"A growing body of research suggests that the vast amounts spent on repurchasing their own stock is a chief cause of the stagnation of American wages and investment and could be a potential source of long-term national decline." Senator Tammy Baldwin
Commentary: In 1982 the SEC issued a rule to provide a safe harbor from manipulations liability Rule 10b-18. Stock buybacks by corporations were near zero at that time, in 2014 $500 billion was spent on stock repurchases. Allocation of corporate profits to stock buybacks by the 449 companies listed on the S&P Index from 2003 - 2012 represented 54% of earnings or $2.4 trillion; dividends accounted for 37% of earnings. Very little remained for investments in productive capacity, higher incomes for employees or future growth of their companies. But executives received $30.3 million apiece; 42% from exercising the sale of stock options and 41% from stock awards. Executive pay is based upon the price of their stock.
Buybacks undermine the formation of physical and human capital.
The corporate argument for free cash flow distribution to shareholders is the risk involved in making an investment without a guaranteed return. However, this also applies to taxpayers and workers. Taxpayers bear risk through government agencies that invest in infrastructure and knowledge creation. Workers bear risk by investing in the development of their capabilities at the firms who employ them and generate productivity improvements thus have equal claims on profits as shareholders.
Gary Pisano and Willy Shih warn in Restoring American competitiveness
"U.S. coorporations must start investing more in R&D and manufacturing to remain competitive with new world competition. Executives are not acting responsibly when they refuse to invest broadly and deeply in the productive capabilities their organizations need to continually innovate. Taxpayers and workers should be part of the Board of Directors to insure executives allocate resources to capabilities that generate innovation and value."
The raison d`etre for corporations is MSV, maximizing shareholder value. Corporations now lobby Congress for federal subsidies for research, development and exploration while devoting greater resources to stock buybacks. i.e., ExxonMobile receives $600 million in subsidies for oil exploration and spends $21 billion a year on buybacks. Same actions by Microsoft, GE and many others.
Dominic Barton, Author of Capitalism for the Long Term opines "Some executives may get pleasure from an economy where corporate profits result in shared prosperity, a reasonable salary for allocating resources in ways that sustain the enterprise, provide higher standards of living to workers who make it succeed and generate tax revenue for the governments that provide crucial inputs."