The Economist Who Put Stock Buybacks in Washington’s Crosshairs

In 1984, an economics professor named William Lazonick joined the faculty at the Harvard Business School, just in time to witness a shift in economic thought. Lazonick, who is seventy-four, had grown up in Toronto and earned a Ph.D. in economics, at Harvard, in 1975. He specialized in economic development, focussing on the ways that companies make innovations in order to attain global dominance of their industries. When he started teaching, the prevailing view in business schools was that companies should take their earnings and reinvest them in their operations, in part by investing in the well-being of their workers. But the business school had recently hired a professor named Michael Jensen, who believed in a theory of corporate management holding that companies exist solely to deliver profits to their shareholders, and that managers should make decisions to maximize those profits at all times. The theory was gaining ground quickly. In 1984, Lazonick said, “no one was talking about ‘shareholder value.’ ” But, by 1986, “everyone was talking about it.”

Jensen and his ideas proved to be hugely influential. Through the rest of the decade, as President Ronald Reagan pushed for tax cuts and eliminated business regulations, the shareholder-value philosophy became the norm. Companies began giving much of their extra capital back to investors in the form of dividends rather than investing it in areas that could have strengthened the business in the longer term, such as new facilities, new products, worker training, and employee raises. In fact, layoffs were often greeted with enthusiasm because they cut costs and caused stock prices to rise. Corporations also found more creative ways of funnelling money to their shareholders. In 1982, the Securities and Exchange Commission passed a rule allowing companies to buy back their own stock (without being charged with stock manipulation), which reduced the number of shares in the market, causing their price to go up. In the late eighties, Lazonick noticed a sharp increase in stock buybacks. It made sense: buybacks, like dividends, enriched investors, including company executives, who received much of their compensation in company stock.

Lazonick felt that maximizing shareholder value rewarded the wrong people. “The idea that public shareholders are ‘investors’ is really nonsense—shareholders don’t actually take much risk at all” when they buy stock in companies, Lazonick told me. “It’s actually workers and taxpayers who invest in companies.” He also felt the practice was having a destructive effect on society more generally. “It was an explanation for concentration of wealth at the top and the erosion of middle-class jobs,” he said. “A lot of this was caused by decisions within corporations, which had become enamored by this ideology.”

He watched as the shareholder-value philosophy helped create the conditions that led to the Great Recession. Between 2003 and 2007, Lazonick noted that the number of stock buybacks among companies in the S. & P. 500 quadrupled. Then, when the financial crisis began, some of these same banks required billions of dollars in taxpayer bailouts to avoid collapse. In September, 2008, just after Lehman Brothers declared bankruptcy (after spending more than five billion dollars on buybacks in 2006 and 2007), Lazonick wrote an op-ed for the Financial Times titled “Everyone Is Paying Price for Share Buy-Backs.” He described how buybacks had left financial institutions in a vulnerable state, which made the crisis more severe when it arrived. “In the 1980s, executives learnt that greed is good,” he wrote. “Now, their mantra could be ‘in buy-backs we trust.’ ”

He also felt that the practice was slowing corporate innovation. Lazonick found that between 2008 and 2017, the largest pharmaceutical companies spent three hundred billion dollars on buybacks and another two hundred and ninety billion paying dividends, which was equivalent to a little more than a hundred per cent of their combined profits. He noted that both Merck and Pfizer, two of the largest pharmaceutical companies, had been spending heavily on buybacks, but had struggled to develop successful new drugs. The same was true in the tech sector. In the nineteen-nineties, the computer-networking-equipment manufacturer Cisco Systems was one of the fastest growing companies in the world. But between 2002 and 2019, it spent a hundred and twenty-nine billion dollars on stock buybacks—more than it spent on research and development, which Lazonick felt compromised its competitive position. He is currently co-writing a paper comparing Cisco unfavorably with Huawei, the giant Chinese company that is building a global 5G network, the next generation of Internet technology. “Huawei is one of the most innovative companies in the world, because it retains and invests its profits,” Lazonick told me. Today, he argues that Apple is falling prey to the same phenomenon as Cisco. Since the death of its founder, Steve Jobs, in 2011, the company has distributed three hundred and twenty-five billion dollars to its shareholders, while spending only fifty-eight billion on research and development. Lazonick believes that the company has fallen behind in creating revolutionary new products, like the iPhone, and has instead been relying on updates to existing ones.

