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[Piecake]

As economic power has shifted from workers to owners over the past 40 years, corporate profit’s take of the U.S. economy has doubled—from an average of 6 percent of GDP during America’s post-war economic heyday to more than 12 percent today. Yet despite this extra $1 trillion a year in corporate profits, job growth remains anemic, wages are flat, and our nation can no longer seem to afford even its most basic needs. A $3.6 trillion budget shortfall has left many roads, bridges, dams, and other public infrastructure in disrepair. Federal spending on economically crucial research and development has plummeted 40 percent, from 1.25 percent of GDP in 1977 to only 0.75 percent today. Adjusted for inflation, public university tuition—once mostly covered by the states—has more than doubled over the past 30 years, burying recent graduates under $1.2 trillion in student debt. Many public schools and our police and fire departments are dangerously underfunded.

Where did all this money go?

In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment. But today, these buybacks drain trillions of dollars of windfall profits out of the real economy and into a paper-asset bubble, inflating share prices while producing nothing of tangible value. Corporate managers have always felt pressure to grow earnings per share, or EPS, but where once their only option was the hard work of actually growing earnings by selling better products and services, they can now simply manipulate their EPS by reducing the number of shares outstanding.

So what’s changed? Before 1982, when John Shad, a former Wall Street CEO in charge of the Securities and Exchange Commission loosened regulations that define stock manipulation, corporate managers avoided stock buybacks out of fear of prosecution. That rule change, combined with a shift toward stock-based compensation for top executives, has essentially created a gigantic game of financial “keep away,” with CEOs and shareholders tossing a $700-billion ball back and forth over the heads of American workers, whose wages as a share of GDP have fallen in almost exact proportion to profit’s rise.

This practice is not only unfair to the American middle class, but is also demonstrably harmful to both individual companies and the American economy as a whole. In a recent white paper titled “The World’s Dumbest Idea,” GMO asset allocation manager James Montier strongly challenges the 40-year obsession with “shareholder value maximization,” or SVM, documenting the many ways that stock buybacks and excessive dividends have reduced business investment and boosted inequality. Almost all investment carried out by firms is financed by retained earnings, Montier points out, so the diversion of cash flow to stock buybacks has inevitably resulted in lower rates of business investment. Defenders of SVM argue that investors efficiently reallocate the profits they reap from repurchased shares by investing the proceeds into more promising enterprises. But Montier shows that since the 1980s, public corporations have actually bought back more equity than they’ve issued, representing a net negative equity flow. Shareholders aren’t providing capital to the corporate sector, they’re extracting it.

http://www.theatlantic.com/politics...-buyback-to-save-the-american-economy/385259/

 

[titiklabingapat]

Apple needs to spend more money!

On a more serious note, investors need to realize that money is just a tool, not actual wealth itself.

 

[Burt]

Shareholders aren’t providing capital to the corporate sector, they’re extracting it.

Pretty succinctly sums up what I'm sure most people have at least a vague sense of regarding the stock market nowadays.

That is why the federal government must reorient its policies from promoting personal enrichment to promoting national growth.

Mm hmm. Good luck with that one.

 

[Trojita]

Hiring a former Wall Street CEO as the leader of the Securities and Exchange Commission is like hiring the Captain Planet Villains as the leaders of the EPA. "I know how to prevent corruption on Wall Street because I did it myself" isn't a great selling point.

 

[Burt]

Hiring a former Wall Street CEO as the leader of the Securities and Exchange Commission is like hiring the Captain Planet Villains as the leaders of the EPA. "I know how to prevent corruption on Wall Street because I did it myself" isn't a great selling point.

Like hiring a dingo as a babysitter.

 

[GregLombardi]

Hiring a former Wall Street CEO as the leader of the Securities and Exchange Commission is like hiring the Captain Planet Villains as the leaders of the EPA. "I know how to prevent corruption on Wall Street because I did it myself" isn't a great selling point.

Can I just say that I have always loved, and will always love your avatar. It is the best avatar ever.

Also, yet another manner in which capitalism is failing and we aren't addressing it.

