I’m a day late to get to a revealing Financial Times comment by Edward Luce, who has among other things served as Larry Summers’ speechwriter. Luce has written important articles on politics (for instance, being one of the first prominent writers to finger how Obama was served poorly by his undue reliance on a handful of long-established retainers like Valerie Jarret and David Axelrod). However, his close connections to Washington insiders means his economics pieces are too often reflections of thinking inside America’s Versailles, as opposed to real world conditions.
Luce’s latest article is a bizarre combination of a solid description of the symptoms of economic pathology and an executive-exclupating, demonstrably erroneous diagnosis.
The Financial Times columnist describes how much firepower major corporations are devoting to propping up their stock prices. Mind you, this is hardly news to anyone who has been paying attention, but it is still useful to have a current reading. From his article:
At a time of soaring profitability, US companies have piled up huge amounts of cash, much of it parked offshore. Yet investing it in long-term growth is the last thing on their mind. According to Barclays, US companies have lavished more than $500bn in the past year on stock buybacks – a multiple of what most are spending on research and development and other capital investments. In the first six months of the year, buybacks surged to $338.3bn – the largest half-yearly volume since 2007. The rationale is simple. By reducing the volume of outstanding shares, chief executive officers increase earnings per share. That in turn lifts their pay, which is heavily tied to short-term stock performance. If you need an explanation for why the top 0.1 per cent is doing so well, start with equity-based compensation.
But the impact is much broader than that. According to William Lazonick, a scholar at the University of Massachusetts Lowell, seven of the top 10 largest share repurchasers spent more on buybacks and dividends than their entire net income between 2003 and 2012. In the case of Hewlett-Packard, which spent $73bn, it was almost double its profits. For ExxonMobil, which came top with $287bn in buybacks and dividends, it amounted to 83 per cent of net income. Others, such as Microsoft (125 per cent), Cisco (121 per cent) and Intel (109 per cent) were even more extravagant. In total, the top 449 companies in the S&P 500 spent $2.4tn – or more than half their profits – on buybacks in those years. They spent almost the same again in dividend payouts. Taken together, they came to 91 per cent of net income.
Yves here. This section is solid, well argued, and suitably urgent.
But then having fingered the real driver of this trend in passing, lousy incentives created by equity linked pay, Luce succeeds in walking that back by spending the bulk of his piece justifying looting lite by US executives. At the very top of the article, he stresses the need to keep share prices up to fend off hostile takeovers. Huh? CEO profit handsomely from losing to an acquisition bid, whether the seriously endangered hostile species or the prevalent faux-friendly type, thanks to golden parachutes. And most deposed CEOs can at a minimum look forward to a lucrative afterlife on big corporate boards, with even the lousy ones having a decent shot landing a new CEO assignment (witness how one of America’s famously bad corporate chieftans, Robert Nardelli, was picked up by Cerberus).
But the big canard that dominates the piece is that US companies don’t have decent investment opportunities. The evidence for that claim? Larry Summers’ “secular stagnation” talk, which was long on intuition and short on evidence.
In fact, it is well documented that corporations have become so short term in their orientation that they have been underinvesting for nearly a decade. Yours truly wrote about that syndrome in 2005 in the Conference Board Review and updated the argument in a 2010 New York Times op-ed with Robert Parenteau. That is not to suggest that Luce could have or should have known of our work, merely that the drivers of the corporate profits have been cost-savings because they are easy to achieve, easy to explain to investors, and thus low risk. But they result in systematic, slow liquidation as companies chronically underinvest.
Had Luce done his homework, he could have readily found ample, rigorous proof that companies are choosing to underinvest, and not that they are plagued with dearth of good options. For instance, the widely respected Andrew Haldane of the Bank of England determined that companies are using overly high discount rates when assessing possible investments.
To translate that out of economics-speak, that means they are seeking unreasonably high returns. Overly high return targets = underinvestment. QED. His conclusion: “Capital markets myopia is real.”
