Sen. Tammy Baldwin is the latest lawmaker to take aim at corporate buybacks.
The Democratic senator from Wisconsin — and frequent critic of share repurchases— is introducing a bill to ban open-market stock buybacks.
On Tuesday, Baldwin also released a report that examines the impact of stock buybacks on workers, companies and the economy. Baldwin and other Democratic senators will hold a hearing examining buybacks on Tuesday afternoon.
The report, put together by Baldwin’s staff, argues stock buybacks suppress wages and drive income inequality, while increasing systemic risk to the economy.
“The evidence also shows that Wall Street insiders and corporate executives have abused the American system of corporate governance, spending trillions on buybacks to benefit themselves at the expense of employees and other corporate stakeholders,” the report said.
Buybacks under fire
Stock buybacks are a common practice by publicly traded companies: companies buying back its own stock decreases the amount of outstanding shares in the market. Fewer shares on the market means the remaining ones are worth more; it’s also often used as an alternative to dividends.
This week, S&P Dow Jones Indices announced that S&P 500 companies spent a record $223 billion in the quarter on buybacks, marking the fourth consecutive quarterly all-time high. That’s the longest streak in the 20 years SPDJI has been tracking buybacks.
“Companies continued to spend more of their tax savings on these share repurchases as they boosted earnings through significantly reduced share counts. Adding to the share reduction, and therefore the EPS impact, was Q4’s stock price decline, which permitted companies to buy even more shares for their dollars and reduce share count more efficiently,“ said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices.
Baldwin’s report argues “the buyback binge” has led companies to take on “risky” debt in order to buy back stock.
“This dynamic has pushed corporate debt to record highs. The share-sellers reap short-term gains, yet they bear none of the risks of the other stakeholders, who are left to face the prospect of a default. Long-term retirement savers suffer the permanent loss of their investment if the company goes bankrupt. Workers face the loss of their job and pension cuts, possibly resulting in a delayed retirement. Taxpayers deal with further strain on public resources when they are used to assist workers who lose their jobs,” the report said.
Baldwin’s report calls on Congress to take legislative action to force the Securities and Exchange Commission to reevaluate a 1982 rule that essentially legalized buybacks.
“The SEC’s misguided rules on buybacks allow executives and wealthy shareholders to extract undeserved cash from public companies. Given these results, it is clear to me that empowering workers—as envisioned in the Reward Work Act—would lead to better economic opportunities for many Americans,” said Baldwin in the report.
THE REWARD WORK ACT
The staff report recommends Congress pass Baldwin’s Reward Work Act, which would ban open-market stock buybacks. The bill would still allow repurchases through tender offers, which Baldwin says are subject to greater disclosure.
The legislation would also require all public companies to allow workers to elect one-third of the company’s board of directors.
Baldwin’s report looked at what happens when companies, largely in Europe, give workers an opportunity to take part in corporate board-level decision making.
“Nations with more worker empowerment have higher wages and higher real wage growth than the United States. Firms with worker empowerment produce 9% higher returns for shareholders and undertake twice as much investment as firms that do not have workers on their boards,” the report claimed.
Baldwin is reintroducing the Reward Work Act on Wednesday. She introduced the bill in 2018, though the proposal did not move through the Republican-controlled Senate.
Republican Sen. Marco Rubio has proposed changing the tax treatment of buybacks to encourage companies to reinvest money in their business, instead of repurchasing shares.
Supporters of buybacks argue repurchases are good for the economy, because they give money back to shareholders, who can put it to use elsewhere.
Baldwin and Sen. Debbie Stabenow will hold a hearing on “reining in corporate stock buybacks and empowering workers to serve on corporate boards” on Tuesday. Schumer is also expected to attend. Workers and economic professors are scheduled to testify.
Jessica Smith is a reporter for Yahoo Finance based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.