America's CEOs and hedge funds are starving the nation's corporations to death

Stock buybacks (previously) allow CEOs to drive up the company's share-price by using profits to buy shares back from investors, rather than investing the money in wages, R&D, capital or expansion.

Many CEOs' pay is based on share-price, and this, combined with "activist investors" (mostly hedge-fund managers) has incentivized the leaders of America's biggest companies to greatly reduce their R&D spending, curtail expansion, fire workers, and flatline or cut wages, while extracting titanic sums from the companies' coffers to make investors (and themselves) much, much richer.

This is especially pronounced in high-tech, R&D-driven companies like IBM and HP. Since 2007, IBM's per-share earnings have gone up 66%, though its earnings have only risen by 15%. It has cut its workforce by 55,000 since 2012, and cut contributions to employees' 401(k)s. Since 2005, IBM's spent $157 billion on buybacks and dividends, and only spent $111 billion on R&D in the same period.

This is short-termism at its worst: companies are devouring their seed corn, starving away their muscle-tissue and hollowing out their bones. IBM made the money it's spending on dividends and buybacks through the R&D that led to the divisions it has sold off (e.g. to Lenovo) and without new R&D spending, there will be no IBM in the future to flog off its divisions and enrich future investors. This is irrelevant, perhaps, to short-term investors who can easily dip in and out of IBM's share-pool and for CEOs who will deploy their golden parachutes before the day of reckoning. But for employees who depend on the company for jobs, for regional economies where the company has its offices and for customers relying on the company to service and improve the products they invest in, this is a disaster.

Reuters' in-depth article on buy-backs and dividends gives example after example (HP, Thompson-Reuters, , Northrop Grumman, Lockheed Martin, GM, Qualcomm, etc) of R&D intensive companies that have flatlined or reduced their R&D budgets and laid off the workers who conduct the R&D, while paying out jaw-dropping sums for buybacks and dividends. They quote Ohio State University's business professor Itzhak Ben-David who explains the ideology at work: "Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms. These are components in the process that have the goal of maximizing shareholders’ value."

This tactic has "concentrated income at the top and has led to the disappearance of middle class jobs," according to University of Massachusetts-Lowell professor William Lazonick, while also destroying the morale and loyalty of those employees who do remain at the hollowed-out firms.

The cult of fiduciary duty will, I think, be remembered, as a great aberration in human history, the moment at which we surrendered our free will and public interest to transhuman hive-organisms that view human beings as their inconvenient gut flora, towards whom they are legally prohibited from showing any empathy or compassion.

In March, Qualcomm Inc, under pressure from hedge fund Jana Partners, agreed to boost its program to purchase $10 billion of its shares over the next 12 months; the company already had an existing $7.8 billion buyback program and a commitment to return three quarters of its free cash flow to shareholders. Still, the stock had been underperforming the S&P 500 for most of the past 10 years.

Jana wasn’t satisfied, and in July, Qualcomm announced it would shed nearly 5,000 workers, among other moves to cut costs. R&D spending, it said, would stay at around $4 billion a year.

Managers ignore shareholder demands at their own risk, especially when the share price is under pressure. “None of it is optional. If you ignore them, you go away,” said Russ Daniels, a technology and management executive who spent 15 years at Apple Inc and then 13 years at HP, where he was chief technology officer for enterprise services when he left in 2012. “It’s all just resource allocation. … The situation right now is there are a lot of investors who believe that they can make a better decision about how to apply that resource than the management of the business can.”

The Cannibalized Company [Karen Brettell, David Gaffen and David Rohde/Reuters]

(via Naked Capitalism)