Should buybacks be banned?

Yesterday, one of the most interesting talks I attended at the Web Summit in Lisbon was given by William Lazonick, Professor of Economics Emeritus at the University of Massachusetts Amherst and co-founder of The Academic-Industry Research Network (theAIRnet) .

The topic was "Why Silicon Valley is Wrong About the Economy."

Lazonick's point, presented in a straightforward and no-bullshit manner, was that the only value investors bring to the table is money.

The emphasis on financial returns undermines the long-term health and stability of companies, workers, other stakeholders, and, consequently, the broader economy.

Since the 1980s, U.S. corporations have adopted the philosophy of "maximizing shareholder value" (MSV), which places increasing stock prices as the primary objective of corporate management. Executives are incentivized to boost share prices to reward investors rather than reinvesting profits back into the business for growth.

When companies buy back their own shares, they reduce the number of outstanding shares. This often leads to an increase in share prices, benefiting shareholders and executives, who frequently receive stock-based compensation. However, this focus on market operations often comes at the expense of workforce development and innovation in new products. As a result, companies may neglect their employees, leading to layoffs, outsourcing, and stagnant wage growth.

The only beneficiaries of buybacks are shareholders and top executives, whose stock-based compensation can create misaligned incentives. This encourages them to prioritize personal gains and short-term stock performance over long-term business growth.

The total number of announced global corporate buybacks has been trending upward in 2024. Higher borrowing costs and recession fears tend to lead U.S. corporations to hoard cash rather than allocate it to stock repurchase programs, which have gained popularity over the last decade.

In 2023, 617 companies announced buybacks. A record high was reached in 2021, with 1,319 companies announcing buybacks, resulting in a total of $922 billion in repurchased stock for S&P 500? companies that year. 高盛 predicts that the total will reach $925 billion this year, surpassing the 2022 record, and is forecasted to exceed one trillion dollars by 2025.

One of the most notable buybacks this year was made by Apple, which, in early May, authorized a total share repurchase of $110 billion - the largest share buyback authorization in U.S. history.

Apple's stock increased by about 6% after this announcement. The common explanation for this price increase is that with fewer shares available after a buyback, each share represents a larger portion of the profits, thus increasing earnings per share. However, it is important to remember that the company has spent money to execute this buyback, so the overall value doesn’t automatically increase just because of it. This is just financial aesthetics...

Buybacks lead to a higher concentration of wealth among shareholders. This trend presents a troubling distortion of the economic system; while investors benefit, it raises important questions about the implications for society and future growth.