 

[Trojita]

Can I just say that I have always loved, and will always love your avatar. It is the best avatar ever.

Also, yet another manner in which capitalism is failing and we aren't addressing it.

Thank you :3

 

[badcrumble]

Can I just say that I have always loved, and will always love your avatar. It is the best avatar ever.

Also, yet another manner in which capitalism is failing and we aren't addressing it.

This is capitalism succeeding at being itself.

 

[Lactose_Intolerant]

Like hiring a dingo as a babysitter.

So funny. I like how he brought it up a few weeks later too

 

[nateeasy]

You misspelled Barack Obama

 

[markot]

Rent seeking is bad hmmkay.

 

[Piecake]

Can I just say that I have always loved, and will always love your avatar. It is the best avatar ever.

Also, yet another manner in which capitalism is failing and we aren't addressing it.

We created an amazingly perverse incentive.

CEO pay and their job performance is largely determined by the short term stock price. This means they not only have a great deal of incentive, but are under massive pressure to institute stock buybacks, which, as the article states, is an incredibly stupid economic policy (if implemented for the reasons above).

You misspelled Barack Obama

What is your argument? Do you disagree with the article's claims and evidence?

 

[CrankyJay]

Buybacks aren't necessarily as effective as this article likes to claim.

 

[Halvie]

hmmm...isn't there a very particular reason as to why buybacks have become so popular...

 

[terrisus]

Iwata: "Please understand."
Iwata: [laughs]

 

[Ether_Snake]

Buybacks aren't necessarily as effective as this article likes to claim.

Companies do a lot of things that aren't effective. The result is the same either way; the money doesn't go where it would be best used.

 

[jackissocool]

Wage labor and private ownership of the means of production are destroying the economy. All of this other shit is symptoms of that.

 

[AstroNut325]

What can we do about this?

 

[Halvie]

What can we do about this?

wait for interest rates to start rising

 

[Piecake]

What can we do about this?

So what’s changed? Before 1982, when John Shad, a former Wall Street CEO in charge of the Securities and Exchange Commission loosened regulations that define stock manipulation, corporate managers avoided stock buybacks out of fear of prosecution. That rule change, combined with a shift toward stock-based compensation for top executives, has essentially created a gigantic game of financial “keep away,” with CEOs and shareholders tossing a $700-billion ball back and forth over the heads of American workers, whose wages as a share of GDP have fallen in almost exact proportion to profit’s rise.

That's basically the author's solution. End the perverse incentive we have created through regulations and laws.

 

[CornBurrito]

Hiring a former Wall Street CEO as the leader of the Securities and Exchange Commission is like hiring the Captain Planet Villains as the leaders of the EPA. "I know how to prevent corruption on Wall Street because I did it myself" isn't a great selling point.

Aren't hackers often hired to beef up network security though?

 

[Fenderputty]

Hiring a former Wall Street CEO as the leader of the Securities and Exchange Commission is like hiring the Captain Planet Villains as the leaders of the EPA. "I know how to prevent corruption on Wall Street because I did it myself" isn't a great selling point.

The FCC appointment seems to be working.

 

[Damerman]

this is just one facet of a larger issue. Cash Hoarding is going on in a lot of financial firms.

 

[Randolph Freelander]

Incentives to reinvest, I can live with that. Laws stipulating higher wages, absolutely. I'll even entertain laws restricting executive pay. Laws to limit the ability to return profits to investors? No, absolutely not. I own stock in these companies for one reason only: to make money.

This article does a lot of complaining and not much else. Companies buying back stock has nothing at all to do with our government's refusal to spend, so there's no point in even bringing that up. And it likens stock buybacks to "flushing away 4 percent of GDP," as if that transaction isn't merely a transfer of funds from one balance sheet to another. It's a net 0 effect. And as the prior post mentions, it's not as if a company is guaranteed to reinvest that money if it is somehow forced to keep it, it might just sit there and accumulate, doing nothing for anybody. A company isn't going to invest in new plants and equipment if there's no need to do so, if the investment isn't going to generate even greater returns, or to replace plants and equipment that have outlived their usefulness. Similarly, a company isn't going to pay a higher wage without impetus, be that via statute or competitive market forces.

