American businesses devour themselves to enrich the 1%


#1

Originally published at: http://boingboing.net/2014/10/21/american-businesses-devour-the.html


#2

This is an excellent example of how the secondary market causes companies to eviscerate themselves.


#3

It’s just capitalism in motion. God wouldn’t let this happen if markets weren’t supposed to do it. Everything is fine, and running naturally


#4

Hanlon’s razor could apply here (Never attribute to malice that which is adequately explained by incompetence)

IIRC, stock buybacks are typically signalled ahead of time for the following year, but then they wait to a “good” time to execute them. So when year-end comes around they realize they haven’t bought back all the stock they said they would, so they panic buy.

The counter-argument here is that fiscal years rarely correspond to calendar years. So probably greed, yup.


#5

It’s the cancer that’s killing American society. People used to invest for the dividends, long term gains, and investing in the workers.

Now capital is being transformed into paper money rather than the other way around, all to satisfy short term greed that’s kicking the country in the back of the knees. The government would probably take care if this if it weren’t already bought by the people profiting from this dangerous and unsustainable extraction of wealth.


#6

Except stock repurchases are just a way of dividending out excess cash. Not saying they’re not timed to help insiders, but investors have different views of how much cash they’d like to get out of the company and stock repurchase is a means to reduce cash while allowing long-term investors to stick with the company.


#7

Wait a second. I see at least two other explanations.

“Neutral” explanation is this: the company will tender shares annually as part of its compensation packages. Compensation is the biggest single expense most companies have, so it arranges payday for any fiscal year at the start of the next fiscal year (for predictability/manageability). It also has a target number of shares to hold for other reasons. Company will look for buyback opportunities throughout the year based on its compensation forecast, especially buying during market corrections / dips when possible. Any buybacks that haven’t happened at EOY need to be done in time for payday, at market price. However, since payday is actually during the start of the next fiscal year, remaining buybacks will be deferred to the new fiscal year instead of screwing up the books for the current year at the last minute. Hence the spike in buyback exactly between the fiscal EOY and payday. Company then has 10mos for finance department to manage buybacks in advance of the next year’s payday. The whole exercise is smoothed out by multiyear vesting schedules anyway so the number of shares needed is predictable.

Another, more diabolical explanation is the company goosing the stock for the exact opposite reason that the story claims - for example (made up numbers):

  1. in August, employee awarded $250k worth of stock “as of payday X in September” +with a vesting schedule
  2. at $4 share price pay would be 62,500 shares
  3. company gooses stock to $5 in advance of chosen payday
  4. company only needs 50,000 shares at $5 to honor the payout
  5. company pockets the extra 12,500 share ‘savings’
  6. shares return to natural price of ~$4 before first employee’s first vesting
  7. company “paid” employee $250k on paper but only spent $200k
  8. employee only holds $200,000 (less taxes) of value until shares reach $5 again after first vesting
    (reinforces incentive to stick around)
  9. company can say “you’re 1%, don’t complain, look at how fortunate you are…” if employees notice (most won’t). also employee expects shares to be reduced for tax purposes so is used to the “true number” being smaller

To really see what’s going on, you’d need to mine multiple years of data and cross-reference market activity. I viscerally wanted to agree with this story and get angry, but I’m not so sure it’s as simple as it looks.


#8

By God , do you mean Corporations ?


#9

Yeah, I thought they were the same thing…


#10

I just got pointed at Max Gladstone’s fantasy novels. I’m now very confused on this point myself…


#11

Obviously, the author has never been a CEO of a public company. Total compensation is usually based on a bucket of objectives, with the stock price being only one and generally, it would not be more than 20% of the total. A CEO’s real compensation comes from options (or for senior executives, warrants) which give the executive the ability to buy the stock at a later date at a given prices. Unless that price is the market price, there is a taxable event to the executive and the company. So, if you are getting options that you plan on exercising in say, five years, you want the stock to be as low as possible on the date of the grant. The value of a company doesn’t change with a buyback. It simply swaps cash for a reduction in equity. The company is still worth the same on an accounting basis. The real question is whether a corporation’s responsibility is to its employees or shareholders. In the post-Enron era, it has been assumed to be the shareholders. Shareholders can sue you if you do not maximize shareholder value. Employees you might have otherwise hired cannot sue. These are the rules we have set for public companies. You cannot blame CEO’s for playing by them. It is one reason most of the really smart managers refuse to run public companies and have gone into private equity. There’s more money there, but you just don’t see it because they have no obligation of disclosure.


#12

Yeah, that’s the point of the essay.


#13

The “market” doesn’t do a goddam thing. It’s people. It’s choices. It’s wrong.


#14

I am not sure about other markets , but Pharma market is rigged really well…It is rigged so that most people make choices that will benefit the ones manupulating the market …


#15

I understand. I’m just getting really tired of the entire world blaming their own bad actions on abstractions. The market made me do it. Optimizing this. Maximizing that. All those people Mitt Romney laid off had families.


#16

The central point of the article was that execs. were manipulating companies’ stock to drop at the date of option grants.

Manipulating stock prices to give execs. an added perk when options are being granted is in no sense benefitting shareholders.


#17

An entity of raw, unchecked power, accountable to no one… Domineering, expects you to serve it blindly, and to be happy in doing so… Claims to care about you, but its actions prove otherwise…

Sounds about right.


#18

No, has was talking about “the company” manipulating the stock so it didn’t have to “pay” for the stock grant. That is totally different. The company has to take a charge for the cost of the stock grant, so if it is higher, the charge is higher. The article also confuses managers with the company. Stock grants are immediately taxable. I once lost about $300k taking stock that later lost about 50% of its value before the taxes were due. Very risky. When you talk about “on paper” it really doesn’t matter in GAAP accounting. It still impacts the bottom line, which is what executives are judged.


#19

We know how to stop this if we have the will. Bring taxes back to 1950’s era rates of 91% for anything over $2.4 mil (adjusted). You know, the 50’s - the era most of those entitled old rich white guy 1%ers think is just ducky. The golden age of America and all that. We could fix our roads, build new schools, pay off our national debt, and generally make America a better place for Americans and not just the ultra rich.
Who am I kidding? The politicians would have to make that change and they want nothing more than to join the 1%. It’s not as if we the public could actually vote in the changes needed ourselves. We only get to vote for the two parties we are told to vote for and they make all the rules. Yup, the system isn’t broke. It was built this way.


#20

Yves Smith IS required reading. I try to never miss her stuff. Thanks!