For years, the Harvard Business School fellow William Lazonick has been writing about the rise of the "shareholder value" doctrine in capital markets, and how that has driven financial engineering tactics like stock buybacks, which allow shareholders (including top executives) to prosper at the expense of the companies they have invested in, siphoning value out of profitable businesses until they collapse.
The practice began in 1982, after the SEC ruled that stock buybacks were not an illegal form of stock-price manipulation. After decades of this practice, some of the most innovative, productive companies in America have been sucked dry and are on life-support, just as Lazonick predicted in his 2014 Harvard Business Review article, Profits Without Prosperity.
Lazonick was interviewed by Worth's Michelle Celarier, discussing how his ideas have found their way into the electoral program of Elizabeth Warren and new pronouncements from the Business Roundtable.
It is absolutely clear to me that the foundation for capital formation is companies retaining their profit through investing in the capabilities they have. In the late '70s and early '80s when you had the Japanese challenge, people were saying, "American companies are paying out too much dividends. They need to invest more." But now on top of dividends, you have buybacks, and it took me a lot of time to really understand it. It wasn't until much, much later that I understood its origins with this SEC rule.
How have increased buybacks affected the health of corporations?
A lot of the companies that are doing the largest purchases are now collapsing, like General Electric. It has now kind of gone totally towards financialization, or what I call value extraction. Or Cisco. It was the fastest-growing company in the world in the 1990s. It's now about twice the size as it was in 2000 but totally not innovative. It had been the highest market capitalization in the world in 2000, and the stock came down and all the profits went into propping up the stock price. As a result, it's not simply that the money disappears, it's that the leadership of the company is not focused on the next round of innovation. That's precisely what's going on with Apple, which has done $270 billion in buybacks.
Stock Buybacks Threaten Economic Growth [Michelle Celarier/Worth]
(via Naked Capitalism)