Your CEO isn't keeping you down - his stock buybacks are...

We hear about the CEO's of publicly traded corporations sometimes taking $1 yearly salaries as a show of their company spirit – the truth is that they also harvest gargantuan executive bonuses through “carefully aimed” stock price targets, all made possible by the gaming of the system via stock buybacks. Here's the real story: even the well paid CEO's harvest those bonuses. It's those stock buybacks that have been wrecking the middle class for forty long years…

TLDR:

Prior to 1982, stock buybacks were illegal.
Stock buybacks vaporize all available (and borrowed) corporate cash for the sole purpose of triggering short-term executive bonuses. Buybacks benefit nobody else in the long-run.
In the long-run, companies that refuse to do stock buybacks fare much better (Ref #4).
Stock buybacks, for the manipulative purpose of hitting stock price targets, have been the primary driver of employer wage abuse and layoffs for the past forty years.
Hitting those same bonus-triggering stock price targets has led to the steady dismantling of the American manufacturing base under the ruse that a service-based economy is better. It's not.
Every quarter, corporate executives happily waste BILLIONS of available cash to trigger only millions in bonuses for themselves, literally robbing shareholders of BILLIONS in dividends and cash that could've been used to grow the business.

Stock buybacks have become so common and so automatic that they’re now the opium of all CEO’s at publicly traded corporations. So enticing, so juicy, and so yummy that CEO's can’t resist doing them in spite of putting the company’s financial future in peril. This post will show you how stock buybacks became legal, why they have consistently proven to be financial Armageddon for the middle class, and how we might shove the practice back into the genies’ bottle.

Are you old enough to remember 1982? While you were spending your hard earned dollars at the movie theater watching ET and Grease 2, the Securities and Exchange Commission was adopting Rule 10b-18. Prior to that legislation, it was illegal for corporations to purchase their own stock off the stock market for the purposes of eliminating it. Why? Because doing so would cause the overall pool of available shares to shrink, which in turn, would cause the price for the remaining shares to go up just a bit.

It’s akin to poisoning all the wells in your town to boost the value of the bottled water you have stored in your garage. Then, once you sell all your high-priced garage water, you un-poison the existing wells.

Stock buybacks were illegal prior to 1982 because such behavior was considered stock price manipulation. In other words, it was illegal to buy and destroy stock for the sole purpose of driving up the stock price.

Simple enough, right?

In practice, stock buybacks have no appreciable benefit to the overall long-term success of corporations (quite the opposite really, see Ref #4 below).

But long-term success is not a key driver in today's boardrooms.

Stock buybacks don’t increase sales. They don’t develop new products or services. They don't build new factories (in fact, they incentivize closing factories). They don’t even cause new markets to open up. Nope, stock buybacks are the vaporization of a corporation’s free cash (and borrowed cash in many cases) for the primary goal of lifting the stock price up a few points to trigger those juicy executive bonuses.

So to summarize: Before 1982, stock buybacks were price manipulation. After 1982, they were price manipulation. See the difference? No? That’s because it’s still price manipulation. To understand how this financial jackhammer is now legal, you had to attend college at the University of Rochester in 1976.

Prior to the mid 1970’s, the purpose of a corporation’s executive team was to grow a company long-term by increasing sales and reducing operating costs. They did this with rational behavior like creating new products, improving existing products, reducing costs, creative marketing, etc. Quite literally – growing the company.

After 1976, that all changed thanks to what started as an academic theory.

Two finance professors named Jensen and Meckling at the University of Rochester published a paper unassumingly titled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (Ref #1). To summarize, it said that the executive & management teams' only goal should be to increase shareholder value by increasing the stock price. Their primary focus should be the stock price, not profits or even the company itself. At least, that’s how the wrong people interpreted it.

Executives read that paper and firewalled the throttles on their bizjets back to their board rooms. They burst through the doors with new stone tablets that had only one commandment: “Thou shalt goose the hell out of our quarterly stock price.” It would become the boardroom equivalent of stock price goalseeking. To reward themselves, they turned their incentive structure on its head, tying bonuses to those stock price targets. Pick a price you want the stock to be next quarter and then do everything you can to make it happen.

By. Any. Means. Necessary.

The only problem was it was hard to make that happen, except through hard work, occasional accounting fraud, pension looting, or the good old standby of employee layoffs.

So despite this new C-level strategy shift, it was still tricky to be a CEO. But a few years later, in 1982, the SEC handed executives the solution on a silver platter by adopting the now infamous 10b-18 ruling.

Welcome to the stock repurchase program.