Haldane further demonstrated that these excessively high return targets penalized long-term projects, which are often the ones that produce the greatest payoffs and spillover benefits
One way to remedy that gap would be to have government take up the slack, as it often does by making infrastructure investments and subsidizing R&D (for instance, the National Institutes of Health and other Federal agencies have provided over time an estimate 30% of drug industry R&D, in particular the more fundamental research). But the “starve government” exercise has slashed these investments. Similarly, the trend towards pernicious “public/private partnerships” as the means of making infrastructure investments results in private sector (as in excessive) return targets being imposed on supposedly societally-benefitting projects, which again produces underinvestment (as any look at the state of US transportation services will confirm).
For a far more accurate picture of executive-suite value extraction, Roy Poses reviews recent studies of corporate investments and how the behavior they depict manifests itself in the health care industry. And what is particularly telling about his post, Value Extractors, “Super-Managers,” Vampires and the Decline of the US and US Health Care, is that it also makes clear that Edward Luce cherry picked one of his major sources, the stock buyback study by William Lazonick.
By Roy Poses, MD, Clinical Associate Professor of Medicine at Brown University, and the President of FIRM – the Foundation for Integrity and Responsibility in Medicine. Cross posted from the Health Care Renewal website
Appearing during the last few weeks were a series of articles that tied the decline of the US economy to huge systemic problems with leadership and governance of large organizations. While the articles were not focused on health care, they included some health care relevant examples, and were clearly applicable to health care as part of the larger political, social, and economic system. The articles reiterated concerns we have expressed, about leadership of health care by generic managers, perverse executive compensation, the financialization of health care, in part enabled by regulatory capture, and the abandonment by effective stewardship by boards of directors, but with new takes on them.
The articles included “Profits Without Prosperity,” by William Lazonick in the the Harvard Business Review, “Why Have US Companies Become Such Skinflints,” by Paul Roberts in the Los Angeles Times, and “How Business Leaders Turned Into Vampires,” by Steve Denning in Forbes, which in turn was partially based on “The Rise (and Likely Fall) of the Talent Economy,” in the Harvard Business Review.
Let me summarize the main points, and discuss some health care examples.
“Super-Managers” as Value Extractors
Steve Denning’s article contrasted people who add value to the economy versus those who extract value. The first species of value extractor he listed was:
‘Super-managers’ are people who hold administrative positions in the C-suite of private-sector bureaucracies but are masquerading as entrepreneurs. They are, to use Thomas Piketty’s slyly ironic term, “super-managers.” As such, they have been able to extract extraordinary levels of compensation. They have been lavished with stock and stock options and have been able to ‘manage’ the share price of their firms with massive share buybacks and other financial engineering so that they receive massive bonuses. As Bill Lazonick documented in the September 2014 issue of HBR, the net effect of their activities is to extract value, rather than create value [see below].
Presumably, “super-managers” as health care executives are also likely to be generic managers, unlikely to have much actual knowledge of caring for patients, unsympathetic to the values of health care professionals, and hence unlikely to uphold the health care mission.
He noted that
there is a tendency to dismiss the activities of ‘vampire talent’ as de minimis. ‘That’s capitalism, right? Every man for himself. It’s no big deal if there’s an occasional bad apple in the barrel. The ‘invisible hand’ of capitalism will make everything come out right for society in the end.’
However,
The problem today is that the super-sized executive compensation, the gambling and the toll-keeping of the financial sector aren’t tiny sideshows. They have grown exponentially and are now macro-economic in scale. They have become almost the main game of the financial sector and the main driver of executive behavior in big business. When money becomes the end, not the means, then the result is what analyst Gautam Mukunda calls ‘excessive financialization‘ of the economy, in his article, ‘The Price of Wall Street Power,’ in the June 2014 issue of Harvard Business Review.
Mr Denning further asserted that the value extraction of super-managers is augmented by the value extraction of two different groups of players, hedge funds that speculate with other peoples’ money, and “tollkeepers” who extract rents through the financial system.
Furthermore, Mr Denning stated that
The growth of super-sized executive compensation is inversely related to performance. The super-managers are in effect being rewarded for doing the wrong thing.
Of course, if executives in health care, like those in other sectors, are mainly concerned with enriching themselves in the short-term, than they are not mainly concerned with patients’ and the public’s health, or the values of health care professionals, and hence the performance of their organizations in terms of health care processes and outcomes will suffer.
Furthermore, the ability of commercial health care firms to actually make a positive impact on health care will be decreased as they are whipsawed by other value extractors like hedge funds and tollkeepers.
