By William Lazonick, President, The Academic-Industry Research Network. Originally published at the Institute for New Economic Thinking website
Now that new Treasury Department rules have effectively thwarted Pfizer’s attempt to evade its U.S. tax obligations by using its proposed merger with Allergan to do a tax inversion, it’s time policymakers turned their attention to a far more common — and even more damaging — corporate practice: stock buybacks. This mode of distributing corporate cash to shareholders helps pump up the pay of Pfizer’s senior executives, while, as President Obama said of the tax inversion, “it sticks the rest of us with the tab.”
Last October, in justifying the proposed merger that would effect the tax inversion, Pfizer CEO Ian C. Read
complained that the company’s U.S. tax burden meant that his management team had to take on global competition “with one hand tied behind our back.” But, as research by the AIRnet has shown, Pfizer makes debilitating decisions that deplete its finances far more than taxes do. During Read’s reign as CEO from 2011 through 2015, Pfizer paid out $44.7 billion in buybacks and $32.9 billion in dividends. Buybacks alone dwarfed the $16.0 billion Pfizer provisioned for U.S. income taxes over the same period.
Buybacks have clearly helped inflate the pay of Ian Read; in his five years as CEO he has raked in $76.8 million in direct compensation, of which 63% came from stock-based pay. Other senior Pfizer executives as well as stock-market traders who have been adept at timing their Pfizer stock sales have also gained from buybacks.
While it’s obvious that buybacks make executives and some other shareholders rich, how buybacks “stick the rest of us with the tab” may be far less evident. Pfizer boosts its profits by charging high drug prices. Yet from 2011 through 2015, Pfizer spent an equivalent of 71% of its profits on buybacks while also distributing 52% of its profits as dividends. By charging high drug prices to enrich shareholders, Pfizer increases the healthcare burden on America’s households – who foot huge Medicare/Medicaid pharmaceutical bills as taxpayers, and face higher retail drug prices, insurance premiums, and co-payments as patients. Bringing stock buybacks by pharmaceutical companies under control is an obvious way of making healthcare more affordable.
A pharmaceutical company like Pfizer would not be able to put drugs on the market without the massive taxpayer-funded life-sciences research through the National Institutes of Health – to the tune of $958 billion (in 2015 dollars) between 1938 and 2015. Financial aid from the public has also come to the pharmaceutical industry through such measures as the Orphan Drug Act of 1983, which birthed Pfizer money-makers Lipitor and Enbrel. Quite apart from the tax inversion that the Obama Administration has wisely thwarted, a company like Pfizer regularly wastes billions of dollars on buybacks that should be returned to taxpayers.
Buybacks will continue without any effective limits unless the SEC’s Reagan-era Rule 10b-18 is struck down. After the scrapping of its inversion plan, Pfizer’s press release quoted CEO Read as saying: “As always, we remain committed to enhancing shareholder value.” Unfortunately, “enhancing shareholder value” and the value a company creates through its actual work often bear little, if any, relation to one another. For example, not one product originated and developed in Pfizer’s own labs after 2005 has generated significant revenue for the company.
And between 2011 and 2015, as Read’s Pfizer was reducing its workforce from almost 104,000 to around 79,000 worldwide (excluding employees from its recent acquisition of Hospira) and seeing its annual revenues shrink from $67.4 billion to $48.9 billion, Pfizer distributed as buybacks and dividends an amount equal to 124% of profits. The $77.6 billion that the company devoted to “enhancing shareholder value” was twice the amount spent on R&D during the period, raising the question of how many new drugs Pfizer’s labs will be capable of putting onto the market going forward.
It’s clear that Pfizer, like far too many US corporations, has left behind the business of making products for the business of making money. Under the cover of “enhancing” or “maximizing shareholder value” — a slogan that allows executives to inflate their stock-based pay while fulfilling a pretend legal obligation — these companies are not only imperiling their own futures, but they’re also transferring money from the pockets of ordinary Americans to those of an elite few. Putting a halt to tax inversions is one of many ways to stem the flow of income to members of the “value-extracting class” who populate the top 0.1%. Banning buybacks by rescinding SEC Rule 10b-18, which for over three decades has given companies like Pfizer license to manipulate the stock market, should be a top priority of any progressive political agenda.
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Please try to refrain from the use of the word progressive. I fancy myself more a republican and agree with you. To credit seemingly only democrats as being sensible is to say the least devisive and counterproductiv.
Huh? Most “progressives” are at odds with the Democratic party. Some Democratic party incumbents that we call fauzgressives or the Vichy Left try to wrap themselves in the “progressive” banner when they are most decidedly not. That type is pro-corporate, issues all the right identity politics noises and makes hand-waves at environmental issues and reducing inequality.