Never had it been so easy to manipulate stock prices at the push of a button – to twist a phrase by Warren Buffet, so easy even a monkey could do it. In this case, a monkey that's paid millions of dollars in salary to push that button. Say hello to endless executive bonuses!

The irony was that many of these stock price bumps are not long-lived, so they don’t usually benefit the average shareholder. Let it be known that their primary raison d’etre is to trigger executive bonuses.

To top it off, just as soon as many of these corporations eliminate the shares and trigger bonuses, they then re-issue new shares to sell to employees in lieu of good salaries – or to raise more capital so they can, you guessed it, perform more buybacks. So in effect, this whole destructive exercise ends up being a wash (except for those bonus triggers) for many companies.

Gone were the days of doing hard work to build a company through improved sales. In were the days of grinding through any and all available spare (and borrowed) cash for a short term bump in quarterly stock price.

And grind they did…

To put into perspective how cataclysmic the destruction of corporate cash has been, it’s estimated that approximately $1.6 TRILLION dollars in spare/borrowed corporate cash has been vaporized on stock buybacks since 2018 alone (Ref #2). Imagine how much internal growth and investment those same dollars could have generated if used as a building tool instead of being incinerated. Perhaps to build new factories? Improve efficiencies? Perform more R&D? Hire more employees? Pay employees more? Or just straight up pay it out to each shareholder in the form of a dividend so actual shareholders can decide the best use of the money?

Nope. Just burn the cash. Vaporize it. Torch it. Heck, borrow a boatload of cash and burn that too! “Gimme my short-term stock price target bonus!” demands the average hired hand CEO every quarter of every year.

Financial journalists went along for the ride, too, rolling their eyes back into their head and digging deep to convince us that stock buybacks are a good thing. One common refrain from the Wall Street hangers on is that increasing stock price helps corporations get advantageous loan rates, or “access to favorable capital” as they like to say. Okay, but where’s the logic in that, given that companies could just use their already available cash instead to self-fund any expansion (and avoid paying interest on the loans.)

To really blow your mind, many of these buyback-happy corporations want to borrow all that money not for business expansion, but for doing even more stock buybacks, putting them into even more enormous debt and even more financial peril. It's like somebody losing their life savings at a casino and doubling down with cash advances on their credit cards to go deeper in debt.

Sure, the Fed interest rates have been zero for over a decade (FYI: not a sign of a healthy economy), but the fact remains they are taking on huge debt. Even with inflation, paying off those gargantuan loans has become a substantial drag on many a corporate bottom line profit and definitely a drag on employee wages. But remember, modern CEO’s don’t care about long term growth. Only current stock price.

Is it starting to make sense? There’s nothing good long term that comes from stock buybacks except for triggering executive bonuses. Even the Wall Street Journal is starting to consider stock buybacks a trick for transferring shareholder wealth into the pockets of executives as bonuses (See Ref #5).

Okay, so how do stock buybacks hurt the middle class? Well, they actually put a huge drain on the nation as a whole. They allow executives to act in the most horrendously irresponsible and abusive manner (to benefit themselves over the well-being of the corporation) and then come crawling back for bailouts every time the stock market takes a dump.

To put it into perspective, in the decade of the 2010’s, all of the major airlines used 96% of their available cash on stock buybacks. (Ref #3)

That’s right. Virtually all of their money. Their rainy day money. Their growth money. Their re-investment money. Money they could’ve spent on better services or schedules or newer airplanes? It was all converted to dust so that the executives could goose the quarterly stock price enough to trigger a flood of bonuses.

It’s important to note that the 96% of cash they destroyed did not necessarily result in 96% worth of increased value. No, the benefit overall is usually much less. So if you’re looking to hire a CEO that can convert a large fortune into a small fortune, get yourself an airline executive.

To complete this thought, over the past five years, the top 20 “buy-back” corporations alone have shredded a combined $1.3 TRILLION on stock buybacks. (See Ref #7). That's $1.3 trillion that the executives decided to vaporize rather than give back to shareholders in the form of dividends so that shareholders could do what they felt was most appropriate.

Think about that 96% financial vaporization rate next time your flight gets cancelled or delayed due to a staff shortage or equipment failure. Don't take it out on the pilots or the flight attendants – it's not their fault.

The financial mismanagement via stock buybacks has another more sinister side to it as well. Many corporations are wasting billions on stock buybacks for the purpose of triggering only millions in executive bonuses. So much emphasis is placed on the so-called intrinsic efficiency of companies that it is truly criminal that they would waste so much of a valuable resource (free cash) for such little benefit to them (see the airline example).