Example – Renaissance Technologies
Mr Denning’s first example of tollkeepers’ value extraction was:
James Simons, the founder of Renaissance Technologies, ranks fourth on Institutional Investor’s Alpha list of top hedge fund earners for 2013, with $2.2 billion in compensation. He consistently earns at that level by using sophisticated algorithms and servers hardwired to the NYSE servers to take advantage of tiny arbitrage opportunities faster than anybody else. For Renaissance, five minutes is a long holding period for a share.
In fact, as we noted here, Renaissance Technologies does not hesitate in trading health care firms. Furthermore, that company has a noteworthy direct tie to health care. Its current co-CEO, Peter F Brown, is married to the current Commissioner of the US Food and Drug Administration (FDA).
Value Extraction and Share Buybacks
William Lazonick’s article also emphasized how corporate leadership is now focused on extracting value from their companies for their own personal benefit, rather than promoting growth, innovation, better products and services, etc. In particular, large public for-profit companies now tend to use their surplus capital to buy back shares of their own stock, rather than invest in new facilities, equipment, employees, etc. Perhaps we should not be surprised that this was facilitated by changes in US government regulation, that is deregulation, in this case instituted during the Reagan administration:
Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b – 18 of the Securities Exchange Act.
Note that
The rule was a major departure from the agency’s original mandate, laid out in the Securities Exchange Act of 1934. The act was a reaction to a host of unscrupulous activities that had fueled speculation in the Roaring ’20’s, leading to the stock market crash of 1929 and the Great Depression.
Given the context, and that the deregulation was implemented by an SEC chair who was “the first Wall Street insider to lead the commission,” this seems to be an example of regulatory capture in service of corporate insiders.
The issue here is that while it might make some financial sense for companies to buy back their own shares if they are priced at bargain rates, after this change they could buy shares at any price without supervision. On one hand, such purchases could lead to short-term bumps in stock prices. On the other hand, a major reason for these buybacks appears to be that they enrich corporate insiders, particularly top hired executives, who now receive much of their pay in the form of stock and stock options, and often can get bonuses based on short-term increases in stock prices. Lazonick wrote,
Combined with pressure from Wall Street, stock-based incentives make senior executives extremely motivated to do buybacks on a colossal and systemic scale.
Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012. (See the exhibit “The Top 10 Stock Repurchasers.”) During the same decade, their CEOs received, on average, a total of $168 million each in compensation. On average, 34% of their compensation was in the form of stock options and 24% in stock awards. At these companies the next four highest-paid senior executives each received, on average, $77 million in compensation during the 10 years—27% of it in stock options and 29% in stock awards. Yet since 2003 only three of the 10 largest repurchasers—Exxon Mobil, IBM, and Procter & Gamble—have outperformed the S&P 500 Index.
Example – Pfizer
Mr Lazonick’s noted some potential outcomes of the frenzy of stock buybacks affecting the US pharmaceutical industry and hence the US health care system.
In response to complaints that U.S. drug prices are at least twice those in any other country, Pfizer and other U.S. pharmaceutical companies have argued that the profits from these high prices—enabled by a generous intellectual-property regime and lax price regulation— permit more R&D to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay.
Moreover, during approximately the same period Pfizer compiled an amazing record of legal misadventures including settlements of allegations of unethical behavior, and some convictions, including one for being a racketeering influenced corrupt organization (RICO), as most recently reviewed here, and then updated here. So while it was putting huge amounts into buybacks, it also put billions into legal fines and costs. This suggests that note only does executive compensation not correlate with “performance,” it may also correlate with corporate bad behavior.
The “Shareholder Value” Dogma
In explaining how US corporate executives turned to stock buybacks to boost their own pay, at the expense of essentially everyone else, Mr Lazonick sounded some familiar themes. One was focus on short-term revenues and short-term stock performance drive by the “share-holder value” dogma out of business schools,
the notion that the CEO’s main obligation is to shareholders. It’s based on a misconception of the shareholders’ role in the modem corporation. The philosophical justification for giving them all excess corporate profits is that they are best positioned to allocate resources because they have the most interest in ensuring that capital generates the highest returns. This proposition is central to the ‘maximizing shareholder value” (MSV) arguments espoused over the years, most notably by Michael C. Jensen. The MSV school also posits that companies’ so-called free cash flow should be distributed to shareholders because only they make investments without a guaranteed return — and hence bear risk.
