Companies use stock buybacks to use profits to increase their stock price. Two U.S. Senators want to only allow this with companies who will do business their way.
U.S. Senators Bernie Sanders and Chuck Schumer take a dim view of corporate stock buybacks, which they made clear in a guest editorial that just got published in the New York Times.
They go into some detail about why they feel that these buybacks do not serve the workers of the companies that buy back this stock. Being politicians that lean to the left of the political spectrum, especially Sanders, it’s not unusual that they would focus on the needs of workers over companies, and are looking to use political clout to influence these companies to enact policies that are more in tune with their political philosophy.
The first question that should come to mind here is to ask what all of this has to do with workers, and that would be a very good question actually. Deciding whether to buy back stock or not is an issue that pertains to a company’s owners, and really has nothing to do with their rank and file employees, whether the profits are distributed directly or through higher share prices.
The authors start out by looking back upon what they see as the glory days of American business, where “until the 1970’s, American businesses shared a belief that they had a duty not only to their shareholders, but to their workers…which created an extremely prosperous America for working people and the broad middle of the country.”
Since then, Sanders and Schumer feel that the focus has turned to shareholder value only, neglecting these duties and creating more economic inequality. They want to try to legislate a stronger duty to workers and hit companies in the wallet, by threatening to take away their ability to buy back shares as the stick to get them more in line.
We now have our connection with share buybacks and the American worker, and companies do benefit at times from buying back their own shares, which does drive up share prices, where they essentially re-invest their profits in the company in an indirect way anyway, rather than pay more of them out to shareholders.
What Do Stock Buybacks Have to Do with Employee Compensation?
This is why this particular issue is essentially an issue that pertains to shareholders and not workers so much, and while Sanders and Schumer argue that this could be used instead for things like research and development, this in itself doesn’t cause the things that the gentleman are looking to improve, which is higher wages for workers.
Reinvesting more of this money back into the business directly may indeed improve worker productivity as they say, but whatever benefits that may accrue are essentially going to benefit the business, not so much the workers, who have already agreed to work at a given wage independent of these things. Businesses don’t pay more just out of the goodness of their hearts, they do so from being influenced by business conditions, when it is in their interests to pay more to get more value for themselves.
Wages are set by the job market essentially, although we do have minimum wage laws that set a floor here, and prevent the situations that we see in many other countries where people are forced to work for wages so low that one can barely survive on, if at all.
Whether we need to do more here with this, raising these minimum wage requirements further, is a separate discussion, and using a company’s ability to buy back its shares as a ransom for this may be questioned for taking too broad an approach to this issue.
Schumer and Sanders point out that 90% of corporate profits get used for either stock buybacks or dividends, meaning that only 10% of earnings get directly put back into the business. Perhaps this is indeed too low of a number, but it’s the shareholders who own the company and get to decide this, and we can also presume that they are pursuing their own interests by only retaining so little.
The senators therefore aren’t just looking to use the power of law to force companies to adopt their collectivist business morals, they also wish to impose their ideals of business management upon them. The fact that it isn’t really that clear how changing the distribution of profits will produce all that much change does not seem to bother them, although there is little doubt that they are biased against shareholders and favorably biased towards their employees, and looking to beat down shareholder value may therefore be enough.
They claim that “the buyback of shares do not benefit the majority of Americans, because large shareholders tend to be wealthier.” This no doubt benefits large shareholders more than smaller ones, but a great number of Americans do own stock, and do benefit. It is also not at all made clear why business activities like this need even be concerned with what or what does not benefit the majority of Americans, or where this requirement imposed by our friends is to find any real foundation apart from their own preferences.
They do point out that 85% of stock is owned by the wealthiest 10% of households, and while they obviously aren’t troubled by meddling with their legal rights as shareholders, the people who own more modest amounts of stock, the ones that they are more concerned about, will get caught in this net as well.
These are what we would consider ordinary folks who work hard all their lives to build a nest egg big enough to retire on, and could not stand much of a shock to their plans as the wealthier people could. If we are concerned with the bottom nine-tenths, they are the ones that stand to lose the most in relative terms anyway with this proposed change.
This Idea is Doomed from the Start Though
Their rationale becomes further exposed in their citing the case of Walmart spending $20 billion on a share buyback deal while closing unprofitable stores and laying off thousands in the process. They claim that the money could have been used instead to keep the workers, keep the unprofitable stores open, and raise their wages as well.
This could have happened, but we can presume that these closures were decisions in favor of the company, and the fate of the workers got caught up in this, and it is not unreasonable for the company to do such things given that its sole task, after all, is to seek to maximize shareholder value, because that’s what a business does and is designed to do.
Boardrooms may not have the same socialist principles guiding them as they guide the views of these senators though, and shareholders do get to decide these things as long as their decisions are within the law. This is one of the reasons why you buy shares in a company actually, with the other one to make money, and having the ability to do so without undue interference from government is what essentially separates free market economies from more politically restrictive ones and provides the buoyancy that allows them to better flourish.
The plan for Senators Schumer and Sanders is to seek to introduce legislation that will only allow companies to buy back their shares if they are “paying all workers at least $15 an hour, providing seven days paid sick leave, and offering decent pensions and more reliable health benefits.”
If such a bill is passed, this would really hurt the consumer service industry in particular, like Walmart, whose compensation levels would have to increase to meet these new and higher targets. The pain of this therefore would not be evenly spread, and far from it, but it no doubt has the guns pointed at the right people as far as these two senators would be concerned.
Companies may simply choose not to buy back the stocks and just pay it all out in dividends though to avoid very disruptive conditions to their businesses, and this is the most likely scenario by far. This really won’t change things much if at all actually, not that getting enough support for a bill like this in Congress, and especially having it not vetoed by President Trump, is in any sense realistic anyway.