a raise.
But if shareholder wealth maximization has shaped corporate America for 40 years, why should we care about stock buybacks now? The answer is because they have skyrocketed to levels never seen before. Between 2010 and 2017, corporations spent more than $3 trillion on stock buybacks. Last year, following President Trump’s tax giveaway to corporations, companies spent $1.5 million every minute of every day on buybacks.
Before the 1980s, the vast majority (80 to 90 percent) of corporate cash payouts to shareholders were made in the form of dividends. In the last four decades, however, stock buybacks have exploded. Between 2004 and 2013, some of the biggest American companies, including Cisco Systems, Hewlett-Packard, Amgen, Time Warner, DirectTV Group, spent at least 100 percent of their net income on stock buybacks. Home Depot spent 99 percent of its net income on stock buybacks over that same period, and IBM spent 92 percent. That’s right, some companies are spending as much as 100 percent of their profits or close to it on their own stocks, rather than workers’ wages.
Stock buybacks jumped even more after President Trump signed the 2017 GOP tax reform law that cut corporate tax rates substantially. According to Moody’s, more money was spent on stock buybacks in 2018 than on debt payments, capital expenditures, research and development, and dividends. In total, last year corporations spent $806.4 billion buying their own stock, which was 55 percent higher than the year before and 36 percent higher than in 2007, the previous buyback record (and also the beginning of the greatest financial crisis since the Great Depression). To put that in perspective, the median household in the U.S. has a net worth of $97,300.
Proponents of stock buybacks argue that companies purchase their own shares only after considering other value-creating investment options. That’s ridiculous. Are we truly out of good ideas? Are all of our factories as updated as they can be? Are all workers getting family-supporting wages and being fairly compensated for the profits they create? Obviously not. Workers’ wages have barely budged in the last several decades, and the average worker paycheck has the same purchasing power it had 40 years ago. We should all be worried if collectively corporate America cannot come up with any alternatives of investing those trillions of dollars, such as on innovations or manufacturing facilities or jobs, all of which would be better for the economy.
Proponents of stock buybacks argue that companies purchase their own shares only after considering other value-creating investment options. That’s ridiculous. Are we truly out of good ideas?
We already know from Chapter One that Wall Street doesn’t like it when workers get a raise, and we know from Chapter Two that companies often announce layoffs and workforce restructurings to boost their stock price. It is no surprise, then, that corporations have not been increasing workers’ pay, despite earning record profits and reaping huge benefits from the 2017 GOP tax law. In fact, analysis of the corporate announcements following the 2017 GOP tax law found that, as of February 2018, stock buybacks announcements were 30 times bigger than announcements of employee bonuses and wage increases. Companies at that time had announced $3.7 billion in one-time bonuses and $1.5 billion in annual wage increases. Various surveys of U.S. companies found that a very small fraction of corporations planned to increase base salaries for workers as a result of the newfound tax-savings. In the instances where corporations did decide to pass along some of the tax windfalls to workers, they opted for one-time bonuses instead of pay increases that could end decades of wage stagnation.
It didn’t have to be this way. The tax code is one of the best tools we have to influence the actions of businesses. Tax reform should have been an opportunity to change the incentive structure and encourage companies to invest more in the workers. In early 2017, I went to the White House with a bipartisan group of Senators. I handed President Trump the Patriot Corporation Act. That bill would have given corporate tax cuts only to those companies that pay their workers well and keep jobs in the U.S. The President said he liked it. But then the special interests went to work in Majority Leader Mitch McConnell’s office, and we know what happened next. Had we started corporate tax reform with the Patriot Corporation Act, we would have seen rising wages. Instead, we’ve seen exploding stock buybacks.