But the MSV school ignores other participants in the economy who bear risk by investing without a guaranteed return. Taxpayers take on such risk through government agencies that invest in infrastructure and knowledge creation. And workers take it on by investing in the development of their capabilities at the firms that employ them. As risk bearers, taxpayers, whose dollars support business enterprises, and workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders’.
Mr Denning similarly noted
The intellectual foundation of all this behavior is the notion that the purpose of a firm is to maximize shareholder value. Unless we do something about this intellectual foundation, the problem will remain. Changes in a few regulations or the tax code won’t make much difference. ‘Vampire talent’ will find ways around them.
Nor will change happen merely by pointing out that shareholder primacy is a very bad idea. Bad ideas don’t die just because they are bad. They hang around until a consensus forms around another idea that is better.
Mr Roberts’ article “Why Have US Companies Become Such Skinflints,” went at this issue from a slightly different angle, noting first
The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society.
He attributed this to the notion promulgated by
conservative economists, [that] the best way for companies to help society was to ditch the idea of corporate social obligation and let business do what business does best: maximize profits.
He noted that this focus on short-term revenues has led to the decline in long-term results,
But because management is so focused on share price and because share price depends heavily on current company earnings, strategic focus has grown ever more short term: do whatever is needed to hit next quarter’s earnings target. And since cost-cutting is a quick way to boost near-term earnings, layoffs and other downsizing once regarded as emergency measures are now routine.
And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling.
Of course, this is antithetical to the “innovation” that current corporate boosters proclaim as the goal of drug, biotechnology, medical device companies and other players in the brave new world of corporate health care.
The Incestuous Mechanisms Used to Set Executive Compensation
Another explanation for the rise in value extraction, and specifically the use of share buybacks to reward top corporate hired executives, was the incestuous way in which corporations set pay for top hired executives. Mr Lazonick wrote,
Many studies have shown that large companies tend to use the same set of consultants to benchmark executive compensation, and that each consultant recommends that the client pay its CEO well above average. As a result, compensation inevitably ratchets up over time. The studies also show that even declines in stock price increase executive pay: When a company’s stock price falls, the board stuffs even more options and stock awards into top executives’ packages, claiming that it must ensure that they won’t jump ship and will do whatever is necessary to get the stock price back up.
This is enabled by boards of directors who seem to represent the ‘CEO union,’ not stockholders, and certainly not other less favored employees, customers, clients or patients, or society at large,
Boards are currently dominated by other CEOs, who have a strong bias toward ratifying higher pay packages for their peers. When approving enormous distributions to shareholders and stock-based pay for top executives, these directors believe they’re acting in the interests of shareholders.
Once again, this was also enabled by the dergulation that started with during the Reagan administration, and continues this day (although the specific relevant deregulatory change occurred during the Clinton administration),
In 1991 the SEC began allowing top executives to keep the gains from immediately selling stock acquired from options. Previously, they had to hold the stock for six months or give up any ‘short-swing’ gains. That decision has only served to reinforce top executives’ overriding personal interest in boosting stock prices. And because corporations aren’t required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done.
Summary
Note that while all the discussion above has been about for-profit corporations, we have seen that in health care, various non-profit organizations, particularly hospitals, hospital systems, academic medical institutions, and health insurers, which all now operate in the current market fundamentalist environment, are acting more and more like for-profits. So while non-profit corporate executives cannot do stock buybacks, they are also all too often generic managers, given huge compensation, but not often for upholding the mission, putting patients’ and the public’s health first, or upholding health care professionals’ values.
It is striking that we are beginning to see protests like those above not in radical publications, but in the Harvard Business Review and Forbes. It is more striking that these protestors are beginning to fear the worst. Mr Roberts wrote,
Sooner or later, markets punish such myopic behavior. Companies that neglect innovation run out of things to sell. Companies that demoralize workers see performance lag.
Although Mr Denning hopefully wrote,
We are thus about to witness a vast societal drama play out. That’s because we have reached that key theatrical moment, which Aristotle famously called ‘anagnorisis’ or ‘recognition.’ This is the moment in a drama when ignorance shifts to knowledge.