There is a problem in the economy, but stock buybacks aren't it. They're at worst a symptom. Don't tell me what to do with profits, thank you very much. Shareholders are entitled to them.

 

[Loki]

Incentives to reinvest, I can live with that. Laws stipulating higher wages, absolutely. I'll even entertain laws restricting executive pay. Laws to limit the ability to return profits to investors? No, absolutely not. I own stock in these companies for one reason only: to make money.

This article does a lot of complaining and not much else. Companies buying back stock has nothing at all to do with our government's refusal to spend, so there's no point in even bringing that up. And it likens stock buybacks to "flushing away 4 percent of GDP," as if that transaction isn't merely a transfer of funds from one balance sheet to another. It's a net 0 effect. And as the prior post mentions, it's not as if a company is guaranteed to reinvest that money if it is somehow forced to keep it, it might just sit there and accumulate, doing nothing for anybody. A company isn't going to invest in new plants and equipment if there's no need to do so, if the investment isn't going to generate even greater returns, or to replace plants and equipment that have outlived their usefulness. Similarly, a company isn't going to pay a higher wage without impetus, be that via statute or competitive market forces.

There is a problem in the economy, but stock buybacks aren't it. They're at worst a symptom. Don't tell me what to do with profits, thank you very much. Shareholders are entitled to them.

You'd almost think that the nation didn't function at all before these buybacks were legal and/or pervasive with posts like this lol.

lol @ "shareholders are entitled to them." Guess they weren't entitled to them before 1980 for some reason. Go figure.

 

[Ether_Snake]

Incentives to reinvest, I can live with that. Laws stipulating higher wages, absolutely. I'll even entertain laws restricting executive pay. Laws to limit the ability to return profits to investors? No, absolutely not. I own stock in these companies for one reason only: to make money.

This article does a lot of complaining and not much else. Companies buying back stock has nothing at all to do with our government's refusal to spend, so there's no point in even bringing that up. And it likens stock buybacks to "flushing away 4 percent of GDP," as if that transaction isn't merely a transfer of funds from one balance sheet to another. It's a net 0 effect. And as the prior post mentions, it's not as if a company is guaranteed to reinvest that money if it is somehow forced to keep it, it might just sit there and accumulate, doing nothing for anybody. A company isn't going to invest in new plants and equipment if there's no need to do so, if the investment isn't going to generate even greater returns, or to replace plants and equipment that have outlived their usefulness. Similarly, a company isn't going to pay a higher wage without impetus, be that via statute or competitive market forces.

There is a problem in the economy, but stock buybacks aren't it. They're at worst a symptom. Don't tell me what to do with profits, thank you very much. Shareholders are entitled to them.

There is an argument to be made that companies in which employees are not properly compensated should have to increase compensation or benefits to their employees first before counting profits. What's over that, they can return it as dividend or buy back stocks.

I'm someone who believes corporate tax is a bit misleading in a globalized world, and instead employee compensation is where money should go. Taxes on corporations should be a form of penalty, such as because they pollute, serve unhealthy food, or for other reasons. Sales tax should also be more flexible, such as higher on luxury items, polluting cars, etc. If most of the money went directly to employees instead, the money would be spent or invested more locally, and then would be taxed anyway on income tax or sales tax. Sounds like it would be a lot better for the economy than giving money back to shareholders who might be on the other side of the planet.

So if you are for corporations paying taxes, you shouldn't be against corporations paying their employees properly, because why the former but not the later? Only because the later's mean to exercise pressure is lower than a government?

 

[Randolph Freelander]

You'd almost think that the nation didn't function at all before these buybacks were legal and/or pervasive with posts like this lol.

lol @ "shareholders are entitled to them." Guess they weren't entitled to them before 1980 for some reason. Go figure.

Start your own business. Pour your blood, sweat, and tears into turning it into a success. Now let some guy on a keyboard somewhere tell you what you can do with your profit. I'll sit here a moment and let you consider it how many different ways you'd tell that person right off.

