What might the biggest threat to sustained economic recovery be? A new banking crisis? Deflation or rising oil prices? Runaway government borrowing?
How about stock buybacks?
These babies are supposed to be the best things since spray cheese. They raise share prices, making investors happier and more confident. When that happens, they buy iPods and Fords, airline tickets and thick barbecue sirloins. Tax receipts go up. Corporate bosses smile because their stock-based compensation plans becomes richer. Merger activity rises, keeping the bankers and lawyers in Brioni suits, their lips wet with fine chardonnay. Pension fund portfolios rise in value. What's not to like?
A lot, at least in the opinion of William Lazonick, a Canadian professor at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness. He thinks buybacks are the Antichrist.
The hundreds of billions - make that trillions - collectively spent on buybacks eliminates the equivalent value that could be plowed into innovation, R&D, job creation or lower product prices.
Perversely, some companies announce lavish buybacks even as they demand government research funds, even as they fire workers, even as they create jobs overseas as the expense of domestic employment. He wants them controlled or banned for the sake of overall competitiveness and economic recovery. In spite of his compelling arguments, our man is a lone voice in the woods, no doubt doomed to rage like Lear at the tree bark for eternity.
His views have no support in Congress or anywhere else on the planet, as far as he can tell. This is not for lack of trying. His new paper, "The New Economic Business Model and the Crisis of U.S. Capitalism," to be published shortly in the Capitalism and Society journal, deals in good part with the evils of buybacks. His views, in vastly truncated form, appeared last week in a column he wrote for BusinessWeek.
Buybacks are almost as old as stock markets. There were times, in Europe and in Japan, where they were considered the devil's brew and regulated tightly. No more. The American-bred cult of shareholder return has turned buybacks into a global phenomenon, nowhere more so than in the United States, where they are worth more than the GDPs of the lesser continents.
Mr. Lazonick's research reveals that 438 companies on the Standard & Poor's 500 index spent $2.4-trillion (U.S.) on buybacks between 1997 and the end of last year. In 2007, when profits were still rising and before anyone knew the world was on the verge of brutal recession, the average buyback for each of these S&P companies was a record $1.2-billion. Between 2000 and 2008, Exxon alone spent $144-billion on buybacks. Next in line were Microsoft ($94-billion), IBM ($73-billion), Bank of America ($56-billion) and Cisco ($53-billion).
While fresh buyback data is elusive, the financial wires are full of buyback notices. Last week Netflix, the online movie rental company, announced it would buy back as much as $300-million of its shares.
Telecom equipment maker Tellabs plans to buy back $200-million of its shares. In Canada, the value of buybacks is not tallied by the TSX. But the number of buybacks is not as low as you would suspect. Through July, 155 buybacks (known as "normal course issuer bids") were announced, putting them on pace to meet, perhaps even exceed, the 331 TSX buybacks announced in the 2007 boom year.
Some buybacks make you cringe. General Motors spent more than $20-billion on them between 1986 and 2002, an era when the company was shedding great gobs of market share as Japanese competition came on strong. Imagine if those bucks had been devoted to making cars that drivers actually wanted to buy. Intel is another example. In 2005, in a masterpiece of cynicism, Intel lobbied Congress to boost the funding of the National Nanotechnology Initiative (NNI), which sponsors research into nanotechnology. That year the NNI budget was $1.2-billion. Intel's buyback budget at the time was $10.6-billion. The same year, then-CEO Craig Barrett said that "U.S. leadership in the nanoelectronics era is not guaranteed." Well, no wonder, buyback boy.
It's no mystery why Mr. Lazonick has no takers on his idea to banish buybacks for the sake of the economy. They appeal to the greed in every shareholder and every stock market company executive, most of whom are loaded to their Alain Mikli eyewear in stock options. Certainly, Michael Jensen, the American economist who, in the 1970s, advocated the use of stock options as a compensation tool, would consider Mr. Lazonick a crazy man.
So would the army of economists, shareholder activists and fund managers who support the starve-the-beast approach. If you give executives a bankroll to spend, they will spend it on stupidly expensive takeovers, so don't tempt the egomaniacs. Force them instead to dole out the profits on buybacks and dividends. Indeed, buybacks have become one of the most notable features of North American, Japanese and American capitalism. The cure for a sinking or flat share price is not better management or better products; it's giving shares the Hoover treatment.
But this time it's different. American-style capitalism is in trouble. Economies everywhere are in the tank. Competitiveness is suffering. Innovation is needed desperately to create new businesses, new products, smarter ways of doing things. Instead, companies are obsessed with spending every spare dollar, euro, pound and yen on an activity that is essentially useless, competitively speaking. This will not change unless the stock option-based compensation model is taken out behind the barn and shot.Report Typo/Error