He then warned,
As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.
If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.
Let us hope that anagnorisis is really beginning, the anechoic effect is fading, and the drama may yet have a happy ending.
31 comments
Comments are closed.
Many years ago I remember when Carl Icahn, a.k.a. Corporate Raider, said that when he took over a company he would remove top management because they were always incompetent. I thought, what a bold statement. How could this be? After seeing how some of them work up close, I believe him. CEOs are more inclined to torpedo developing better products versus doing what it takes to get better quarterly results. Oh yea, because someone is a CEO does not make him an Einstein. What counts is how to get those sales numbers, even if it means using nifty accounting practices. Nothing else matters. So disastrous is this policy people down the line, who would never consider doing a bad thing in their life, would abide with policy, because its always been done this way, to get those results. Folks do it because they have mortgages, kids to feed, and don’t want to make waves.
Ethics? Forget it.
But does Mr. Icahn put in competent managers? Or does he just put in his own coterie of cronies?
While corporations are full of overpaid managers, people like Icahn are part of the problem – not the solution. People like him reduce our societal institutions (that’s what companies are) to narrow vehicles for value extraction by a small handful of people by himself. Icahn is merely complaining that these managers are not ruthless enough in their social strip mining or not pursuing on timescale he prefers. That’s what he means by “incompetent”.
Just yesterday, Tesco, the giant foodstore chain (No. 2 world-wide) was embarrassed to have to reveal that it had overstated its net worth by £250m (GBP). The stock lost 12% on the news–though maybe it recovered some of that by the closing bell.
stock buybacks…Obviously buybacks that exceed profits are at some level looting. But I do wonder to what degree buybacks as opposed to dividends might be a rational response to a difference in the tax treatment, either for the company or investors..
The notion that there are no good investments opportunities out there is really funny–it’s like saying the sun isn’t shining because there are clouds–the sun is indeed there and currently shrouded by clouds. What clouds? The oligarchs who run Western society. Their interests are to keep the status quo–to assure themselves that there is no threat to their position within the corporation and out. None of this has the slightest thing to do with “economics” but everything to do with politics. Each of these “super-managers” is a political player who wants to best his fellow oligarchs within a tightly defined playing area that guarantees stability in who enters the game and that the game be reserved to a particular class of players. These people have no interest in free markets or, more accurately, freer markets than the fixed, gamed, and captured markets that we see today.
These people must be deposed–all efforts must be made to disrupt the system so that it loosens just a bit and allows others to have more input. Whatever it takes.
I certainly wouldn’t say that there aren’t good investment opportunities. But with low aggregate consumer demand we have fewer investment opportunities than can soak up all the money sloshing around Wall Street looking for yield. Previous recessions have sometimes resulted in a choking off of business investment because there was a lack of money, but the with the fed spigot wide open we have seen an inflation in the price of financial assets rather than consumer goods…Which has resulted in a greater concentration of wealth, and a lowering of aggregate consumer demand. So the economy is essentially stalled, what with consumer debt at already unsupportable levels, pumping more money in to the banks is unlikely to have a great deal of effect.
Actually I believe summers secular stagnation thing, but he doesn’t diagnose the cause and doesn’t give the cure. his and his crews economic policies are the cause. stock buybacks would be considered a good cause of secular stagnation. I am certain that a big aspect of it is the federal reserve and the incentive to invest in long term projects. when you can borrow less than the rate of inflation (and take a bull crap tax deduction) why risk investing in risky r and d, products etc. the fed insures you what is essentially a risk free return. it’s financialization that has cause secular stagnation. yes the shareholder value and ceo pay to stock price is a big aspect. before financialization you had to build the economy ground up. you want to get demand, workers must earn. with unlimited “credit” you just lever up the markets. (stock buy backs). you don’t have to generate economic value to get wealth. it’s why too. sorry but the bernake/ greesspan put altered the entire rational choice for ceo’s. you need a small financial sector without “derivative” that can’t extend that much credit for “speculation” and consumption. so it drives credit to productive investment. lord adair turner has written some great stuff over at the institute of new economic thinking. summer and his ilk caused the stagnation. we have a ‘top down”. As long as those at the top can benefit the most without taking the real risk of productive invesment, new products, research why should they. the entire economy is so distorted it works backwards from the way it should. I’m not a gold bug, but I realize that unlimeted credit is bad.