Lest anyone be confused, what a difference a K makes:
“Vichy” as in a government cooperating with the Nazi occupation of France.
Vicky Left can hang out with Tom Tomorrow.
Corrected. Yet another of my infamous typos,.
I’m feeling a little playful, so let me tease you by pointing out that the original “progressive” movement included a lot of Republicans. I don’t know your attitude toward Theodore Roosevelt, but he was a Republican and enthusiastically supported the Progressives. I think he even called himself one.
Lets stop the outsized profits due to the outdated IP-laws, time for a reform of IP-laws. Ceo compensation and probably patent-attorney compensation is higher than the compensation for researchers – based on that it is possible to come to the conclusion that the researchers are the least important (meritocracy right?) when making discoveries…. Seems we’re seeing researchers as a cost to be cut but CEOs and lawyers are bringing (at least they are getting) most of the benefits :-(
Mark Twain said that a country without a strong patent system is like a crab, it can only crawl sideways. We need this to encourage more independent inventors, even if they need to arise back from extinction.What could be done is to repeal Bayh Dole which allowed universities to own and patent government funded work. Putting this into the public domain would raise the quality bar on patents, without detracting from the right to own intellectual property. This right was considered so important by the founding fathers it is actually in the US Constitution. Without a strong, independent inventor class, there is less of a check against the manipulative power of large institutions.
Some might argue that the current patent-laws are what keeps independent inventors away. The big institutions are using the threat of patent-litigation to keep competition quiet. Patent-law is now a lot about who can afford the litigation and to some extent also a little bit about who might be in the right. Independents can’t afford long litigation.
+1, and the tpp makes this all worse by extending patent protections (that’s protection as in protectionism for all the “free traders” you stumble over in your daily life…)
The inventor class, at least the small inventor class, may not be aided much by the patent system as defending their patents may require large expenditures of time and money when a valuable patent is unfairly used by a large corporation.
The below examples may instead illustrate the manipulative power of large institutions of the current patent system.
Edwin Armstrong (FM radio) vs RCA, https://en.wikipedia.org/wiki/Edwin_Howard_Armstrong
This has “After his death, a friend of Armstrong estimated that 90 percent of his time was spent on litigation against RCA”
The Wright brothers (aircraft flight control patent 821,393)
https://en.wikipedia.org/wiki/Wright_brothers_patent_war
The previous suggests the Wright patent fight may have “retarded the development of aviation.”
The pushbutton ratchet patent vs Sears Roebuck, a 20 year dispute.
http://articles.chicagotribune.com/1989-09-17/news/8901260271_1_sears-wrench-new-trial
. . . The key paragraph on the Wright brothers (cited above):
The Wright Brothers never got rich from their aircraft because they kept putting all their profits from manufacturing back into law suits defending their patents. They would have been a lot better off ignoring the patent violations and just reinvesting their revenue in their plant.
Strong patents leading to patent trolling, and inventors rarely being able to profit from their own inventions because they have to take on investors that can manipulate them so they lose all their rights, and lots of other scams.
What good are they when the only funding is from predatory finance?
A simple executive order: No publicly traded company can buy back their own stock if they have closed/moved a plant or had a layoff of more than, say 50 people, for two calendar years. Every thousand jobs eliminated above a certain level adds 1 more year to this moratorium. Jobs added to R&D can offset this number.
If a company wants to issue debt to buy back their own stock, they need to have met the above AND have given a COLA raise to every employee in the past year and to maximum compensation ratio of the company cannot have exceeded 200:1.
Watch this buyback crap stop.
Hmm, something like this might very well work. Worth a try, or at least a rigorous simulation.
How about
“No company can sell their products to any government agency if they have moved production offshore”.
Which is why we have to make sure that we don’t get stuck with the TPP, under which no signatory could make such a law.
SEC’s Reagan-era Rule 10b-18 ?
David Dayen — ‘SEC Admits It’s Not Monitoring Stock Buybacks to Prevent Market Manipulation’ (8/13/15): “…under SEC Rule 10b-18, adopted in 1982, companies receive a ‘safe harbor’ from market manipulation liability on stock buybacks if they adhere to four limitations: not engaging in buybacks at the beginning or end of the trading day, using a single broker for the trades, purchasing shares at the prevailing market price, and limiting the volume of buybacks to 25% of the average daily trading volume over the previous four weeks… [but] the SEC doesn’t collect data that would let it know whether companies breach even these generous limits.”
from his final column in the WaPo
10b-18: How to End the Stock Buyback Deluge
HAROLD MEYERSON JANUARY 1, 2016
First, let’s not be naive – a corporation’s purpose is to return value to shareholders.
