Self-made billionaire (meaning he didn’t inherit it), Nick Hanauer is not one to mince words, especially when they are backed by facts and principles of fairness. The Seattle entrepreneur, author and venture capitalist (he was the first non-family investor in Amazon), is known for vocally championing Seattle’s staggered increase of its minimum wage to $15 an hour as good for workers and the economy. Any contrary corporatist to debate him on this subject would lose big.
Mr. Hanauer is speaking before business and political groups, including the Democratic senators at their recent Baltimore retreat, about a favorite cause of mine—the utterly damaging waste of massive corporate profits known as stock buybacks. Stock buybacks are so massive—6.9 trillion since 2004—that it justifies Mr. Hanauer’s description of them as “the biggest scam bankrupting business and the middle class.”
Hear him out: “Our crisis of income inequality wasn’t principally caused by the rich not paying enough tax, even though we don’t. Rather, it is largely the product of the $1 trillion a year that once went to wages, but now goes to corporate profits. And this consumer demand and investment-killing trillion-dollar-a-year transfer of wealth from the bottom 80 percent of households to the top 1 percent is the direct result of the economic and regulatory policies both Republicans and Democrats have imposed since the dawn of the trickle down era.” That was in 1982 when President Reagan loosened the rules that had made stock buybacks a form of illegal stock manipulation, he adds.
Between 2003 and 2012, stock buybacks amounted to an astounding 54% of corporate profits which could have gone to “higher wages or increased investments in plants and equipment or in public investment,” such as infrastructure, all of which would have increased consumer demand, the engine of economic growth, he notes.
Leading shareholder rights advocate and author, Robert Monks, has pointed out that stock buybacks reflect a serious failure of management. Corporations have not used this money for productive purposes and labor well-being, but rather for a paper increase in the earnings per share (EPS) to elevate the value of already skyrocketing executive compensation packages.
Mr. Hanauer adds to the growing realization by business writers of how harmful stock buybacks, driven by executive greed, can be with this example from Walmart, which recently announced giving its lowest paid workers a billion dollars more a year in wages:
“Wal-Mart has spent [over ten years] more than$65.4 billion on stock buybacks — about 47 percent of its profits. That’s an average of more than $6.5 billion a year in stock buybacks, enough to give each of its 1.4 million U.S. workers a $4,670-a-year raise. It is also, coincidentally, an amount roughly equivalent to the estimated $6.2 billion Wal-Mart costs U.S. taxpayers every year in food stamps, Medicaid, subsidized housing, and other public assistance to its many impoverished employees. In this context, how can stock buybacks be either morally or economically justified?”
James Montier, an asset allocation manager, has documented how a generation of stock buybacks has contributed to reduced business investments and increased inequality. (See “The World’s Dumbest Idea”.)
Jeff Reeves, a Market Watch contributor, says that stock repurchases are a “clever trick among Wall Street sharks…to buy back stock to maximize the value of stock awards to top executives.” In an article on March 12, 2015, he listed six giant companies who engaged in megastock buybacks in 2014 but didn’t succeed in increasing their shares’ prices. They are Exxon Mobil, IBM, Caterpillar, Boeing, McDonald’s and AT&T. He concluded that “massive buyback plans cannot change the fundamentals of a business, and turn a stock in a tough spot into a good investment.”
The Harvard Business Review’s writers, William Lazonick and Matt Hopkins, just wrote an article criticizing GM’s $5 billion stock buyback, titled “Bad for America and the Company,” a few years after U.S. taxpayers had put up $49.5 billion to bail out the company from a self-inflicted, fast-approaching bankruptcy. They quote former top GM executive and auto designer, Bob Lutz, as saying that stock buybacks are “always a harbinger of the next downturn…in almost all cases, you regret it later.”
If all the above reflects Mr. Hanauer’s views, why does he declare that he too has “done stock buybacks” for his public companies? Well, “virtually all public companies do it. In this era of short-term-focused activist investors, it is nearly impossible to avoid,” he acknowledged.
In an interview with me he elaborated. Both major activist shareholders and institutional shareholders, such as leading mutual funds like Fidelity, put “enormous pressure on the company CFOs,” he said. They use the argument “well if you don’t believe enough in your stock to buy it back, why should we buy your shares?” When he resisted this “artificial inflation of the stock price,” saying “we shouldn’t be doing this,” he “lost every time.”
There has been considerable discussion about the misallocation of public budgets toward bloated military expenditures and corporate welfare subsidies, giveaways, bailouts and extreme tax escapes. Get ready for another public spotlight on the misallocation of record, big corporate profits by their executives and boards of directors. Making both of these cruel power plays into major political issues during the next presidential campaign could be a very healthy antidote to an otherwise tedious, vapid, rhetorical exercise through the long primaries and general election days.