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Buybacks make case for new economic order

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It’s shaping up to be one fat Christmas for executives and major shareholders at Boeing. The nation’s leading civilian aircraft manufacturer announced this week that it would increase its dividends by 50 per cent and devote a further $10 billion over the next two years to buying back its stock — a move that drives up the value of the remaining outstanding shares.

For Boeing employees, Christmas is looking distinctly leaner. The company’s contract offer last month to the more than 30,000 unionized workers at its plants outside Seattle demanded that they swap out their defined-benefit pensions for 401(k) plans and imposed lower pay on new hires. By a 2-to-1 margin, the workers rejected the offer. Now that they know the company plans to devote $10 billion to purchasing its own stock, I doubt their feelings toward Boeing have grown any fonder.

Like most major American corporations these days, Boeing is sitting on a mountain of cash. This year, the Federal Reserve calculated that publicly traded U.S. firms, excluding banks and utilities, have cash assets of roughly $1.7 trillion.

And what, you may wonder, is big business doing with all that money, at a time when investment is modest, unemployment remains high, wages continue to stagnate and median household income persistently shrinks? Why, buying back its stock — what else?

As Jia Lynn Yang reported in Monday’s Washington Post, the 30 companies listed in the Dow Jones industrial average authorized $211 billion in buybacks this year — before Boeing upped the ante. That’s three times the amount those companies have spent on research and development. The total value of all stock buybacks in 2013, Yang noted, was $754 billion (again, pre-Boeing). Even companies that are laying off workers are repurchasing their stock. Cisco recently announced that it would spend $15 billion buying back its shares even as it gives pink slips to about 5 percent of its employees.

Buybacks weren’t always the norm. In 1985, there were 52. This year, Yang found, there have been 885. William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts, attributes the shift to a rule the Securities and Exchange Commission (SEC) passed during the Reagan administration that protected corporations from charges of price manipulation when they repurchased shares. A good thing, since the manipulation of share price is an explicit purpose of the buybacks. There’s one other purpose, too: boosting CEO pay. Fully 26 of the 30 companies on the Dow link executive pay to per-share earnings, which rise when a repurchase reduces the number of outstanding shares.

Even if CEOs resist the temptation to give themselves a raise — though no such instances come readily to mind — publicly traded companies routinely come under pressure to pay more to shareholders through higher dividends or share buybacks. Shake-down artist — excuse me, investor — Carl Icahn has been nagging Apple to send more of its record stash of cash to him and his fellow shareholders. Whether Apple complies or not, throwing money at shareholders is exactly what most big U.S. companies have been doing — at the expense of investment, research or, God forbid, giving their employees a raise.

Since the early 1980s, corporate boards have believed that their primary mission is to reward shareholders, while workers in post-union, high-unemployment America have had no way even to get the directors’ ear. The result is an economic system that rewards (increasingly short-term) shareholder investment and CEO pay at the expense of both labor and the research and long-term investments that companies need to flourish. While privately held firms devote 6.8 percent of their total assets to investment, publicly traded firms — the ones with shareholders - devote just 3.7 percent.

Justifying our shareholder brand of capitalism on either economic or moral grounds is no easy task. Economically, shareholders don’t provide companies, other than start-ups, with the capital they need to do business. Morally, it’s hard to argue that the institutional and individual shareholders whose investments may be spread among many companies, or may hop every few nano-seconds from one company to the next, deserve greater financial rewards than do the employees who make or sell the companies’ products — much less financial rewards that result from reducing those employees’ wages. Though there is no apparent economic or moral logic to this arrangement, it’s how the U.S. economy works today. Building a more productive and equitable one will require a panoply of changes: raising taxes on capital, changing SEC rules, reforming labor laws and requiring corporate boards to include worker and public representatives. In short, a whole new economic order.

 

Meyerson is editor-at-large of The American Prospect.

 

— Special to the Washington Post

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