The rise of stock buybacks, now and over the last 40 years, is both a symptom and a cause of the high-profit, low-wage corporate sector we see today.
“Stock buybacks” are when companies buy back their own stock from shareholders on the open market. When a share of stock is bought back, the company reduces the number of shares left in the market, which raises the price of the remaining shares. Company executives have every incentive to buy back stock since most of their compensation derives from shares and a higher share price makes them personally richer.
Stock buybacks are on the rise: in the 2010s, companies sent $6.3 trillion to shareholders in buybacks, even while arguing they can’t afford employee compensation or investment in new products. At least $200 billion in new stock buybacks were authorized after the 2017 Trump tax bill gave companies huge windfalls.
The shortage of ventilators at the height of the COVID-19 pandemic can be traced back to government contracting with manufacturers that were acquired by companies committed to maximizing shareholder value above all else–including through the rampant use of buybacks.
Companies from Comcast to Boeing poured over a trillion dollars into stock buybacks after the Trump tax bill, at the same time as they announced layoffs and decreased investments in their companies. As the biggest beneficiary of the tax bill, Wells Fargo alone bought back over $40 billion of its own stock, at the same time as it laid off over 700 workers and defrauded millions of customers in dozens of illegal practices.
Buybacks even play a role in the tragic 2018 and 2019 crashes of Boeing 737 MAX planes. Boeing executives spent the company’s reserves on $20 billion in stock buybacks instead of research and testing. Rather than take responsibility for a faulty anti-stall system, Boeing officials, along with the Trump-appointed head of the Federal Aviation Administration and several Republican Congressmembers, then blamed the 737 MAX crash alternately on “foreign pilots” and a bird strike.
Limits to Stock Buybacks for Federal Contractors
Federal contracting is an opportunity for public money to benefit the public. But rampant use of stock buybacks undermines the economy, efficiency, and effectiveness of federal contracting, as every dollar spent on stock buybacks is a dollar not spent on resources companies need to provide high-quality goods and services. Indeed, studies have shown that stock buybacks are associated with investment slowdowns, reduced innovation, wage stagnation, and layoffs. However, through executive action, President Biden can give preferential treatment to companies that do not engage in stock buybacks, and instead invest in their workers, research and development, and other key priorities that drive quality and innovation.
Establish Corporate Guardrails Through the Implementation of the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act
The Biden administration must ensure the historic investments Congress legislated have the intended effects, and are not put to waste through stock buybacks and outrageous executive compensation packages. The Biden administration can do that by conditioning the distribution of public funds on limits to stock buybacks and executive compensation, union neutrality and other pro-worker measures, along with other critical guardrails for this public spending.
The Reward Work Act of 2022 (Bill No. Pending)
- Re-introduced in the House in the 117th Congress, the Reward Work Act of 2022 would end corporations’ ability to buy back their stock on the open market. Repurchases through tender offers — subject to greater disclosure — will still be allowed. It also requires that public companies allow one-third of their board to be elected by workers to spur healthier decision-making.
The Inflation Reduction Act of 2022
- On August 16, 2022, President Biden signed the Inflation Reduction Act passed by the House and Senate into law. The bill featured a nondeductible 1% excise tax on the repurchase of corporate stock, also known as “the buyback tax.” The 1% tax is expected to generate $74 billion over 10 years, although corporations immediately began looking for loopholes to avoid paying it. For an explanation of what this tax will mean, see this blog post from AFR corporate governance expert Natalia Renta.
“Why Biden’s new industrial policy won’t work without reforms: The passage of the administration’s Inflation Reduction Act should be celebrated, but without explicit corporate guardrails it’s doomed.” by Lenore Palladino, Boston Review, September 22, 2022.
“Wall Street hunts for ways to skirt Biden’s share buybacks tax,” by Eric Platt and Nicholas Megaw, The Financial Times, August 25, 2022. (paywall)
“Congress takes historic step to tax stock buybacks,” by Natalia Renta, Americans for Financial Reform, August 9, 2022.
“Tax corporate stock buybacks that enrich executives and worsen inequality,” by Take on Wall Street & Americans for Financial Reform, November 2021.
“Financialization at work: Shareholder primacy and stagnant wages in the United States,” by Lenore Palladino, Competition & Change Vol 25: Issue 3-4, June 22, 2020.
“U.S. companies cut thousands of workers while continuing to reward shareholders during pandemic: Five companies paid a combined $700 million to shareholders while cutting jobs, closing plants.” by Peter Whoriskey, The Washington Post, May 5, 2020.
“The Stock-Buyback Swindle: American corporations are spending trillions of dollars to repurchase their own stock. The practice is enriching CEOs—at the expense of everyone else.” by Jerry Useem, August 2019 Issue.
“Desperate Boeing Bets on American Racism Being More Powerful Than the Fear of Flying 737 MAX 8,” by Charles Mudede, The Stranger, May 20, 2019.
“Frequently Asked Questions about Stock Buybacks,” by Take on Wall Street and the Roosevelt Institute, February 2019.
“Stock buybacks, explained: The tax cuts have put stock buybacks in the spotlight. Here’s what they are — and why you should care.”, by Emily Stewart, Vox, August 5, 2018.
“Stock Buybacks and Corporate Cashouts,” Speech at the Center for American Progress by Securities and Exchange Commissioner Robert Jackson, Jr., June 11, 2018.
“The Cannibalized Company: How the Cult of Shareholder Value Has Reshaped Corporate America Part 1 Part 2 and Part 3 (investigative series), by Karen Brettell, David Gaffen, and David Rohde, Reuters, November 16, 2015.
“Profits Without Prosperity,” by William Lazonick, Harvard Business Review, September 2014.