at a time when the nation is looking for ways to battle unemployment, big companies are creating fewer jobs, and critics say they are neglecting to lay the foundation for future growth by expanding into new businesses or building new plants.
What is more, share buybacks have not fulfilled their stated purpose of rewarding investors over the last decade, experts say. “It’s a symptom of a deeper problem, which is a lack of investment in the long term,” said William W. George, a Harvard Business School professor and former chief executive of Medtronic, a medical technology company. “If we’re not investing in research, innovation and entrepreneurship, we’re going to be a slow-growth country for a decade.”
Liberal critics insist the trend is another example of top corporate executives raking in an inordinate share of the nation’s wealth, even as their employees suffer.
“It’s an extraordinarily unimaginative way to use money,” said Robert Reich, a former secretary of labor under President Clinton who now teaches public policy at the University of California, Berkeley. After diving in the wake of the financial crisis, buybacks have made a remarkable comeback in recent years, with $445 billion authorized this year, the most since 2007, when repurchases peaked at $914 billion.
But spending on capital investments like new plants and infrastructure has stagnated more broadly in corporate America, confounding efforts by the Obama administration to spur economic growth. Capital expenditures by companies on the Standard & Poor’s 500-stock index are expected to total $546 billion in 2011, down from $560 billion in 2008, according to data compiled by Thomson Reuters Eikon.
The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster. In many cases, like that of the medical device maker Zimmer Holdings, executives are able to meet goals for profit growth and earn bigger bonuses despite poor stock performance.
“It’s clear there’s a conflict of interest,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Unless earnings per share are adjusted to reflect the buyback, then to base a bonus on raw earnings per share is problematic. It doesn’t purely reflect performance.”
In addition, executives, who are often large shareholders, stand to benefit from even a small, short-term jump in stock prices.
When everything is about the stock price, and keeping the insatiable maw of Wall Street analysts happy, there's zero incentive to create actual growth by investing in products and services and plant, let alone investing in people.
The whole "public" ownership model has become a sham. The concept is that issuing stock allows companies access to more capital than they might be able to tap otherwise. But "public" (and I use the quotation marks deliberately) ownership isn't about returning actual value to shareholders, it's about keeping Wall Street happy.
Case in point: Apple.
On a recent flight back form Florida, I counted no fewer than ten iPads befre I had to get on the plane and stop counting. At least three others of them besides me were reading Steve Jobs on it. I would say that at least twenty percent of the people on that flight were listening to iPods. Another sizable number had iPhones. There are other tablets and music players and smartphones, but these names are becoming almost generic terms for all brands of their concepts, much the way "Kleenex" now means facial tissue, no matter who makes it.
On October 18, Apple announced its third-quarter results, which included sales of 17.07 million iPhones. Got that? OVER SEVENTEEN MILLION iPhones sold in three months. That's over five million a month or over a million a week. But the stock immediately lost five percent of its value, because the "Wall Street analysts" predicted sales of 20 million -- and it's been swooning ever since, closing yesterday at $369.01.
Has anything really fundamentally changed at Apple since the stock surged to over $400/share in early November -- almost a month after Steve Jobs' death? The day after he died, 96% of Wall Street analysts gave the stock a "Buy" rating with a MEDIAN target price of $500/share. And now the price is $369, because some idiot in a suit pulled a number -- twenty million -- out of his ass, and because only a million and a half iPhones sold per week, the stock has been slammed.
And this is the system we're protecting? No wonder executives are buying back stock to artificially prop up the price rather than actually invest in something that might help their companies actually grow. Taking chances is punished by Wall Street.
We keep hearing about how we have to lower corporate taxes to eliminate "uncertainty". Is this what business has come to? Guaranteed results, every time? Business is all about uncertainty. Innovation is what generates growth in a business, and innovation THRIVES on uncertainty. A new car model may not go over well with buyers. A new drug compound may turn out to be ineffective and have to be scrapped. Buyers may be wary of a hi-def webcam because they don't want to have to dress up and put on makeup to talk to relatives. 3-D television may prove not to be perceived as having sufficient additional value to warrant the cost. The very nature of business is a crapshoot. It's full of uncertainty, and it always has been. But today business is governed by Wall Street, and Wall Street goes into a panic at the slightest bit of bad news. Today we hear news that Greece may default? The Dow will drop by almost 400 points. Tomorrow there are signs that an agreement may be reached? A 300-point surge. Day after tomorrow we'll hear bad news about Italy and it'll be another swoon.
Is this any way to run an economy? What happened to rewarding the risk-takers; those who take a chance that they may lose, but that they also may win? In an environment in which a risk that doesn't reward is punished out of all proportion to the supposed "offense", why take the chance?
There's a nice little company called Angie's List. The concept is simple: People who have used contractors and other professoinals rate them, so that if you need someone to, say, install insulation in your attic, you can read other people's unsolicited experiences with insulation contractors, rather on just relying on the references the contractor provides. It started with construction-related services, but has branched out into medical, veterinary, and other services. No anonymous reviews are allowed, only members are allowed to review companies, and while your name and contact information isn't published, Angie's List knows who you are. This also keeps contractors themselves from spamming their pages with bogus reviews. I'm a member, and I don't hire anyone without checking their reviews on Angie's List. The membership is about fifty bucks a year.
Angie's List is about to be ruined, because it's going public, with an initial IPO price of $13/share. Three venture capital companies are going to own 43% of he company. and as you can see, the analysts are already freaking out. My guess is that within three years, Angie's List will cease to exist and you'll be back to waiting until one of your neighbors has work done on his house to find a good contractor. All because Wall Street hates "uncertainty."
It's all part of today's "up is down" world, in which the biracial son of a single mother is said to have "grown up in a privileged way"; Republicans use veterans as political props to shore up their so-called defense cred and then vote against veterans' benefits; and yacht owners are the real victims of the recession.
It's no wonder our economy is in the crapper. It's run by a bunch of people who, like five-year-olds, want iron-clad guarantees of success before they'll take any chances at all -- like on hiring people, one of whom could very well have the Next Great Idea.