Shareholders are business owners. Every last dime of net income belongs to them. The only reason they, we, forego that is the promise -- not the mandate -- that greater returns would be had with reinvestment. Otherwise, there is no point, give me my money thank you very much.

Again, give a business a reason to invest in expansion. Absent returns, no sane business would. The economy first needs the inkling that there is demand, and this article is very short on drawing the straight line between cutting stock buybacks and creating demand for business goods and services.

 

[Ether_Snake]

Start your own business. Pour your blood, sweat, and tears into turning it into a success. Now let some guy on a keyboard somewhere tell you what you can do with your profit. I'll sit here a moment and let you consider it how many different ways you'd tell that person right off.

Like a shareholder?

 

[Randolph Freelander]

Like a shareholder?

Actually, a shareholder would have perfectly good standing to request a cut in stock buybacks, certainly. By all means. If an investor has a better idea of what to do with those funds, present it. I never said stock buybacks are the best use of funds for all businesses, but they certainly are for some when, again, the alternatives are not sufficiently profitable.

 

[Ether_Snake]

Actually, a shareholder would have perfectly good standing to request a cut in stock buybacks, certainly. By all means. If an investor has a better idea of what to do with those funds, present it. I never said stock buybacks are the best use of funds for all businesses, but they certainly are for some when, again, the alternatives are not sufficiently profitable.

Employees or shareholders, both have the right to make requests. A shareholder invests some money and possibly gets some in return, an employees puts in his time/energy/often health in to get some money in return, but in both cases what they get in return is debatable, and both can debate about one another's return. The more money shareholders get, the less the employees have, and vice-versa.

 

[Piecake]

Start your own business. Pour your blood, sweat, and tears into turning it into a success. Now let some guy on a keyboard somewhere tell you what you can do with your profit. I'll sit here a moment and let you consider it how many different ways you'd tell that person right off.

Shareholders are business owners. Every last dime of net income belongs to them. The only reason they, we, forego that is the promise -- not the mandate -- that greater returns would be had with reinvestment. Otherwise, there is no point, give me my money thank you very much.

Again, give a business a reason to invest in expansion. Absent returns, no sane business would. The economy first needs the inkling that there is demand, and this article is very short on drawing the straight line between cutting stock buybacks and creating demand for business goods and services.

You don't think having CEO pay tied to the company stock price and their job performance being largely determined by that short-term stock price creates a perverse incentive for CEOs to implement stock buyback plans even though that might not be in the long-term interest of the company?

You say that any rational business would invest if their was a reason to, but why? If the profits gained from expansion is well off into the future and less than a proposed stock buyback, why would a CEO who is paid and judged by his stock price do that? I don't think the dramatic increase in stock buyback plans and the significant fall in research spending is just a coincidence.

How do you explain the significant drop in spending on research? If they are flush with profits, but the economy lacks demand, why wouldnt they put more money into research for the long-term health of their company?

Why do you think you are entitled to profits generated by deliberate stock price manipulation? Do you think that serves the greater economy or just you? Why should we as a society permit practices that harm the economy as a whole and only benefits certain individuals? (I agree that the article is overstating its case, but I do think it is harmful).

I think you are also under the misguided assumption that business owners achieve everything due to their own hard work. Certainly they could not have achieved without hard work, but they also could not have succeeded without the strong foundations and economy of society. Therefore, I think we should regulate practices that actively harm the overall economy, even if this article is rather hyperbolic it the effects of this harm

Employees or shareholders, both have the right to make requests. A shareholder invests some money and possibly gets some in return, an employees puts in his time/energy/often health in to get some money in return, but in both cases what they get in return is debatable, and both can debate about one another's return. The more money shareholders get, the less the employees have, and vice-versa.

Yup, and this is one of the major reasons why our demand is rather weak. The profits and returns are going to the shareholders while employee compensation has largely stagnated.

 

[Randolph Freelander]

Employees or shareholders, both have the right to make requests. A shareholder invests some money and possibly gets some in return, an employees puts in his time/energy/often health in to get some money in return, but in both cases what they get in return is debatable, and both can debate about one another's return.