Second, let’s not be naive – buybacks are ALWAYS done with the benefit of inside information. It’s simply impossible for a corporation NOT to have inside information.
While insider information may well be true, it may not be a significant factor.
A corporate executive may view themselves as a supplier of their company’s stock (via stock options or holdings) and naturally wants a higher price for their stock position.
These executives may have an incentive to have the company buy high in the market and sell low (via options) to the executives.
Companies SHOULD be embarrassed to announce a stock buyback program. In a sense, a buyback program telegraphs to the world some possibilities: perhaps an aggressive and inefficient executive stock option program is in place that will significantly increase the number of shares unless some shares are bought back, perhaps the buyback illustrates a lack of suitable opportunities to use the cash in other ways: more product development through R&D, increased employee training, improved physical plant, or growth opportunities for the company via buying intellectual property or other company acquisitions.
If the executives view the stock as priced too low, the senior executives can buy for their own portfolio from the market.
Furthermore, from inside a corporation, the buyback program may not be a morale booster for the working stiffs who lack a large stock position as they know the money comes from somewhere and makes their future employment somewhat less likely when the piper must be paid.
Stock buybacks were viewed as stock manipulation prior to 1982, the years after this may show that is indeed what it is.,
I’m with John Wright here, generally, and think you’re naive if you think the talking point that shareholder value is the “purpose” of a corporation. If we go bare bones the purpose of a corporation is to spread liability.and to create a “life” beyond the scope of it’s founders lifespan. I would be interested in other opinions on this, but shareholder value is just a meme. And as I’ve learned from Prof. Black, Wall St. is a criminogenic environment and insider trading is Standard Operating Procedure
Your comment is a better synthesis that I’ve come up with — hope I can reuse it ;-)
Here was one post that that helped me understand that ‘shareholder value’ is a relatively modern, business school notion that has caused no end of economic havoc the past few decades:
http://www.nakedcapitalism.com/2014/01/myth-maximizing-shareholder-value.html
Also, David Stockman (of all people!) has eloquently explained, as has Yves, how the ‘shareholder value’ and ‘stock buybacks’ skullduggery is actually cannibalizing what were once good companies.
google ‘stockman stock buybacks’.
Here’s a start:
http://davidstockmanscontracorner.com/bubble-finance-in-one-chart-nearly-100-of-net-corporate-debt-issuance-in-the-21st-century-has-gone-into-stock-buybacks/
Indeed, this is why I argued for years on Groklaw.net (now defunct) that corporate limited liability needs to have a few holes poked in it. In other words, incorporation is now being abused such that liability isn’t just limited, it is completely eliminated. There needs to be a way for the general public to pierce the corporate veil and hold the decision-makers directly and personally accountable. After all, a corporation is just a legal construct – a person within it made the decisions. And *nothing* of the evils in our society will change until those who hide behind the curtain are brought out into the light.
Read the articles of any corporation, and you will find that is not true. There are a number of goals for a corporation.
That’s utterly untrue. You are spouting a theory of governance first articulated (and pretty incoherently) by Milton Friedman in a 1971 New York Times op-ed, which didn’t become conventional wisdom until the 1990s. This is a theory made up by economists, with no legal underpinnings.
And if companies were so good at making use of inside information, and wisely buying their stock when it is undervalued, why have studies of buybacks found that they are money-losing as investments?
Indeed – let’s not be naive.
A corporations purpose is decidedly not “to return value back to shareholders”. Particularly since they haven’t participated in the original risk taking required to build a corporation nor invested in any creative development or value building.
Its way more complex and interesting than that.
I suggest a little reading.
Start with Edith Penrose and Alfred Chandler.
Yet from 2011 through 2015, Pfizer spent an equivalent of 71% of its profits on buybacks while also distributing 52%
How does this add up to over 100%? Are they borrowing money to buy back shares?
Keep reading…
This is what we call “looting the company.”
Ya it’s a fucking management club – pumping up the share price so senior management can cash out and retire richer and the devil take the hindmost.
I always sell my stocks that have buyback programs – it’s the worst sort of short-termism, utterly irresponsible, and bad for the long-term health of the company.
This kind of corruption and stupidity is wrecking the economy. Off with their silver-backed heads, the greedy scum!
And, to note: all dividends are not created equal, c.f., Medtronics (now plc, formerly inc) dividends are a mix of profit and return on capital.
ndc, I gotta know, what noms do you feed your keyboard(s)?
