In the Fight for $15, McDonald’s is emblematic of the problems confronting fast-food workers and all low-wage earners in the U.S.
It is estimated that 96 percent of fast-food workers make less than $15 per hour, and most (55 percent) rely on public assistance.
McDonald’s employees receive an estimated $1.2 billion each year in public assistance, which is equivalent to 25 percent of McDonald’s 2014 net income of $4.8 billion. As a result, taxpayers provide not only financial support for the company’s employees but also, in effect, a financial subsidy that boosts McDonald’s profits.
McDonald’s sends these profits, and additional money that it borrows, to its shareholders using dividends and stock buybacks.
Stock buybacks, in the view of some economists, are a major cause of U.S. income inequality, the loss of middle-class jobs, and a sluggish recovery from the Great Recession.
Buybacks emphasize short-term profits over long-term investments in productive capacity like jobs, training, higher wages, research and development, and capital spending on plant and equipment. The practice has been called a cult, an obsession, an addiction of corporate America that is bad for the economy, and, in some cases, a potential national security threat. Concern about the long-term effects of stock buybacks has crept into public discourse, along with low wages and inequality, and caught the attention of some politicians, including Massachusetts Sen. Elizabeth Warren and Democratic presidential candidate Hillary Clinton.
For the decade 2005-2014, the McDonald’s returned $51.1 billion in profits to shareholders through dividends and stock buybacks. In 2014, McDonald’s spent $6.4 billion on buybacks and dividends, equivalent to 134 percent of its net income.
In seven of the last 10 years, as depicted in the chart below, McDonald’s returned more to shareholders through dividends and buybacks than it generated in net income. To cover this shortfall, McDonald’s borrowed against its future earnings.
Officials from four U.S. public pension funds warned in May that McDonald’s may be jeopardizing its own future by returning excessive amounts of its profits to investors via share buybacks. In November, Standard & Poor’s expressed similar concerns when it downgraded the company’s debt.
The practice of buybacks is not limited to McDonald’s. A November 2015 investigative report by Reuters, titled “The Cannibalized Company: How the Cult of Shareholder Value has Reshaped Corporate America,” found the “combined stock repurchases by U.S. public companies have reached record levels.”
For economist William Lazonick and others who criticize the growing number of companies like McDonald’s that now put their shareholders first, the problem runs much deeper than credit scores and long-term corporate viability.
Lazonick, writing in the May issue of the Harvard Business Review, said, “Stock buybacks snatch returns from workers and taxpayers who have contributed to the value-creation process. Buybacks are a major cause of U.S. income inequality, contributing to both the concentration of income among the richest households and the disappearance of middle-class jobs.”
“Stock buybacks snatch returns from workers and taxpayers who have contributed to the value-creation process.”
William Lazonick, economist
Buybacks and their effect on stock prices have shortchanged workers, concludes Reuters. “Share repurchases have helped the stock market climb to records from the depths of the financial crisis….That wealth, some economists argue, has come at the expense of workers by cutting into the capital spending that supports long-term growth – and jobs. Further, because most U.S. stock is held by the wealthiest Americans, workers haven’t benefited equally from rising share prices.”
“Pervasive share buybacks are an economic, social and moral disaster,” according to Steve Denning, a Forbes contributor who writes about leadership. “Yet share buybacks have become ‘an unhealthy corporate obsession,’ even ‘an addiction.’”
Goldman Sachs has linked share repurchases with stagnant wages and a lack of business investment. Laurence Fink, the chief executive of BlackRock, which manages more than $4.5 trillion in assets, argues that share buybacks, while they may boost share prices in the short term, harm the creation of value over the long term.
Until 1982, companies were largely prohibited from buying their own shares.That year, under the Reagan administration, the SEC eased its rules to allow companies to buy their own shares on the open market.
Stock buybacks are part of the “shareholder value” model of capitalism that is increasingly ingrained in the fabric of the American economy. Originally espoused by Milton Friedman in 1970, the model claims companies have no social responsibility except to increase profits.
“Serving customers, creating innovative new products, employing workers, taking care of the environment … are NOT the objectives of firms,” Itzhak Ben-David, professor of finance at Ohio State University’s Fisher College of Business and a buyback proponent, told Reuters in an email. “These are components in the process that have the goal of maximizing shareholders’ value.”
Corporate executives come under intense pressure from hedge funds and other activist investors, along with a network of other interests, to repurchase shares to increase share price, at least in the short term. “Managers ignore shareholder demands at their own risk, especially when the share price is under pressure,” reported Reuters.
At the same time, corporate executives often have a lot to gain from buybacks. Executive compensation may be tied to share price and earnings per share ratios, which repurchases will boost even when corporate financial performance is flat.
Maximizing shareholder value, according to Denning, has come to govern the thinking of CEOs, institutional investors, legislators, regulators, politicians, analysts and business schools.
“Taxpayers and workers should demand that open-market repurchases by all companies be banned,” said Lazonick in HBR. “Stock buybacks manipulate the stock market and leave most Americans worse off. In this case, it is clear that what is good for the hedge funds is bad for the United States.”
In recent months, as the 2016 election campaigns have gathered momentum, concern about the long-term effects of stock buybacks has become a topic of public discussion, and it has caught the attention of politicians.
Democrat Sens. Elizabeth Warren and Tammy Baldwin have called on the Securities and Exchange Commission to investigate buybacks as a potential form of market manipulation.
In response to what she calls “quarterly capitalism” and “hit-and-run” activists, Hillary Clinton has made shifting companies’ short-term focus to the long term a key plank of her campaign.
In July, she proposed increasing taxes on short-term investments and more rigorous disclosure of share repurchases and executive compensation.
These moves, she said, will foster longer-term investment, innovation, and higher pay for workers.