An employee can ask for a higher wage. If you'd prefer, they can demand it under the implied threat of taking their talent elsewhere. I'm all for that.

Again, in my original comment I'm all for increasing wages, by federal statute if necessary. I'm not against government intervention in business. I'm fairly progressive, I'd prefer if the government was more active in influencing the economy through its own spending and smart regulations of business. I draw the line at what to do with net income, and again fail to see what point is being served by any call for governments to reign in the return of that income to the shareholders. After all employees are paid, after expenses are accounted for and everyone is satisfied and Uncle Sam has his cut, what's left belongs to the business owner. The government can do whatever it has the political will to do regarding wages, taxation, incentives, but after all obligations are met, give me my money. If you instead invest it, I'll trust that my dollar invested now nets me $1.13 next year.

 

[A Human Becoming]

Iwata: "Please understand."
Iwata: [laughs]

Come on terrisus, you can do better than that.

CEO pay and their job performance is largely determined by the short term stock price. This means they not only have a great deal of incentive, but are under massive pressure to institute stock buybacks, which, as the article states, is an incredibly stupid economic policy (if implemented for the reasons above).

From my understanding stock buybacks are along the lines of equating corporations to people. Why does that problem sound familiar...

 

[Randolph Freelander]

You don't think having CEO pay tied to the company stock price and their job performance being largely determined by that short-term stock price creates a perverse incentive for CEOs to implement stock buyback plans even though that might not be in the long-term interest of the company?

Again, if you note, I'm not against regulation of executive pay. By all means, government could consider ways to restrict that pay or to tie it to something other than shorter term stock performance.

You say that any rational business would invest if their was a reason to, but why? If the profits gained from expansion is well off into the future and less than a proposed stock buyback, why would a CEO who is paid and judged by his stock price do that? I don't think the dramatic increase in stock buyback plans and the significant fall in research spending is just a coincidence.

You should find it decidedly coincidental, since the article was quoting federal research dollars.

Yet despite this extra $1 trillion a year in corporate profits, job growth remains anemic, wages are flat, and our nation can no longer seem to afford even its most basic needs. A $3.6 trillion budget shortfall has left many roads, bridges, dams, and other public infrastructure in disrepair. Federal spending on economically crucial research and development has plummeted 40 percent, from 1.25 percent of GDP in 1977 to only 0.75 percent today. Adjusted for inflation, public university tuition—once mostly covered by the states—has more than doubled over the past 30 years, burying recent graduates under $1.2 trillion in student debt. Many public schools and our police and fire departments are dangerously underfunded.​

That entire snippet is a total divergence from the issue and has nothing at all to do with stock buybacks. Insufficient or reduced federal and state spending on infrastructure, research, and education is because of the lack of political will, not because GE or IBM are buying back stock.

 

[Sub_Level]

I am a finance newb and do not comprehend stock buybacks.

Public companies issue stock to shareholders so they can invest in their company. They often keep certain stocks not issued, known as treasury stock. The value of these treasury stocks can be re-allocated to other parts of the company or just plain issued as new stocks. So apparently companies can buy back stock that they issued that I'm guessing has not been purchased by shareholders yet to "raise the value" of the company, but what do people mean by raising the value?

Does it increase numbers on the balance sheet? Does it raise the price of the stocks that shareholders currently have (earnings per share as the OP's article puts it)? If you lessen shares then yes I can understand how you earn more PER share since the number of "pie slices" becomes a smaller number while the actual mass of the pie remains the same, but why is EPS an important metric? It seems arbitrary to me and it seems like the company neither loses or gains money on moving around stocks that it had that weren't bought yet.

 

[Gallbaro]

I am a finance newb and do not comprehend stock buybacks.

Public companies issue stock to shareholders so they can invest in their company. They often keep certain stocks not issued, known as treasury stock. The value of these treasury stocks can be re-allocated to other parts of the company or just plain issued as new stocks. So apparently companies can buy back stock that they issued that I'm guessing has not been purchased by shareholders yet to "raise the value" of the company, but what do people mean by raising the value?

