SEC Commissioner Wants To Pump The Brakes On Corporate Stock Buybacks

Nov 18, 2019

SEC Commissioner Robert Jackson says U.S. corporations aren’t helping build the economy. They’re using tax cuts to buy back their own stocks.

He wants to put the brakes on the common corporate practice.

Guest

Robert Jackson Jr., commissioner at the Securities and Exchange Commission. Appointed to the SEC in 2017 by President Donald Trump. Confirmed in January 2018. (@SECJackson)

Interview Highlights

On the recurrence, time and time again, of stock buybacks after corporate tax cuts 

“We have been to the movie of tax cuts and buybacks before, in the Republican administration during the George W. Bush era. We enacted a quite substantial tax cut during that period. And studies after that showed very clearly that most corporations use the funds from that tax cut for buybacks. And here’s the kicker. That particular tax cut actually required that companies deploy the capital for capital expenditures, wage increases and investments in their people. Yet studies showed that, in fact, the companies use them for buybacks. So we’ve been to this movie before. And what you’re describing to me, that corporations turned around and took the Trump tax cut and didn’t use it in investing in their people or in infrastructure, but instead for other purposes, shouldn’t surprise anybody at all.”

“In my experience, and you know, before I was an FCC commissioner, I was a corporate lawyer. And before then I was an investment banker. My experience is that people do what they’re paid to do. People follow their incentives. And the truth is that CEOs don’t get paid for making investments in people. CEOs don’t get paid for building long term capital investments in American communities. CEOs get paid on the basis of stock price. And so it’s not surprising to me at all, as someone who studies incentives, that what they did with the money we gave them was maximize that stock price. Now we can talk as a society about whether or not that’s the right thing for them to maximize. And we should. But we ought to be honest with ourselves about what’s going to happen when we cut taxes for American corporations, because we’ve been to this movie before.”

What is the reasoning, on paper, for a corporate buyback of stock?

“The basic law and finance of a buyback works like this. The company has excess capital and has to determine what to do with it. And it will often choose — depending on the projects that are available to it — to return some of that capital to investors, by announcing that the company will buy back shares. And typically the signal that’s being sent there is that the company believes that the stock is undervalued. And that as a consequence, they’re prepared to use Treasury money at the corporation to buy those shares back.”

If performance in share price is tied to a CEO’s compensation, is there perhaps a perverse incentive there?

“Absolutely. So two things to say, and I think you’re right, we should unpack these two things. One is the CEO has to decide whether and when to do a buyback. And second, the CEO is paid based on the stock price and indeed paid in shares of stock. And what the CEO would like to do is find a moment in which to sell those shares. And what’s really troubling for me is that at the same moment, the company says, ‘The stock is so cheap, we are going to use Treasury money to buy it.’ That’s the same moment the CEO says, ‘This is a time for me to sell it.’ And my experience with CEOs is that they don’t sell expensive things cheaply. And that’s why I’m so troubled by the notion that at the same time they’re buying back stock, they’re selling their own personal shares.”

From The Reading List

Wall Street Journal: “Tax Cuts Provide Limited Boost to Workers’ Wages” — “U.S. companies are putting savings from the corporate tax cut to use, but only a fraction of it is flowing to employees’ wallets, new data show.

“In the months after the December tax-code overhaul that lowered the corporate rate to 21% from 35%, dozens of companies such as Walmart Inc. and FedEx Corp. announced one-time bonuses and wage increases for hourly workers. Those moves earned praise from the Trump administration as evidence the cuts were quickly reaching many Americans.

“Now, various surveys indicate that most companies aren’t passing the money directly to employees.”

CNBC: “Stock buybacks hit a record $1.1 trillion, and the year’s not over” — “It’s official: This is an all-time record year for corporate stock buybacks.

“Announced buybacks for 2018 are now at $1.1 trillion. And companies are using their authorizations. About $800 billion of stock has already been bought back, leaving about $300 billion yet to be purchased. We’ve seen buyback announcements recently from Lowe’s, Pfizer, and Facebook, but in the last few days, as stocks have moved to new lows, companies are picking up the pace of activity.”

Harvard Business Review: “Are Buybacks Really Shortchanging Investment?” — “It’s no secret that the American economy is suffering from the twin ills of slow growth and rising income inequality. Many lay the blame at the doors of America’s largest public corporations. The charge: These firms prefer to distribute cash generated from their businesses to shareholders through stock buybacks and dividends rather than invest for the long term, undermining job growth and putting our economic future at risk. Excessive distributions to shareholders, it’s further claimed, also increase inequality: They cause wages to stagnate while enriching shareholders and executives.

“Buybacks in particular have attracted the ire of corporate America’s critics. Larry Fink, CEO of the investment management firm BlackRock, for example, warned corporate leaders against seeking to ‘deliver immediate returns to shareholders, such as buy-backs…while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.’ Former U.S. Vice President Joseph Biden recently claimed that the high level of buybacks ‘has led to significant decline in business investment’ with ‘most of the harm…borne by workers.’ Critics often point to the high ratio of shareholder payouts to net income. As William Lazonick of the University of Massachusetts noted in these pages, stock repurchases and dividends totaled 91% of net income in S&P 500 firms from 2003 to 2012.”

Vox: “How did American CEOs get so rich?” — “On October 24, 1929, the American stock market crashed. Fortunes disappeared overnight, and the value of American companies tanked. But the people in charge of those companies had an idea: They started buying shares of their own stock from investors, which meant there were fewer stocks out there for other people to buy. And when there’s less of something, the price goes up.

“Corporations had figured out a kind of magic trick. They could jack up their stock price without actually doing anything. This was the beginning of the stock buyback.”

This article was originally published on WBUR.org.

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