Putting Workers First at the SEC

October 24, 2017

Yesterday, two nominees went before the Senate Banking, Housing, and Urban Affairs Committee for a chance to become the next commissioners of the Securities and Exchange Commission.

We were thrilled to see Senator Brian Schatz ask the nominees to give their thoughts about the stock buyback “safe harbor,” Rule 10b-18, and even more excited that both nominees agreed to reconsider the rule if they become commissioners.

This esoteric-sounding rule, in short, allows public companies to focus on making money simply by moving money around. By buying back their own stock, firms can raise the share price of the stock that remains, without having to take a single step to attract more customers or increase productivity.[1]

This may sound minor. But between 2006-2015, the companies in the S&P 500 spent 54 percent of their net income buying back their own stock. Evenly divided among the 24 million employees of these firms, the nearly $4 trillion spent on buybacks could have given each and every worker a $158,650 raise over the decade.[2]

Buybacks aren’t just a tool used by struggling companies in a mediocre economy. Walmart just announced that it has authorized a new $20 billion stock buyback plan for the next two years—even as its stock is already up 17 percent in 2017. From 2007-2016, Walmart spent a total of $67.3 billion on share buybacks—45 percent of its total profits over the decade.

As Catherine Ruetschlin of Demos showed in 2014, Walmart could have raised the wages of its 825,000 frontline employees by $5.13 per hour if it had chosen to invest in its workers, rather than spending $6.6 billion on stock buybacks in 2013.

If Walmart ended this year’s buyback program and invested instead in its workforce, it could meet the call by OUR Walmart, an association of Walmart employees, to pay associates $15 dollars an hour. And because so many Walmart associates shop at Walmart, a raise could boost sales while also reducing turnover and increasing customer happiness.

This is, in essence, companies buying a rising share price. Who does it benefit? Corporate executives have become some of the largest holders of the shares of their own companies, as compensation practices have shifted, which means they have personal, as well as professional, incentives to boost share price. In 2012, 83 percent of the compensation of the 500 highest paid executives came from realizing gains from stock.

Workers aren’t the only ones hurt: As my colleague J.W. Mason showed in Disgorge the Cash, buybacks hurt the long-run productivity of firms themselves by reducing investment in research and development.

Allowing for this level of stock buybacks hasn’t always been standard business practice. The safe harbor protects companies from facing any liability for share repurchases (as long as they don’t exceed 25 percent of the stock’s average daily trading volume over the preceding four weeks), even though they don’t have to disclose exactly when they repurchase their stock, and they only have to report on their plans. The safe harbor was only instituted in 1982, in the midst of the myriad of other changes ushered in by the Reagan administration. Before that, buying back shares of your own stock opened up companies to charges of market manipulation.

The stakes were incredibly high at yesterday’s hearing. As the process continues, Robert Jackson Jr. and Hester Peirce should put forward a proposal that ends the unproductive enrichment of shareholders. The wages of American people are on the line.

[1] For a full discussion of stock buybacks, see William Lazonick’s Profits without Prosperity.
[2] According to Lazonick, the S&P 500 firms spent $3.941 trillion; their aggregate employment at the end of 2015 was 24,840,743. This calculation does not take into account shifts in employment over the decade.