I’m not a financial person or economist, but what you say pretty much sums it up. Things are stagnant bc the whole show has been rigged or gamed to be that way. We all know that back in the “olden days” when corporations actually paid taxes, and the marginal tax rates were much higher than they are now, there was much more money put back into businesses/corporations on R&D, developing new products, capital projects, expanding business opportunities, hiring employees, and so forth. These days? Not so much.
As someone who has owned shares for decades, I’ve witnessed the same small contingency of corporate Board members sit on each other’s boards and award themselves and their lackey CEOs giant salaries (or whatever you call them), plus various perks & lurks. All the while spewing forth the pernicious lies of Trickle Down & Supply Side “economics,” which many a citizen bought into. And pop goes the weasel and here we are. Stagnant and staying that way. Safety for the 1% and all pain for the 99s. Sucks to be a 99.
As long as the 99% are in pain, there will never be safety for the 1%. I don’t envy the 1% – they have a tiger by the tail, and what happens when they cannot hold on any longer is predictable.
“William Lazonick’s article also emphasized how corporate leadership is now focused on extracting value from their companies for their own personal benefit, rather than promoting growth, innovation, better products and services, etc.”
When faced with the choice of creating something amazing or abusing a broken incentive system, a large number of people will choose the later. Their only real limit is what they are capable of rationalizing. And rationalizing your actions gets much easier once they latch onto a supporting ideology/dogma.
One way to remedy that gap would be to have government take up the slack, as it often does by making infrastructure investments and subsidizing R&D
Government subsidized R&D to corporations is a waste. If the government does the R&D directly, and puts the results into the public domain, it might be a different story.
In Canada, there is a subsidy called SRED (Scientific Research and Experimental Development) tax credits available to corporations, and it is abused. The results of this experimental development is usually transferred to China where the products developed are ultimately manufactured.
Consider JDSU. They receive millions in SRED tax credits to develop their optical splitters and other products, and nearly all of their components are made in China, where they used to be made in Ottawa or California. When they closed the Ottawa facility and moved production to China, employees from Ottawa were sent to China to set up the manufacturing facilities and transfer technical knowledge to the Chinese to make their products. Imagine training Chinese slaves, knowing that you were out of a job when you came back!
The CEO can exploit the Canadian tax system to pay for product development, and then exploit Chinese workers in the manufacturing of said products.
This isn’t capitalism anymore.
Yes, and also as to infrastructure investments by the govt: who pays for that? Why the 99s, that’s who, bc the 1% and the corporations have made darn sure that they’re not paying taxes under any circumstances whatsoever; if anything the 99s have to pay a fealty to them to actually create any jobs in our countries anymore. The 1% uses all sorts of infrastructure but paying for it is for the lower orders, not for them.
Thanks for another informative, mind-boggling post.
Per:
Having been around true entrepreneurs, it’s my observation that those folks are driven by ideas, by a goal. They are not primarily driven by money.
The original premise of ‘stock options’ in startups was to dangle a big enough carrot to get employees to ‘hang in there’ long enough to get prototypes and products to market. That structure fit startups (and IMVHO, it still does). Startups often have very little, or no, money and it’s a scramble to get things off the ground: it makes sense to pay people back later if things turn out well. But that type of organization is completely different from a Regence, or a Wells Fargo, or a Pfizer.
The fact that the CEO-led Boards of Directors don’t seem able to distinguish between a startup and a large corporation is appalling. (I suspect the Boards of Directors flatter their own vanity by supposing themselves to be at the helm of ‘innovative’ companies. Meh.)
The day Larry Summers calls out these Boards of Directors for their stupidity in misapplying startup economics to large banks and healthCos, I swear that I’ll buy a bottle of very good wine to celebrate. I won’t hold my breath.
“lavished more than $500bn in the past year on stock buybacks”
A thought: where is that money going? In principle, they’re doing the right thing, paying out the company’s gains rather than hoarding them. That puts the money (whatever that is) back into circulation. Where does it go?
