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New book argues stock buybacks are a mode of predatory value extraction leading to income inequity, employment instability, productive fragility
Link information
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- Title
- The Scourge of Corporate Financialization: Income Inequity, Employment Instability, Productive Fragility
- Published
- Aug 21 2023
- Word count
- 4376 words
There's a lot of things wrong with the financial system, but I'm not immediately able to understand why you're pinning it on buybacks, specifically, while saying that dividends are fine. Your article (I have not read your book) seems to be more of a list of corporations which have done buybacks, and less of an explanation on why buybacks, specifically when chosen over dividends, make inequity and unemployment worse, as you assert.
My (layperson) understanding of buybacks is that they are economically equivalent to dividends, except relating to taxes. (I'm providing the link for other readers, I assume you already know what I'm talking about.)
Although you mention taxes at the end of this article, it seems your main criticism is not taxes, but that buybacks are price manipulation. Can you help me understand why you think a buyback resulting in a price increase from $10 to $11 per share is price manipulation, whereas promising to pay a dividend of $1 per share is not price manipulation?
It does seem to me intuitively that they are the same. In the buyback case, the shareholder could just cash out 1/11 of their shares at the higher price, and end up with the original amount of exposure plus $1 cash per share. Meanwhile in the dividend case, the shareholder could just reinvest their $1 per share and reach the same outcome as the buyback case ($11 of exposure to the stock).
That is to say, the two are equivalent assuming that every shareholder has the option to convert between cash and shares as they please. I think this does hold true for everyone but the smallest shareholders, but I know some retail brokers offer fractional shares, so it might be true even for them.
Thanks for the feedback. It's not my book but I thought the article (and possibly the book) raise interesting questions.
You might want to edit your top level response to this thread, then. If you're just quoting an article and not intending to claim authorship then it isn't clear at all
Thanks, I will
Lots of things operate off of and judge companies by the earning per share (EPS) or the price to earnings (PE) ratio. Dividends do not manipulate this numbers directly unlike buybacks.
The numbers aren't being manipulated, them going up is the natural and obvious consequence of a buyback.
Say you have a company that has 500 shares. It decides to do a buyback and buy 100 of those shares, so afterwards there's only 400 left. Now each share is 25% more valuable, because it represents 1/400 of the company instead of 1/500. There's no manipulation to make the price higher, the shares simply become worth more because there are fewer of them
It's manipulation because it games the primary way company performance is measured by the market and that is tied to a lot of C-level compensation and such.
Technically not different. Massive real world implications.
It's manipulation in reality. We can see it plain as day.
And those same execs who own tons of shares would also make bank if the company just paid out the money in dividends instead of via a buyback. People who own shares in a company getting richer when the company does well isn't manipulation, its literally the entire point of a company in the first place. They exist to make a profit and then return that profit to investors over time.
It isn't the buyback money going to them. It's the company's other money going to them via performance incentives based on EPS and similar.
One of my previous companies went bankrupt because of manipulation like that done to enrich the C levels. I saw it with my own eyes and saw the effects in the company of stripping operating expenses destroying the company to fuel buybacks.
It's manipulation.
You're just throwing around a lot of terms without saying anything useful, this thread is pointless.
Investors have more than 2 braincells, well the rich ones generally do, they can figure out that if the number of shares changes, then earnings per share and other metrics will change accordingly, they don't just see the EPS go up and not take the buyback into account. Additionally, if the C-suite is trying to enrich themselves by driving up the prices of shares (that they own), the last thing they would want is to drive the company bankrupt (which would make their shares worthless, thus not enriching themselves at all).
Companies can send too much money back to their investors too quickly, either through dividends or buybacks, and then have too little cash on hand to deal with an unexpected incident, and go bankrupt because of that. But that has nothing to do with manipulation, or buybacks, its just poor management. And not really by the C-suite, those decisions would have to be approved by the board of directors.
I invite you to watch leadership cashout before the company crashes.
I've literally watched it happen so you cannot tell me my eyes are lying.
Quote from the article (not my book)
My just-published book, Investing in Innovation: Confronting Predatory Value Extraction in the U.S. Corporation (currently available for free pdf download), exposes corporate financialization as a prime source of the nation’s extreme income inequity and diminished innovative capability
Using the quote markdown really helps with making sure people know it’s not you speaking. I saw this earlier and thought you had published the book (I almost sent you a congratulatory PM, lol).
