Shaking off the doomy prognostications of mainstream economists, stock markets on both sides of the Atlantic have surged since the Brexit vote in June and Donald Trump’s election as US president, hitting high after high. Why?
The conventional reading mentions receding fears of recession in the UK, while in the US after initial caution businessmen are supposedly experiencing a rush of animal spirits at the prospect of tax cuts and infrastructure spending ‘setting off a virtuous circle of economic growth and rising confidence’, in the words of former Treasury secretary Larry Summers.
Dream on. Joining the real world, a more cynical reaction would be that it’s a sigh of jubilant relief as business as usual is restored, with a vengeance. Trump and Theresa May are of course correct to sense that there’s something very wrong with their respective economies – the resulting discontents are what brought them to power. But far from altering current trends or models, their current proposals rev them up.
In the UK, May, echoed by a chorus from the press, evokes an ‘all in it together’ spirit and calls for boardroom restraint to be exercised through the usual suspect, greater control for shareholders.
But shareholders, in cahoots with top management, are already in far too much control. ‘Dividends dwarf pension deficits,’ shouted a recent front-page headline in the FT, above an article reporting that FTSE 100 companies last year paid out five times more in dividends to shareholders than in contributions to pension funds – even though half of them, according to the research quoted, could have cleared their deficits in a single year by reversing the payout ratios. And this, note, understates the grotesque disproportion in stakeholder treatment. It takes no account of share buybacks, which directly affect the share price by reducing the number of shares in circulation.
As usual, what happens in the UK is a pale reflection of goings on across the Atlantic, where combined dividends and buybacks of the largest companies have reached extraordinary proportions. The figures compiled by researcher Bill Lazonick are astounding. Over the 10 years to 2015, firms in the S&P 500 spent 3$3.9tr on stock buybacks, equal to 54 per cent of net income, with another 37 per cent going on dividends. In both 2014 and 2015, according to other research, buybacks and dividends of publicly traded companies actually exceeded net income – in the latter year they reached 115 per cent.
Delving more deeply into the tight link between buybacks and CEO pay, Lazonick made another eye-popping discovery. If the stock-option portion of CEO pay (running at above 80 per cent in the US) is calculated not by value at the time of the grant but by value actually realised on exercising the option, the CEO-to-median-worker rockets from the 300:1 commonly quoted – which is shocking enough – to an astronomical 1000:1.
Hardly surprising that appeals to self-interest on this heroic scale are not often resisted – they are not supposed to be – nor that they decisively mould the decisions on what and what not to invest in. As Lazonick spells out, trillions of dollars that could have been spent on innovation and job creation have instead been diverted into share buybacks for the purpose of manipulating stock prices. ‘As a growing body of research demonstrates, actual realised gain on stock options and stock awards can incentivize executives to do buybacks, price gouge, offshore, lay off workers, do financially driven M&A deals, dodge taxes, engage in false financial reporting, and so on, all for the sake of boosting the company’s stock price’ – a process in which those making the resource-allocation decisions are themselves the prime beneficiaries.
In this context, as Steve Denning has pointed out, even managers of ‘good’ companies, who know the behaviour to be wrong and in the long term self-destructive, have succumbed to the buyback syndrome. Personal temptation, the argument that ‘everyone else is doing it’ and/or the attentions of shareholder ‘activists’ (raiders, to give them their more accurate name) make the pressure almost irresistible. Apple, which in Steve Jobs’ day blithely ignored special claims of shareholders, is a case in point.
In these circumstances – if corporate behaviour is responsible for the economic ills that are spilling over so spectacularly into politics – then as an FT commentator pointed out, ‘there are policy levers to pull. It would be time to stop thinking about corporate governance and executive pay as equity matters and to regard them instead as a macroeconomic problem of the first rank.’
Which, of course, they are. But there is no sign that a UK government under May perceives them this way, still less the incoming administration in the US, where the barbarians and vampire capitalists are not just at the gate but comfortably ensconced around the cabinet table.
So if, as promised in the election campaign, US corporate taxes are reduced and the estimated $2tr of corporate profits stashed abroad are brought back home, expect a round of share buybacks and dividend increases that will make even current levels look puny. As Cisco CEO Chuck Robbins (with around $60bn to repatriate) obligingly made clear, investment in plant and job-creating innovation was the last thing on CEOs’ minds: Cisco, he said, planned to use the money for ‘a combination of dividends, share buybacks and M&A activity’ – that is, on financial engineering to bolster the stock price.
That’s why stock exchanges are jubilating.
Yay, the music’s still playing, boys! Trebles all round!