We see some answers, even in today’s nc: e.g., into “emerging markets.” Into buying OTHER stocks, or much more bizarre and questionable financial “products” (since when does finance produce anything?). That is, into the casino. And some of it into bidding up real estate prices (but not value) in certain markets.
But I suspect there’s a larger picture: what are people doing with the payouts from those huge buybacks? Why isn’t it stimulating the economy? Or is it – there is a claimed recovery?
“the largest half-yearly volume since 2007”
Uh-oh. Right before the crash, you mean?
And now a naive question:
“more than $500bn in the past year on stock buybacks “. Where is that money going? In principle, they’re doing the right thing (albeit for the wrong reasons): paying out the company’s gains rather than hoarding them. So what do the recipients of that money do with it? In principle, they just lost an investment. An article here today mentions “emerging markets”, and there are all those questionable financial “products” (since when does finance “produce” anything?)
But I think it would a worthwhile investigation: where did that half a billion go?
I think you made a typo. That’s half a trillion.
It’s half a trillion, not billion, and it is going to the owners of stock–i.e. the top 7% of wealth holders, who either use the money on more of the same (houses, yachts, cars, vacations, jewelry), other stocks and bonds, or into offshore accounts in the Cayman Islands et al. Bluntly, it is being used to fatten up the geese who are already obese.
Sorry about the typo; the correct number only underlines my point – this should have been a huge economic stimulus (maybe it was, and we’re in worse shape than we thought).
You answered my intended question: what do the bought-out shareholders do with the money? This phenomenon is one reason for the “desperate search for return” we keep hearing about; the recipients are looking for somewhere profitable to park the money, given that there’s so little demand that PRODUCTIVE investments are scarce.
Aside from yachts and mansions, I think it’s going into the huge pool of funds sloshing around in the casino.
Doesn’t it simply go to anybody already owning the stock who sells?
Stock buybacks have the effect of propping up a stock price and create strength to sell into.
Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012
Actually, it’s not far from $1 trillion
With their neutering of political, legal and regulatory checks and balances, and the fact that the 0.1 percent has been able to run the table and concentrate the wealth and resources of an entire society in the wake of the 2008 financial collapse that they engineered, it is difficult to see how society can quickly react to their massive legalized theft, despite increasingly widespread recognition about what has occurred and is ongoing.
I particularly appreciated how Mr. Denning outlined how CEOs’ stock options and stock awards have led to corporations to take on huge amounts of debt to buy back shares at or near market highs to enable the CEOs to maximize their personal income from stock options. Among many other legal and particularly tax measures, it is clear that Rule 10b-18 of the Securities Exchange Act should be revoked.
“Let us hope that anagnorisis is really beginning, the anechoic effect is fading, and the drama may yet have a happy ending.”
Happy ending? Hundreds of millions of people have been trashed by this system of corporate greed and government indifference. Amazing that it has to get this bad before anybody says much of anything.
All,
I strongly suggest that you read the second part of the current GolemXIV series, the link to the first part of which is found in the 09/20/14 “Links” section. The points of analysis there tie in nicely to things described in this guest post, and deepen one’s understanding.
http://www.golemxiv.co.uk/2014/09/next-crisis-part-two-manifesto-1/
Extraordinarily good stuff. Part Three is promised to appear soon.
What I find intriguing is the number of companies that in pretty good shape that are laying people off by the 1000’s (including one I was at until recently).
It seems that only when the corporate ideology is defeated will this ever end.
à propos of all this:
A plug for the documentary film “Orphans of the Sahara” — available free on-line at Al Jazeera’s website.
I have recently watched a documentary on Al Jazeera’s English service entitled “Orphans of the Sahara” and now I’m writing to urge all of you to take the time to watch it, too.
It puts all of the growing socio-political disorder into a very helpful perspective. Most of all, it impressed me with the fact that there is simply no way that the burgeoning chaos which seems to mark the fall of a long-standing modern set of political arrangements is somehow mysterious to the heads of state and their top counselors around the world. Many of us might be confused and mystified about what is at the sources of all this rebellion and political disruption but the people within the elite of business and political fully know and understand exactly why these armed insurgencies have sprung up everywhere. Almost without exception, they’re the reactions against the politically dominant order–and the religious fanatics associated with the insurgencies are only more or less sincerely interested in the most common and understandable of the impulses to resist the current neo-liberal economic order. While it’s true that the Al Quaida-s and the Al Shabaab-s and Boko Haram-s want to overthrow “Western” powers’ rule, they of course want to do that in order to establish Islamic religious law (as they regard it), rather than to address the needs and interests of ordinary people in the territories they infect. That latter is alreadywell understood in these parts, of course. But the program is very much worth your while to veiw. If you don’t have a television, you can watch it on-line at Al Jazeera’s website.