I think looting is a bit extreme. From what I can tell, it looks like a company that has done very little innovation for awhile, and is using its rent to acquire innovations, sometimes selling off assets, and disgorging its cash through buy-back and dividends. Measured profits are not the same as cash flows, and their cash flows from operations have been sufficient to cover their buy-backs.
They’ve been doing the same thing as many other corps in an era of stagnation and no growth opps–use their cash on buy-backs and mergers.
nice apologia, they’re not making any money selling stuff (remarkable in itself considering drug prices and o care) they use market power to acquire competitors (you know, so they don’t have to compete, because that’s not the biz they’re in, they’re in the financial shenanigan biz) which leads to selling assets (otherwise known as asset stripping, or in some cases “looting” h/t diptherio) then “disgorging” (hmmmm) cash through gimmicks such as buy backs and dividends (the process by which financial shenanigans complete the cycle of looting, and back to the start) Cash flows from apparently legacy operations (since they don’t innovate, right?) are engineering a rise in value through buy back. But it’s ok because everyone is doing it? See criminogenic environment for concise explanation of that canard.
It wasn’t meant as a defense. The main point was the question about how they could spend more on div + buy-backs than profits generated.
My additional comments were meant to acknowledge this is what corps have done in the financialization accumulation regime that’s been dominant since 2000–financial transactions dominate over real.
Saying Pfizer is no different is not trying to excuse them, it’s recognition of standard Corp behavior in this day and age. If that’s what’s known as looting, then my mistake.
point taken as to the state of affairs description of the accounting mechanism, and according to the link yves put in lower downthread it seemed to have gotten going in the ’90’s.
“Awhile” is 11 years… and referring to the monopolizing of the sector as “acquiring innovations” is a nice bit of PR. Almost sounds admirable. And you do know, don’t you, that just because everyone is engaged in the financial engineering and stripping of their companies, that doesn’t mean it’s right, or something we should quietly accept.
Pfizer’s CEO is apparently making $80M per annum in compensation. The average pharmacologist makes $84,000/yr, or about $3.5M over a 40 year career. Let’s be generous and say $4M. So, in order for the CEO’s salary to be justified from a value-creation standpoint, we have to assume that the CEO creates more value in one year than an actual pharmacologist creates in 20 lifetimes. Really now….
The executives are looting the company by paying themselves far, far, far more than they could ever possibly be worth. I know, everybody does it. That doesn’t make it right.
And third – buybacks are the direct result of the disastrous prolonged Fed zero interest rate policy…i.e. free money to Wall Street casino.
Most on point comment here. Most companies are borrowing money to perform the buybacks. If debt was properly priced this would not be occurring! The Fed is the real culprit!
Disagree…. the Jenson shareholder meme stated the whole thing …. which in turn facilitated equities becoming a dominate form of moeny for c-suite bonuses and M&A activity’s…
Skippy…. for some the Fed causes all problems, funny how some stripes loved the Fed during Greensplaines Chair…. fickle lovers I guess…
Skippy is right. Buybacks were common long before ZIRP.
I’m curious, how do people find out the total subsidies paid out to companies like Pfizer by the NIH? I looked at their site and couldn’t find a thing about $958 billion (in 2015 dollars). That amounts to an average of over $14 billion a year!
All I could find was lots of PR crap but nothing solid concerning numbers by company.
@JCC – Perhaps check the NIH website, and/or it’s subsidiary institutes.
. . . For example, not one product originated and developed in Pfizer’s own labs after 2005 has generated significant revenue for the company.
And between 2011 and 2015 . . . The $77.6 billion that the company devoted to “enhancing shareholder value” was twice the amount spent on R&D during the period, raising the question of how many new drugs Pfizer’s labs will be capable of putting onto the market going forward.
I smell accounting bullshit. Pfizer invests $7.7 billion per year in R&D and comes up with zeroes, the question becomes how much of that expense is truly R&D. During this time of zeroes, the CEO in charge rakes in nearly $80 million. Would that be merit pay?
It’s clear the criminal minds of finance have infected every area of business where financial engineering, using cheap debt available only to them, results in value extraction.
Share buybacks should have never been permitted.
The whole pharma – medical business is a gargantuan racket. Cheap debt enables the consolidation of an industry in so few hands that they can raise drug prices overnight by multiples, and if you need it to live it’s extortion, which is still a crime for the little people.
The anti trust laws have apparently been sent to the shredder. The criminal minds of finance have infected government.
Drug trials, which are very expensive, are paid for with R&D dollars.
