Last week, Sen. Tammy Baldwin (D-WI) sent a letter to the head of the Securities and Exchange Commission (SEC) about the growing trend of companies giving money to investors through stock buybacks, rather than investing in workers or equipment.
Workers’ wages are currently growing at the slowest pace since the 1960s, despite healthy corporate profits and increasing productivity. A big part of that disconnect is that companies are spending nearly all of their profits on stock buybacks and dividends, which serve to enrich shareholders, leaving little room to increase pay or make any other long-term investments.
Baldwin’s letter notes that the SEC issued a rule in 1982, Rule 10b-18, that changed the way it regulates stock price manipulation and therefore stock buybacks, which often end up driving up the price of a company’s stock. Under the new rule, executives could do open market stock buybacks with little worry that the SEC would look into whether they were manipulating prices. “There is mounting evidence to suggest that buybacks have a negative effect on jobs, wages, and investment, which in turn have negative impacts on innovation and long-term national economic growth, competitiveness, and security,” the letter says. “This evidence raises serious questions about the adequacy of the SEC’s rules governing repurchases on the open market.”
Given that the SEC regulates “fair and efficient capital markets,” the letter states, Baldwin has requested any analysis the agency has done about the impact of that rule change, any investigations into the violation of the rule, and an assessment “of whether this rule is adequate for the SEC’s state mission — to foster capital formation and prevent fraud.”
The letter represents one of the first responses from Congressional lawmakers to the explosion of money going to shareholders instead of to company investments in workers’ wages and other long-term priorities. But can the SEC really tamp down on trend and are there any other solutions that might curb it?
William Lazonick, a professor of economics at the University of Massachusetts Lowell who has studied the issue of stock buybacks for years, noted that Baldwin’s letter is unique. “No one has ever asked the SEC anything about stock buybacks and the rules that are supposed to regulate it,” he noted. And he thinks Baldwin was right to send her letter to the SEC. “That’s the place to start,” he said. Buybacks “are contrary to what the state mission of the SEC is,” which is to keep the market free of manipulation and to encourage capital formation.
Lazonick argues that Rule 10b-18 “basically says that companies can do a lot of stock buybacks and they won’t be charged with manipulation, and in fact [the agency] never investigates if they’re even doing more than they’re allowed to do…. They’re not trying to get rid of manipulation, they’re encouraging it.”
The first step, he argues, is getting information from the SEC about what it has or hasn’t done to monitor market manipulation, along the lines of what Baldwin is requesting. But real change will take more. “If there’s really going to be any substantial change in this, it would have to I think go through Congress, not just the SEC making a rule,” he said.
It would also have to come with other changes to make sure that companies that started investing more of their profits in-house didn’t become targets of hostile takeovers, or when a company attempts to gain control over another without management’s consent by either convincing the shareholders to let it be acquired or by replacing the current management. “If you kept this money in the companies, big Wall Street actors would be out there being hostile again to get access to companies…and pump the money out one way or the other,” he said. “It wouldn’t solve the problem without additional legislation that has to do with issues of corporate governance.”
Meanwhile, JW Mason, a fellow at the Roosevelt Institute, argues that tamping down on buybacks might not make things much better, because companies could simply turn to dividends — a share of earnings paid out directly to shareholders — to give money to investors instead. So targeting the SEC addresses “the symptom here a little bit but not the cause,” he said.
Both suggested an important response to these trends is empowering workers to influence what companies do with their profits. “It’s not to say there’s a perfect model out there, but the U.S. has one of the most disastrous models in place right now,” Lazonick argued. Germany may have one of the more robust systems. Companies there are required to let workers, rather than shareholders, vote on who gets elected to half of their board seats. That means workers themselves often end up with a fair number of board positions and therefore have access to information and sway over how the company spends its money. Even in other countries that don’t have Germany’s strict requirement, 15 others have provisions requiring at least some worker representation on boards.
“Unless you start having the people whose interests are really served by investing in companies, workers and taxpayers, on boards who have information on what companies are doing and some information over the allocation of resources,” Lazonick said, “you’re never going to solve the problem.”
Mason also suggests giving investors more power to reward companies that take a longer view toward company value. “There’s no silver bullet here, but [it’s important] to shift the balance of forces within shareholders away from the short-term payout and more toward building the company in an ongoing way,” he noted. Currently, shareholders like union pension funds are legally obligated to seek the highest returns for their investments. While the law technically says that they can take into consideration secondary benefits like investments in wages or other long-term priorities if all else is equal, an update under the George W. Bush administration had a “chilling effect” on the people in charge of these investments on seeking out those benefits, according to Heather Slavkin Corzo in the office of investment at the AFL-CIO. But that language could be clarified to make it clear that pensions have room to invest with an eye toward the long term. “It would definitely be positive,” Corzo said. “You might change some behavior.”
It wouldn’t be too painful to make reforms, no matter which form they take. Lazonick pointed out that buybacks didn’t really come into vogue until the 1980s. “So it’s not like a different system is alien to the United States,” he pointed out. But without action, there’s little stopping corporations from continuing to hand out cash to shareholders instead of workers.