Executives that lean on the stock buyback button do not have the best interest of the corporation in mind. If a company performs stock buybacks, they need to be called out for it.

How many times have you been put on hold by a company where the message says “Due to unusually high call volumes…”? And yet the same message plays every day? How many times has your own department been struggling with being understaffed due to corporate refusing to hire people? Or worse, saying they don't “have the budget”? Chances are good that if you research your corporation on your favorite financial news website, you’ll find that they approved millions (or billions) in stock buybacks this year.

At one point in time, they certainly did have the budget.

The disturbing incentives for stock buybacks hurts everybody down the line except for the executives. It warps the free market so that a huge slice of the pie always flows through the executives' bank account.

If stock buybacks were still illegal, there would’ve been trillions of available cash over the years that could’ve been re-invested in businesses. Think of how many new jobs, new products, and new factories that could’ve created. Heck, they could've just paid it out as huge dividends to the shareholders, but dividends don't trigger executive bonuses.

Speaking of dividends… There’s another silly Wall Street argument regarding stock buybacks versus paying out dividends. The argument goes like this: dividends will incur a tax immediately, but share price increases from stock buybacks won’t be taxed until the stock is sold. The truth is that the majority of stocks are held in either tax-deferred (retirement) or non-taxable accounts (See Ref #6), so neither capital gains nor reinvested dividends are taxed until withdrawn after retirement for most people. And even then, usually at a much lower rate.

Most amazing of all:

Dividends paid/re-invested into a Roth IRA are NEVER TAXED AT ALL, EVEN AT WITHDRAWAL (Ref #9).

So you see, there is no reason NOT to give those pools of available cash straight back to the shareholders as dividends if the corporation feels there is no other productive use for the money (FYI: a sure sign of poor leadership).

Well, okay, there is one reason, but to beat a dead horse, dividends don't trigger executive bonuses. Stock buybacks do.

As a shareholder, if you had to pick between a temporary bump in stock price (which you’ll likely not see any long-term benefits from anyways) versus a portion of a yearly distribution of billions of dollars in dividends into your retirement account, you’d have to be masochistic to prefer the fleeting effect from a stock buyback.

Perhaps you disagree, using anecdotal examples such as Amazon. After all, Amazon's stock has gone up, up, and up for years. There's only one small problem: Amazon is one of the few corporations that refuses to do stock buybacks, pouring every last cent into growing their businesses and hiring employees. (Ref #8).

Since 1982, executives have been artificially converting trillions of available company cash into billions worth of bonuses, deposited straight into their pockets immediately while screwing employees, shareholders, and the nation out of so much potential long-term growth and dividends. In fact, because closing factories or moving them overseas also gooses the quarterly stock price (there goes that bonus trigger again), it’s no coincidence that American executives have been surgically dismantling this nation for four decades.

It had nothing to do with worker productivity. It had nothing to do with Americans being “unable to compete.” If that were the case, Honda, Toyota, Hyundai, Kia, BMW, etc. would not have built car factories right here inside the USA. The dismantling of factories was all about meeting those stock price targets and triggering executive bonuses.

If you want to correct what has been a soul-sucking albatross around the neck of every working American for four decades, ask your elected representatives to make stock buybacks illegal again.

This time, permanently.

It's time to stop allowing them to vaporize the long-term growth and stability of this nation. Contact your Senator and House of Representatives member and demand this legal grifting loophole be ended.

The addiction to stock buybacks is so strong that the fight to make them illegal will unleash the greatest propaganda campaign in American history. Entire news networks will be reconfigured to fight it. They'll blame it on unions. They'll blame it on lazy workers. They'll blame it on people who quit their jobs just to live off of unemployment (despite unemployment not being available to people who quit their jobs). It will be utter madness for the worker bees. Just keep forging ahead, knowing that stock buybacks were the driving force behind all the antagonistic executive decisions of the past forty years.

Please share your thoughts below!

*** References ***

Ref #1:

https://www.cringely.com/2018/02/26/win-lose-wall-street-screwed-middle-class/

Ref #2:

https://www.cnbc.com/2021/10/27/stock-buybacks-surge-to-likely-record-highs-but-a-tax-from-congress-poses-a-threat.html

Ref #3:

https://markets.businessinsider.com/news/stocks/airline-bailout-coronavirus-share-buyback-debate-trump-economy-aoc-2020-3

Ref #4:

https://www.cnbc.com/2016/03/28/companies-that-do-buybacks-do-worst-over-time-.html

Ref #5:

https://www.wsj.com/articles/the-real-problem-with-stock-buybacks-1530903118