Imagine you are a shareholder in a big company and the top executives are sitting on huge amounts of cash and are not interested in putting it to work through productive capital investments, research and development, reducing company debt or paying employees a higher wage. What would you want done about it? Since you and other shareholders are the owners of the company, you’d likely say “give us back our money in cash dividends.”
“No way,” say your hired hands, the company managers, who have spent a staggering $2.1 trillion of your money in the last five years on stock buybacks allegedly to increase the company’s earnings per share ratio, instead of increasing shareholder dividends. Overall this tactic has not been working over time except to make the corporate bosses richer, which is the real reason for many buybacks.
What is the incentive for this cash burning frenzy? According to University of Massachusetts scholar, William Lazonick, in 2012 the 500 highest-paid executives received 52% of their remuneration from stock options and another 26% from stock awards.
Call it self-interest, or conflict of interest with their shareholder-owners, they continue to get away with this massive heist, this clever transfer of wealth. They do not need to get the approval of their owners – the stockholders – under what is called the “business judgement rule” (BJR). Developed by corporate attorneys and adopted with few boundaries by the Delaware courts –…