William Lazonick and Stock Buybacks
A recent post at NEP-HIS Blog reviews William Lazonick's working paper on the Financialization of the U.S. Corporation. Lazonick is concerned with why, following the disappearance of large numbers of middle-class jobs in the U.S. during the past three decades, U.S. corporations have not invested in new technology and created high-value jobs to replace those lost to rationalisation and globalisation. His answer is the financialization of the U.S. corporation, with stock buybacks being the most obvious manifestation of this process. According to Lazonick, corporations use stock repurchases to manipulate their share prices, with the result that corporate executives holding stock options are enriched. He ultimately blames this on the erroneous 'ideology' that corporations should be run in such a way so as to maximise shareholder value.
I think that Lazonick is correct to highlight the problems with stock buybacks. As a student of financial history who has worked on dividend policy (click here), I know that stock buybacks were little used prior to the 1970s. I also know that they were illegal for a long period of time precisely because they could be used to manipulate stock prices.
However, I have doubts about two other aspects of his argument. First, he assumes that new technology would have appeared if only U.S. corporations had invested more of their profits in innovation. This is a big assumption to make (click here). Second, the problem is not the ideology of maximising shareholder value, rather shareholders have been expropriated by CEOs and directors. If U.S. corporations had been maximising shareholder, they would not have engaged in extensive buybacks which benefit CEOs at the expense of shareholders.