Simply throw a
>symbol at the front of a paragraph to make it a block quote. It’ll make it look like this:Thanks for sharing!
It seems to me like the author is unhappy with companies providing a return on investment to their owners, just in general.
There's a brief digression into shareholders vs. sharesellers, and paying dividends rather than doing buyback. This meaningless distinction in my opinion, since any shareholder can sell their shares at any time, and the main purpose of doing a buyback over a dividend is to allow shareholders to chose when they realize gains and pay taxes.
Likewise, I don't see a problem with the concept of "downsize and distribute". Companies, again, are built with the purpose of providing their investors with a return on investment. That might be recognizing that the company is not well suited to innovating in their industry anymore, and slowly winding things down and allowing their investors to allocate their money elsewhere.
Is the problem that innovation these days tends to happen in private companies rather than public companies? Because I agree, that is frustrating! I don't have a good idea for a solution there.
The author's criticism of buybacks is superficial IMO, but is the problem that investors are able to roll their investments forward for centuries tax-free through buybacks? I have absolutely no problem with banning buybacks from a tax policy perspective, as a sort of wealth-tax lite.
Is the problem that wages are not keeping up with productivity and that companies are allowed to be too calloused towards employees? I also agree with that! But the solution is not to ask companies to be altruistic (an altruistic company will fail in a cutthroat market), it is to change the law to require a living wage and to support and straighten unionization and worker rights. That way all companies are able to compete fairly.
So it seems to me that many people agree that we are too close to Gilded Age capitalism in terms of income and wealth disparity but people disagree about what if anything can or should be done about it. There is also the problem of power and influence. To quote the old story, who bells the cat?
I don't have a preferred set of policy proposals and I think economic freedom generally speaking leads to greater wealth and happiness than managed systems. I hope we all learned from the failures of communism world wide. I do however believe in strong economic safety nets and am always interested to see these kinds of questions being raised and discussed. I think the range of income in Eisenhower's America was closer to ideal than what we have now. I have read that CEOs then made 20 times average income, not 400 times as we see today.
Ironically a big part of the problem with CEO income was a law designed to pressure companies to pay CEOs less by requiring that their salaries be public.
Instead it simply gave CEOs huge amounts of leverage when negotiating positions.
Personally the more I think about it (with my limited understanding of the situation), the more I think that publicly traded companies are just a bad idea.
The problem is that if you are a publicly traded company, you have been enslaved by the need for constant growth. Growth in and of itself is not a bad thing, but the issue is how that growth is achieved. Ideally it should be a result of investment and innovation (which in itself requires investment). But since roughly the Reagan years, more often than not growth has come from increases in exploitation. Workers are dealing with worse and worse conditions for lower pay, and pensions have effectively disappeared off the face of the earth, replaced with an investment scheme. Competition is bought and shuttered, monopolies have been formed, and IP law has been strengthened so that companies can make more money and sick the government on people who are trying to use those properties regardless of how fair their use is or is not. And through the whole things margins have gone up, making life worse for everyone.
In theory this shouldn't be a problem, because our government is supposed to be making rules that prevent this kind of thing from happening. But the government had been bought practically since day one. There's a popular saying that republicans want a government small enough to drown in a bathtub, but the fact of the matter is that corporations already have that kind of power. It's the reason why even existing regulations frequently get ignored or bypassed (sherman antitrust act, anyone?), and why every time they are caught doing something wrong they are just given a fine that is so small it's barely an inconvenience to them.
I know this probably sounds crazy, but the only thing I think will have an effect is if we start organizing and staging massive protests. It's too late for us to write our politicians; they're already too bought out by the big corporations; it's how they got elected in the first place. The world is full of apologists for the kind of thinking that got us here, and they also have the loudest loudspeakers and the tallest soapboxes. We need to be the audience that boos them so loudly that they have no choice but to leave. We tried this before and failed, but things have only managed to get worse since then, so action is more than warranted.
Let's step back and see what being publicly traded actually means. When you're publicly traded, the government requires that you as the company must provide publicly available quarterly updates about your finances amongst other regulatory obligations. In return for this, your stocks are allowed to be bought and sold by the general public.