“…While it’s true that the Al Quaida-s and the Al Shabaab-s and Boko Haram-s want to overthrow “Western” powers’ rule, they of course want to do that in order to establish Islamic religious law (as they regard it), rather than to address the needs and interests of ordinary people in the territories they infect….”
I think you’re skipping something there.
Look here: When Saudi Arabian govt says western TV and internet must be censored and that women cant drive cars, cannot work alongside men and cannot leave the country without the written permission of a male relative, behind all that are assumptions about what is necessary to maintain specific social values. This is actually NO different than Boko Haram’s agenda for example. Not one iota of difference. All that’s different is that one group is roaming the desert while the other group its in gilt-encrusted palaces and is “approved” by the western powers and the UN.
Do I agree that those regimes are best for the ordinary man or woman in those countries? No. But that’s worlds away from taking a blanket assumption that these people dont believe that these religious schemes are in the best interests of their societies. They do, same as the rulers of saudi Arabia, Quatar and all the dressed up gang leaders that the Western powers are friends with.
In short this is just about the West wanting its own thugs in power. They dont care about the women or poor people in Syria, Nigeria or wherever else – same as they have thrown the women of Saudi Arabia and the peasants of Bahrain to the wolves. In our calculus they are all just collateral damage in our power game….
RE: …”Not one iota of difference. All that’s different is that one group is roaming the desert while the other group its in gilt-encrusted palaces and is “approved” by the western powers and the UN.”
Listening to the first-person reports of people who have witnessed and fled from (in this particular instance, “IS”) various insurgent groups, it is abundantly clear that these witnesses consider the insurgents as utterly abhorent–appalling. After first describing insurgents as murderers, rapists, beheaders and looters, one distraught man (referring to IS) asked (in his Syrian arabic, and, himself apparently a Muslim) rhetorically “What kind of ‘Muslims’ are these!?” I have seen and heard virtually identical first-person accounts again and again in the reporting presented by Al Jazeera. What is clear is that the scores of thousamds fleeing the insurgents see nothing about them or their goals as compatible with what they want. The insurgency leaderships clearly could not care less whether their idea of Isalmic laws are either valid or desired by the populations on which they’re determined to impose them.
Again, we are talking about summary imprisonment, beheading and so on. Plus leaders taking the lion’s share of any resources avilable, while suppressing minorities among them. Explain to me what about this is NOT being practiced in Saudi Arabia for example? And what about it is so damn “muslim”?
Wake up folks.
We cant keep siding with thugs just because they do our bidding. That’s how you end up with these crises in the first place. As a country we need to come to terms with this – and stop doing it.
It’s not a “competition” ! I haven’t and I don’t in the LEAST pretend that the Saudi regime or that in Libya or in any other places in the grip of insurgencies is socially or politically much if any different or better than the lawless brutality of the IS groups. Your assumptions about myown positions are entirely mistaken. It seems you haven’t seen the documentary so you don’t recognize that it doesn’t take sides such as you present them above; rather, it presents detailed first-person accounts of various groups and shows what has prompted them to organize.
In particular, the focus of the documentary is on the story of the ravages of Areva Group’s uranium mining operations in western Niger and how an insurgency in the Azawad region of Mali has organizeditself and even formed a self-declared government to oppose and resist the exploitation and degradation of the environment and the toll on the indigenous peoples of the areas affected which ensue from Areva’s corruption of the Niger government—& etc. It is through this lens that the rest of the varied insurgencies are revealed as being in their ways the outgrowth of similar such Western-backed profit-driven enterprises which leave the local populations exploited and dispossessed.
I had no intention of going into the details of the film’s narrative; and, beyond this post, I won’t respond to further such objections as yours. Go and watch the film, then comment if you care to.