Does it increase numbers on the balance sheet? Does it raise the price of the stocks that shareholders currently have (earnings per share as the OP's article puts it)? If you lessen shares then yes I can understand how you earn more PER share since the number of "pie slices" becomes a smaller number while the actual mass of the pie remains the same, but why is EPS an important metric? It seems arbitrary to me and it seems like the company neither loses or gains money on moving around stocks that it had that weren't bought yet.

Rather then increase the numerator, the decrease the denominator. So per share value.

 

[Piecake]

Employees or shareholders, both have the right to make requests. A shareholder invests some money and possibly gets some in return, an employees puts in his time/energy/often health in to get some money in return, but in both cases what they get in return is debatable, and both can debate about one another's return. The more money shareholders get, the less the employees have, and vice-versa.

Again, if you note, I'm not against regulation of executive pay. By all means, government could consider ways to restrict that pay or to tie it to something other than shorter term stock performance.



You should find it decidedly coincidental, since the article was quoting federal research dollars.



That entire snippet is a total divergence from the issue and has nothing at all to do with stock buybacks. Insufficient or reduced federal and state spending on infrastructure, research, and education is because of the lack of political will, not because GE or IBM are buying back stock.

Woops. Kinda curious what private R&D spending actually is now.

 

[Randolph Freelander]

I am a finance newb and do not comprehend stock buybacks.

Public companies issue stock to shareholders so they can invest in their company. They often keep certain stocks not issued, known as treasury stock. The value of these treasury stocks can be re-allocated to other parts of the company or just plain issued as new stocks. So apparently companies can buy back stock that they issued that I'm guessing has not been purchased by shareholders yet to "raise the value" of the company, but what do people mean by raising the value?

Does it increase numbers on the balance sheet? Does it raise the price of the stocks that shareholders currently have (earnings per share as the OP's article puts it)? If you lessen shares then yes I can understand how you earn more PER share since the number of "pie slices" becomes a smaller number while the actual mass of the pie remains the same, but why is EPS an important metric? It seems arbitrary to me and it seems like the company neither loses or gains money on moving around stocks that it had that weren't bought yet.

If a company buys back stock and retires it, it does nothing to the overall value or profitability of the company, it's just that the value and profitability are distributed over a lesser number of shares, which is going to impact share price, earnings per share, dividend yield, and things such as that.

It's like if you're splitting profit 10 ways and you collectively buy out one shareholder. Assuming equal profits, you're now splitting it 9 ways, each person getting a bigger piece of the pie. The dividend yield, the earnings now and the promise of earnings in the future, is the main consideration. That's what shareholders are paying for, they don't own stock just for the pride of it.

 

[Randolph Freelander]

Woops. Kinda curious what private R&D spending actually is now.

It would have been lovely if he mentioned it, wouldn't it? Instead, he distracts the reader with federal spending data.

 

[kyser73]

Start your own business. Pour your blood, sweat, and tears into turning it into a success. Now let some guy on a keyboard somewhere tell you what you can do with your profit. I'll sit here a moment and let you consider it how many different ways you'd tell that person right off.

Shareholders are business owners. Every last dime of net income belongs to them. The only reason they, we, forego that is the promise -- not the mandate -- that greater returns would be had with reinvestment. Otherwise, there is no point, give me my money thank you very much.

Again, give a business a reason to invest in expansion. Absent returns, no sane business would. The economy first needs the inkling that there is demand, and this article is very short on drawing the straight line between cutting stock buybacks and creating demand for business goods and services.

Lol at corporate shareholders being the ones who put the blood, sweat, time and tears into companies being successful or not. I'm certain that you've put many, many hours into working hard in the companies you hold stock in.

Your version of investment and company ownership is toxic to the economy and society over the long-term.

 

[Sub_Level]

If a company buys back stock and retires it, it does nothing to the overall value or profitability of the company, it's just that the value and profitability are distributed over a lesser number of shares, which is going to impact share price, earnings per share, dividend yield, and things such as that.

It's like if you're splitting profit 10 ways and you collectively buy out one shareholder. Assuming equal profits, you're now splitting it 9 ways, each person getting a bigger piece of the pie. The dividend yield, the earnings now and the promise of earnings in the future, is the main consideration. That's what shareholders are paying for, they don't own stock just for the pride of it.