If there were no public companies, all companies would all have complete secrecy over their numbers, and only rich people (quite literally,
) would be able to own and the reap the rewards of equity.
There is nothing inherently compelling public companies to grow (well, grow beyond inflation). There are no lack of publicly traded companies who plod along with minimal growth and provide dividends - just google dividend stocks. Major companies of this type tend to be energy companies, especially fossil fuel energy companies, whose stock prices are basically the sine curve at this point.
You just get less of a revenue multiple, which seems fair, since you are not growing. That's OK. There's more to the stock market than the 50 largest companies, which are trying to grow.
I'm not upset that public companies exist. I'm upset that public companies are exploitative.
And the thing I'm especially tired of is people simping for them. Every time someone says something critical of their greedy business practices, someone inevitably butts in and says "companies exist to give money to their shareholders", often with the false idea that it's a legal requirement and completely ignoring all of the other people who have stakes in the companies, like the people who work for them or the people who do business with them. It happens here quite frequently. Try this one or this one.
Surely you've seen the news lately and seen huge numbers of people going on strike lately? Right now IATSE and SAG-AFTRA are on strike, UPS Teamsters just narrowly avoided having to go on their own strike, and UAW is currently building up towards a strike. These are all good things for people in those unions, but it does nothing for the people who work in non-union jobs, which makes up more than 95% of all workers.
The amount of money these companies control is also obscene; I found this website and did some math on their data. The top 50 companies make up 0.6% of the companies they list, yet their combined market cap is 29% of the entire market. You can't say that this is just a problem with a few bad apples when they make up such a huge part of the economy.
Well the Biden administration has proposed new stricter rules for antitrust and we are currently in a public comment period for the next month.
Thanks for your comment.
https://www.justice.gov/opa/pr/justice-department-and-ftc-seek-comment-draft-merger-guidelines
https://www.ftc.gov/news-events/news/press-releases/2023/08/ftc-doj-extend-public-comment-period-30-days-proposed-changes-hsr-form
Eh, dividends are taxed immediately vs. Held. In addition there are tax moves you can make while still owning stock to avoid taxes all together (asset swaps). Berkshire does this occasionally where they swap stock for another company. They did this with P&G and Duracell.
The number one issue in my opinion are leveraged buy backs and dividends. Where you borrow against your future earnings to return cash now.
I'm generally against stock buy-backs. But in their defense they can help a company consolidate ownership of their corporation and protect it from hostile takeovers. I agree that spending money on buybacks instead of innovation is a poor strategy for sustainable growth.
It's important to point out that issuing dividends can also be a form of corporate abuse. There's nothing to stop a board from deciding to issue out dividends even if the company is struggling financially. This presents a moral hazard as it could funnel money to Senior Management (who often hold a lot of shares of the company), even though they've poorly managed the company. Lehman Brothers paid shareholders $631m in the 2 yrs prior to their collapse; Richard Fuld (LB's CEO) made $500m in the 8 yrs prior to their collapse.
I guess I'm trying to make two points here: 1.) We should judge each action individually and consider intentions behind those actions. 2.) We should really consider how the legal form of the Corporation plays into this. You essentially have a bunch of assets managed by people (CEOs and Company Executives) who don't own them, are legally protected by their poor management of them, and yet can still benefit immensely even when they do manage them poorly. Meanwhile, the owners (shareholders) have no direct claims to those assets. The Boards often have a lot of overlap with Senior Management which creates conflicts of interest.
Ultimately, when shit hits the fan - this allows for a situation where everyone can point their fingers and shift blame so no one is culpable and everyone is off the hook. I don't see how the legal form of corporations don't set us up for a situation with significant moral hazard. Maybe I'm off? I don't know...
I read an interesting book the Anarchy by Dalrymple about the history of the British East India Company. The argument for the corporation is that it organizes and leverages wealth toward specific purposes (both good and bad) in ways that would be a lot more difficult without it. The question you raise is very much worth thinking about but I don't think the answer is simple at all.
By the way, it would appear that today is the last day you can download the book for free, so If you have any interest, it might be a good idea to download it now.
(paging @cykhic and @squalex just in case they're interested)
Thanks - did not notice that! I'll have to add it to the list
Good catch --- thanks for the ping.