I’m genuinely curious. How? The patients still have to pay. The doctors are not paid anything extra. The hospital administrators don’t receive anything extra. Is it the tabulating and analyzing of the data?
A drug trail will require specialized medical exams that are paid for by the drug companies, Here is a quote from wikipedia on what a drug company pays for a trial:”The costs to a pharmaceutical company of administering a phase 3 or 4 clinical trial may include, among others:
manufacturing the drug(s)/device(s) tested
staff salaries for the designers and administrators of the trial
payments to the contract research organization, the site management organization (if used) and any outside consultants
payments to local researchers (and their staffs) for their time and effort in recruiting patients and collecting data for the sponsor
study materials and shipping
communication with the local researchers, including on-site monitoring by the CRO before and (in some cases) multiple times during the study
one or more investigator training meetings
costs incurred by the local researchers, such as pharmacy fees, IRB fees and postage
any payments to patients enrolled in the trial (all payments are strictly overseen by the IRBs to ensure the patients do not feel coerced to take part in the trial by overly attractive payments)
“https://en.wikipedia.org/wiki/Clinical_trial
So the drug companies pay for extra medical interventions, tests etc, that the trial may require. They don’t pay for other health care for participants of the trial.
In addition they have to pay the costs for rolling up the information from the trial to final reports. So while the patients have to pay for other medical costs the costs of the trial are paid by the company sponsoring the trail.
Good info! Thanks!
cnchal,
Very well said: “Share buybacks should have never been permitted… Cheap debt enables the consolidation of an industry in so few hands that they can raise drug prices overnight by multiples…
The anti trust laws have apparently been sent to the shredder. The criminal minds of finance have infected government.”
I’m sure the FTC is all over this on anti-trust grounds.
Meanwhile, the so called “smart money” vultures are circling and salivating over the “coming opportunities in distressed assets” as the debt binge to fund corporate stock buybacks and dividend payouts (and to maximize C suite stock options and bonuses) at many marquee corporate names nears conclusion and economic pressures that have to date been largely concentrated in the commodity and energy sectors surface in the broader economy and drive “restructuring”.
All done due to the “I’ll be gone, You’ll be gone” mindset of maximizing short-term personal gain. Another banquet of consequences to be paid for by the innocent.
http://wolfstreet.com/2016/04/06/opportunities-distressed-assets-for-private-equity-kkr-existing-investors-crushed/
get your money out now, ahead of the deluge… like any good PP/corporate raider
i mean PE
STO,
As you asked in your excellent 4/7 comment regarding perpetual war… “for what?”
Thank you for that.
“It’s clear that Pfizer, like far too many US corporations, has left behind the business of making products for the business of making money. Under the cover of “enhancing” or “maximizing shareholder value” — a slogan that allows executives to inflate their stock-based pay while fulfilling a pretend legal obligation — these companies are not only imperiling their own futures, but they’re also transferring money from the pockets of ordinary Americans to those of an elite few.” The final paragraph by Mr Lazonick………………..
The business has always been making money, any commodity is the means to the end, for any for profit business. And the corporate franchise granted by the state is redistribution of wealth from the demand side, a function of the state before the capitalist mode. For the most part, a commonwealth was the basic understanding of just about any civilized social order. A place for everyone and of course, everyone in their place, subject to the rule of the king. The social obligation to provide for the subjects, noblesse oblige, was redistribution, in lieu of a market mechanism to provide for the food and shelter and what not. This sense of the powerful, in the their divinely ordained position required them to maintain the social order, because it simply was not up to the passive subjects to make decisions. And there was no point in dealing with Mr In-Betwee, the middle class, you directly spent the time of the labor force on what was needed or wanted for the higher ups, there was no sense of making something only to resell it. You made it because you had a use for it, and the use was not in making money. Today of course, any deviation from the capitalist model M-C-M’ or in the financialized phase, M-M’, result is the same, anything you produce is produced for its money making potential, not because YOU want or need it. Some else does and they will just have to pay cash on the barrel for it.
That is not correct. You’ve bought into corporate revisionist history. The old model for most companies was if you had a good product and served your customers well, the money would take care of itself.
From John Kay in the Financial Times:
There is another aspect to these stock buybacks and dividend payouts that has received scant attention. That is the large aggregate amounts of federal, state and local subsidies and tax forbearances many of these corporations are receiving under various provisions of the tax codes; and for locating offices, plant and distribution facilities in a particular state or community. In some cases these exceed the amounts of their corporate stock buybacks and dividend payouts.
Why should the public subsidize these buybacks and payouts? Cui bono?