In 2014, Lazonick wrote an article for the Harvard Business Review called “Profits Without Prosperity,” which helped his ideas break into the mainstream. In the article, he argued that the “allocation of corporate profits to stock buybacks” deserves most of the blame for the stagnation of wage growth for the majority of Americans, the fact that well-paid jobs are increasingly scarce, and the dramatic rise in income inequality. He placed responsibility at the feet of executives, who were prioritizing their own paychecks over investments in their businesses. Proponents of stock buybacks often argue that they are an efficient way to take excess cash that a company can’t use and redeploy it into the economy. But Lazonick felt that, given how little companies were investing in their workers and infrastructure, this argument had little merit. “The very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results,” he wrote. “If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it.”

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Lawmakers took note. Lazonick told me that, in 2015, he was consulted by Hillary Clinton’s campaign—which cited his Harvard Business Review article in its economic platform—as well as by Bernie Sanders’s campaign. Some Republicans have even started pointing to buybacks as the cause of America’s political and economic ills. A year ago, one of Senator Marco Rubio’s policy advisers contacted Lazonick to express interest in his research. Rubio later published a report called “American Investment In the 21st Century,” in which he expressed concern that economic growth was driven more by finance than by actual productivity, and mentioned the buyback phenomenon several times. Senator Elizabeth Warren has made the idea a theme of her campaign. She “picked up the correct message right away,” Lazonick told me. “She said, the reason we don’t have prosperity for workers any more is that companies aren’t sharing it. That is the critical point.” The issue looks set to become a central part of the economic platform of several Democratic Presidential candidates.

Around ten years ago, Lazonick started a nonprofit organization called the Academic-Industry Research Network, which now has around a dozen academics around the world, and explores ways of fostering equitable, long-term economic growth. He told me that it was gratifying to finally have enough credibility that his ideas are taken seriously. “The world’s finally waking up to the reasons why income inequality has gotten so bad and why jobs have disappeared,” he said. Last March, Senator Tammy Baldwin, Democrat of Wisconsin, reintroduced the Reward Work Act, which is intended to curb buybacks and to give workers greater influence over decision-making at their companies. Lazonick was invited to testify at the hearing, and he arrived wearing a dark suit and royal blue tie, his silver hair combed neatly back. He sat at a long table with several experts, workers, and organizers. “I think it’s great that people are finally raising the issue,” he said. “But it’s been thirty-six years.”

The pace of buybacks continues to increase. Last year, the Trump Administration passed one and a half trillion dollars in tax cuts, the largest share of which benefitted corporations; companies spent much of the money they saved buying back their stock. In 2018, S. & P. 500 companies spent a record eight hundred billion dollars on buybacks; in 2019, they are set to spend more than a trillion. Once one starts paying attention, it begins to seem as if buybacks are responsible for all sorts of corporate disasters. On May 31st, Lazonick co-authored an article in The American Prospect noting that, between 2013 and 2019, Boeing spent more than seventeen billion dollars on dividends (forty-two per cent of its profits) and an additional forty-three billion dollars on buybacks (a hundred and four per cent of its profits) rather than spending resources to address design flaws in some of its popular jet models, or even to develop new planes. Two of the company’s 737 Max jets had high-profile crashes within the last year, and the Federal Aviation Administration recently grounded the plane over safety concerns.

Some experts worry that the rate of buybacks poses an existential threat to the economy. “I think there’s a real danger of stock buybacks topping out the market, and then the bubble bursting,” Lenore Palladino, an economist with the Roosevelt Institute, told me. “We know who gets hurt when the bubble bursts. It’s the majority of us.”