If the shareholders are receiving more then that tells me that the company is paying out the same amount in dividends that they did when it was splitting profit 10 ways. So the company is not saving any money, as you pointed out. It's just to appease current shareholders and possibly entice prospective ones? (which could include employees since they get shares as some sort of incentive)

 

[Randolph Freelander]

If the shareholders are receiving more then that tells me that the company is paying out the same amount in dividends that they did when it was splitting profit 10 ways. So the company is not saving any money, as you pointed out. It's just to appease current shareholders and possibly entice prospective ones? (which could include employees since they get shares as some sort of incentive)

Correct, the ideal, or really the standard expectation, is that profitability will grow over time. Stock buybacks or not, if profitability isn't growing over time, the company has issues to address. We have to have it, even if to only keep up with inflation.

In that regard, yes, the expectation would be that it would be the same and, really, higher dividend amount in total paid out to shareholders.

 

[Renekton]

As economic power has shifted from workers to owners over the past 40 years

Obviously I wasn't born 40 years ago... but did workers have any economic power then?

 

[Randolph Freelander]

Lol at corporate shareholders being the ones who put the blood, sweat, time and tears into companies being successful or not. I'm certain that you've put many, many hours into working hard in the companies you hold stock in.

Your version of investment and company ownership is toxic to the economy and society over the long-term.

I don't know what to tell you, but welcome to capitalism. If you're a business owner, that net income is yours. Again, don't be confused, I'm completely open to taxes, wage laws, executive pay restrictions, and anything else the government can present as reasonably effective ways to decrease economic inequalities and incentivize growth. I'm about as progressive as you can get on such things. But as long as businesses are not socialized, capitalism is what we have and business profits belong to the owners of it.

 

[terrisus]

Come on terrisus, you can do better than that.

What? >.>
Nintendo has done a number of stock buybacks...

 

[iamblades]

I am a finance newb and do not comprehend stock buybacks.

Public companies issue stock to shareholders so they can invest in their company. They often keep certain stocks not issued, known as treasury stock. The value of these treasury stocks can be re-allocated to other parts of the company or just plain issued as new stocks. So apparently companies can buy back stock that they issued that I'm guessing has not been purchased by shareholders yet to "raise the value" of the company, but what do people mean by raising the value?

Does it increase numbers on the balance sheet? Does it raise the price of the stocks that shareholders currently have (earnings per share as the OP's article puts it)? If you lessen shares then yes I can understand how you earn more PER share since the number of "pie slices" becomes a smaller number while the actual mass of the pie remains the same, but why is EPS an important metric? It seems arbitrary to me and it seems like the company neither loses or gains money on moving around stocks that it had that weren't bought yet.

No, the stocks companies buy back are already owned by share holders.

This has the effect of increasing the share price because the share price of a company is the value of the company divided by shares outstanding.


As for whether stock buybacks are a good thing or a bad thing, as with almost everything, it depends. I agree that there may be some questionable incentives for CEOs to favor stock buybacks over reinvestment even when reinvestment is the better option.

The problem with the OP's analysis is that it assumes that that capital just disappears when it gets returned to shareholders, but that money ends up going somewhere, and if it isn't as productive because of CEO's being incentivized in a negative manner, the shareholders can always change the incentives in the CEO's contract.

Ultimately what is the suggested change? Banning stock buybacks seems like a fairly extreme step, as there is a reason they exist, as sometimes the most profitable investment a company can make is to buy itself.

The ultimate fix IMO is to normalize taxation for dividends and cap gains, so companies can distribute excess cash as dividends instead of having to backdoor it through a less efficient stock buyback.

Having large corporations having 10's of millions of dollars in cash hoarded because they can't find anywhere to invest it is a far bigger drag on the economy than stock buybacks.

 

[Einhander]

Shareholders can be summarized with "fuck you, I got mine".

 

[Admiral Bone to Pick]

Obviously I wasn't born 40 years ago... but did workers have any economic power then?

Yeah, there were unions and living wages. It was a strange time in society.

