The rise of stock buybacks, now and over the last 30 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 remaining shares. Company executives have every incentive to buy back stocks, since most of their compensation derives from stock and a higher stock price makes them personally richer.
Stock buybacks are on the rise: over the last decade, companies have sent 94% of corporate profits out to shareholders in buybacks and dividends, after which companies argue they can’t afford employee compensation or investment in new products. At least $200 billion in new stock buybacks were authorized after the 2017 tax bill gave companies huge windfalls.
The Trump tax bill of 2017 was sold as something that would “trickle down” to workers. But after the bill went into effect, instead of investing in workers, research & development, or new technology, US companies overwhelmingly chose to enrich their C suites and wealthy investors. Companies from Comcast to Boeing poured over a trillion dollars into stock buybacks, at the same time as they announced layoffs and decreased investments in their companies. In fact, Bank of New York Mellon, the only bank reported to have taken the bill at its word, increased workers’ wages and technology investments after the tax bill, only to see investors penalize their stock price by 4% the next day.
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 bird strike.
Introduced in the 116th Congress, the Reward Work Act of 2019 (H.R. 3355/S. 915) 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.
“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.
“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.
“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.
“What Wells Fargo’s $40.6 Billion in Stock Buybacks Could Have Meant for Its Employees and Customers,” by Lenore Palladino, The Roosevelt Institute, November 7, 2018.
“Stock buybacks: Driving a High-Profit, Low-Wage Economy”, by Lenore Palladino, Roosevelt Institute, March 20, 2018.
“Profits Without Prosperity,” by William Lazonick, Harvard Business Review, September 2014.
“Stock Buybacks Are Killing the American Economy,” by Nick Hanauer, The Atlantic, February 8, 2015.
“Trump’s Tax Cuts in Hand, Companies Spend More on Themselves Than on Wages”, by Matt Phillips, New York Times, February 26, 2018.
“Tax cut scoreboard: Workers $6 billion; Shareholders $171 billion,” by Matt Egan, CNN, February 16, 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.
BONUS! Fun footage of Representative Cindy Axne’s (IA-03) questioning JP Morgan CEO Jamie Dimon about stock buybacks at an April 2019 hearing.