Defenders of stock buybacks argue that increasing a company’s stock price is good for workers whose retirement accounts do better when the stock market does better. That argument is fundamentally flawed. First, workers’ retirement plans are long-term investments that do not benefit from short-term stock price increases. Second, only about half of American families own any stock at all. As of 2016, 51.9 percent of families owned stock, including through a retirement plan, but there are significant racial disparities within that statistic. While 60 percent of white households own some stock, only 36 percent of black households and 37 percent of Hispanic households do. In addition, more than one-third of workers do not have employer-sponsored retirement accounts. Moreover, just because a small majority of Americans own some stock does not mean they own enough to reap the benefits from stock buybacks. On the contrary, the richest 10 percent of households own 84 percent of the total value of the stock market.
Stock buybacks are not good for workers. End of story.
Stock buybacks are, however, in the interest of corporate executives whose pay packages include significant stock compensation. Depending on the size of the company, stocks can account for as much as half of a corporate executive’s compensation package. That means it’s really in the personal interest of executives for the company’s stock price to go up. And since stock buybacks increase companies’ stock prices, it is specifically in corporate executives’ interests for a company to buy back its stock rather than pay its workers or update its plants.
Unsurprisingly, executives’ personal interest in the stock price influences their decision-making. A 1998 study of more than 2,500 companies found that the greater the percentage stock options in executive compensation packages, the more likely a company was to make stock buybacks. A more recent analysis by SEC Commissioner Robert Jackson found that corporate executives often sold their stocks at the higher value after repurchasing a company’s stock. Commissioner Jackson, in a speech given June 11, 2018, described an analysis his staff completed of 385 buybacks in the preceding 15 months. His staff found that a stock buyback resulted in a big increase in stock price and that corporate executives sold their stock soon after: “During the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day — a fivefold increase. Thus executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement.” It’s no wonder that average CEO pay grew to more than 300 times average worker pay.
So how do we stop this never-ending cycle of corporate greed? How do we make sure that workers are sharing in the profits they create?
It may not seem like it, but there are already regulations in place that treat stock buybacks as what it is: stock price manipulation. In 1982, just as the shareholder wealth maximization theory was gaining traction, the Securities and Exchange Commission (SEC) adopted a regulation called Rule 10b-18. Under 10b-18, companies are not liable for manipulating their stock if they limit stock buybacks to below a certain threshold and adhere to a few other requirements. SEC amendments to 10b-18 in 2003 tinkered with the purchase price and timing requirements and added some transparency mandates but left unchanged the exemption that had permitted companies to announce $1 trillion in stock buybacks. Given the increases in stock buyback volumes and values and the historic levels of share purchases last year, it is time to develop more effective ways of limiting buybacks.
We should strengthen Rule 10b-18 so that it no longer shields companies from stock manipulation. Instead, the rule should prohibit excessive stock buyback activities. To that point, Rule 10b-18 should permit only small amounts of stock buybacks, and require companies to provide much more transparency about the purchases when they make them. Hundreds of billions of dollars in wealth should not be given to shareholders on Wall Street under the table.
Others have suggested policy proposals that would effectively eliminate most stock buybacks. That sounds like a good policy, but it’s not going to put more money in the pockets of workers. Instead, we should permit some stock buybacks but predicate them on giving workers their fair share of corporate profits. We know corporations consider workers to be a budget line item to be minimized, not an asset to be invested in, and we know this thinking is exacerbating our rampant economic inequality. Widespread economic insecurity is bad for our economy. It’s time we had policies that both limit excess corporate greed and invest in workers.
My proposal is simple: it says if corporations want to transfer wealth to Wall Street, workers must get a proportionate share of the pie. For every $1 million passed on to shareholders in the form of stock buybacks or dividends, corporations will have to pass on $1 to every worker. I’m calling it a Worker Dividend, and all public corporations will be required to pay it. I’ll be introducing legislation to replace Rule 10b-18 and to establish the Worker Dividend in the coming weeks.
Wall Street considers shareholders’ equity in a company to be all that matters, but workers have equity in a company, too. It’s called sweat equity, and it’s time workers are rewarded for it.
