Over at the Atlantic Magazine, they published a great article detailing the latest bit of economic larceny that is being inflicted on the average consumer and stockholder. Written by a guy named Jerry Useem it chronicles the ways that companies used their windfall from the 2017 tax cut bill to let CEO’s line their own pockets while screwing both their own employees and not doing their shareholders any favors either. It’s the latest in a series of self-serving lies told to the American public that can trace their lineage back to Arthur Laffer and his justification for large wealth transfers from Main Street to Wall Street. He called it to supply-side economics and it is a myth that the GOP has stubbornly clung to for almost 40 years. They repeated the lie again when the massive tax cut was passed, a tax cut that has caused the deficit to balloon and kept money from going into the hands of the middle class where it might actually do some good.
Which is not what the Orange Monster told you at the time. He made a big deal of bragging about one-time bonuses some companies gave to employees. Interestingly enough, these same companies did not give all their employees a raise which would have benefitted them more in the long run, and it would have benefited the economy. This occurred while companies were sitting on wads of cash – almost 1.7 trillion dollars – something I wrote about a few weeks ago.
It’s all thievery whether it is 1985 or 2018.
In the early 1980s, a group of menacing outsiders arrived at the gates of American corporations. The “raiders,” as these outsiders were called, were crude in method and purpose. After buying up controlling shares in a corporation, they aimed to extract a quick profit by dethroning its “underperforming” CEO and selling off its assets. Managers—many of whom, to be fair, had grown complacent—rushed to protect their institutions, crafting new defensive measures and lodging appeals in state courts. In the end, the raiders were driven off and their moneyman, Michael Milken, was thrown in prison. Thus ended a colorful chapter in American business history.
Or so it seemed. Today, another effort is under way to raid corporate assets at the expense of employees, investors, and taxpayers. But this time, the attack isn’t coming from the outside. It’s coming from inside the citadel, perpetrated by the very chieftains who are supposed to protect the place. And it’s happening under the most innocuous of names: stock buybacks.
Buybacks are a way companies can artificially inflate their stock price, and thus allow the folks at the top to increase their compensation – since stock options are a source of top executives compensation packages. Supposedly it “enhances shareholder value” to borrow a Milton Friedman -ism. In reality, any benefits are short term and it sets the company up for trouble in the long run.
Corporations describe the practice as an efficient way to return money to shareholders. By reducing the number of shares outstanding in the market, a buyback lifts the price of each remaining share. But that spike is often short-lived: A study by the research firm Fortuna Advisors found that, five years out, the stocks of companies that engaged in heavy buybacks performed worse for shareholders than the stocks of companies that didn’t.
The practice should be illegal.
So take Craig Menear, the chairman and CEO of Home Depot. On a conference call with investors in February 2018, he and his team mentioned their “plan to repurchase approximately $4 billion of outstanding shares during the year.” That day, he sold 113,687 shares, netting $18 million. The following day, he was granted 38,689 new shares, and promptly unloaded 24,286 shares for a profit of $4.5 million. Though Menear’s stated compensation in SEC filings was $11.4 million for 2018, stock sales helped him earn an additional $30 million for the year.
By contrast, the median worker pay at Home Depot is $23,000 a year. If the money spent on buybacks had been used to boost salaries, the Roosevelt Institute and the National Employment Law Project calculated, each worker would have made an additional $18,000 a year. But buybacks are more than just unfair. They’re myopic. Amazon (which hasn’t repurchased a share in seven years) is presently making the sort of investments in people, technology, and products that could eventually make Home Depot irrelevant. When that happens, Home Depot will probably wish it hadn’t spent all those billions to buy back 35 percent of its shares. “When you’ve got a mature company, when everything seems to be going smoothly, that’s the exact moment you need to start worrying Jeff Bezos is going to start eating your lunch,” the shareholder activist Nell Minow told me.
It should be noted that Menear is an ardent Trump supporter.
The practice is just one of many ways that companies have departed from their once accepted belief that: 1) employees were stakeholders in the company too and 2) making a good product was the way to compete – and furthermore, publically chartered companies had a responsibility to the society they sold goods in. Those days are long gone.
Many early stock certificates bore an image—a factory, a car, a canal—representing the purpose of the corporation that issued them. It was a reminder that the financial instrument was being put to productive use. Corporations that plow their profits into buybacks would be hard-pressed to put an image on their stock certificate today, other than, perhaps, the visage of their CEO.