 

[Piecake]

Some of you might find this interesting

Let’s get this straight. Big banks that emphasize return to shareholders above all else have been shown to be menaces to society. Yet one of the main responses to the problems banks got into has been to … reaffirm the primacy of shareholders.

Such is the power of the ideology known as shareholder value. This notion that shareholder interests should reign supreme did not always so deeply infuse American business. It became widely accepted only in the 1990s, and since 2000 it has come under increasing fire from business and legal scholars, and from a few others who ought to know (former General Electric CEO Jack Welch declared in 2009, “Shareholder value is the dumbest idea in the world”). But in practice—in the rhetoric of most executives, in how they are paid and evaluated, in the governance reforms that get proposed and occasionally enacted, and in almost every media depiction of corporate conflict—we seem utterly stuck on the idea that serving shareholders better will make companies work better. It’s so simple and intuitive. Simple, intuitive, and most probably wrong—not just for banks but for all corporations.

Proponents of shareholder value argue that, whatever the law says, corporations would be more successful—and do more good—if executives and boards spent less time balancing their various obligations and focused instead on making money for shareholders. This idea began percolating at the University of Chicago and on a few other campuses in the 1960s and ’70s, and it made some sense at that historical moment. American corporations were struggling in the face of global competition and technological change, yet most were complacent. If only executives were forced to pay more attention to their companies’ plummeting stock prices—by the threat of a hostile takeover, perhaps, or by a strong link between their pay and those prices—they might take the risks and make the changes that the times demanded. Or so the thinking went.

These arguments began to reshape corporate practice in the 1980s. By the mid-’90s, they had congealed into the simple doctrine that the job of a chief executive is to keep shareholders happy. Executive-pay packages were stuffed with stock options, and a newly restive breed of professional investors began goading boards into pushing out managers whenever a company’s stock price languished. Underlying both practices was the belief that stock prices were the best measure of corporate performance—which made it pretty easy to judge whether a CEO was doing a good job or not. For a few wonderful years, all of this seemed to work. Corporate America, after lagging behind Japanese and German competitors, made a spectacular comeback, and the U.S. economy boomed with it.

This heyday ended with the stock-market collapse that began in 2000. The popping of the tech-stock bubble demolished the notion that stock prices are reliable gauges of corporate value. And as the economy languished, the shareholder-driven U.S. corporate model ceased to look so obviously superior to its Asian and continental-European rivals. The intellectual assault on shareholder value began, and has been gaining strength ever since.

Collins’s books embody the most common criticism of shareholder value: that while delivering big returns to shareholders over time is great (it is, in fact, Collins’s chief measure of “greatness”), focusing on shareholder value won’t get you there. That’s what Jack Welch was getting at, too. In a complex world, you can’t know which actions will maximize returns to shareholders 15 or 20 years hence. What’s more, most shareholders don’t hold on to any stock for long, so focusing on their concerns fosters a counterproductive preoccupation with short-term stock-price swings. And it can be awfully hard to motivate employees or entice customers with the motto “We maximize shareholder value.”

In Mayer’s telling, corporations succeed by entering into commitments with employees, customers, suppliers, and shareholders. Many of these commitments go well beyond contractual requirements, and ultimately, they are what make long-term investment and business success possible. Putting all authority in the hands of shareholders who can sell at a moment’s notice makes it hard for a corporation to credibly commit to anything. Over time, Mayer argues, this narrows business possibilities by leaching away the goodwill of other stakeholders.

http://www.theatlantic.com/magazine/archive/2013/07/stop-spoiling-the-shareholders/309381/

There was another good article, either in The Atlantic or Slate or something like that on this topic, but I can't seem to find it now.

 

[Laekon]

Never understood how the stock market became such an important part of American business. Most shareholders, even large corporate ones, didn't "invest" in the company, they bought their shares from other people. After the IPO most companies don't raise any significant money by selling stock. Most companies are profitable no matter what their stocking is doing so why do they give a shit about it?

And I'm not looking for an explanation. I under why they do, it just doesn't make a lot of sense besides increasing the personal wealth of a few people.