How Corporate Share Buybacks are Destroying America

Happy Labor Day!

This weekend’s must-read is quite apropos of today’s holiday. ‘Profits Without Prosperity’, an incredible article at the Harvard Business Review, shows exactly how corporate share buybacks have gotten out of control in the last decade. It then goes on to point out the various ways in which buybacks-gone-wild are killing the capital formation process in America, holding back the investments needed to keep us competitive and decimating the middle class workforce that actually built this country.

The evidence is presented by William Lazonick, professor of economics at the University of Massachusetts Lowell, and one of the nation’s foremost experts on corporate buyback activity. Having studied the subject for some three decades, Lazonick concludes that an SEC rule rewrite in the early 1980’s meant to drive Value Creation has instead ushered in an era of Value Extraction – wherein an increasingly smaller group of corporate executives and hedge fund managers reap an increasingly larger share of the productivity benefits of the economy.

For example, buybacks and dividends – which serve to drive compensation higher, enriching shareholders while diverting resources away from investment and innovation – accounted for over 75 percent of net income for long-time S&P 500 member companies last year. Contrast that with the retain-and-reinvest model that the economy ran on from the end of World War II to the end of the 1970’s, in which corporations were much less preoccupied with “maximizing shareholder value” and padding CEO salaries.

The chart below illustrates this point starkly:

Since the early 1980s, when restrictions on open-market buybacks were greatly eased, distributions to shareholders have absorbed a huge portion of net income, leaving much less for reinvestment in companies. (Note: Data are for the 251 companies that were in the S&P 500 Index in January 2013 and were publicly listed from 1981 through 2012. If the companies that went public after 1981, such as Microsoft, Cisco, Amgen, Oracle, and Dell, were included, repurchases as a percentage of net income would be even higher.)

buybacks

Josh here – No one is denying that stock prices haven’t gone up as a result of this trend. The claim, however, is that much more value has been extracted as a result of this than has been created for the real economy and other stakeholders – like taxpayers, employees and society at large.

You may not agree with all of Lazonick’s points or his prescriptions for a better way forward, but I guarantee this piece will change the way you think about how markets are currently working and whom they’re actually working for.

Find the time to read it this weekend (free registration may be required, just do it):

Profits Without Prosperity (Harvard Business Review)

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. http://www.newlaunchcondominiumsg.com commented on Dec 07

    … [Trackback]

    […] There you will find 35031 more Infos: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  2. visit site commented on Dec 10

    … [Trackback]

    […] Find More Informations here: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  3. apps free music commented on Dec 11

    … [Trackback]

    […] Read More here: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  4. Franklin commented on Dec 13

    .

    ñýíêñ çà èíôó!!

  5. scrape commented on Dec 17

    … [Trackback]

    […] Informations on that Topic: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  6. عقارات اسطنبول commented on Dec 21

    … [Trackback]

    […] Read More: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  7. curve de lux commented on Dec 22

    … [Trackback]

    […] There you will find 41463 more Infos: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  8. Blinds commented on Dec 22

    … [Trackback]

    […] Informations on that Topic: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  9. Roller Blinds commented on Dec 24

    … [Trackback]

    […] Informations on that Topic: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  10. telecharger jeux astuces commented on Dec 24

    … [Trackback]

    […] Read More: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  11. Marine Blue launch commented on Dec 24

    … [Trackback]

    […] Read More: thereformedbroker.com/2014/09/01/how-corporate-share-buybacks-are-destroying-america/ […]

  12. max commented on Jan 15

    .

    good.