Should Stock Buybacks be Prohibited? (S. 2605)

What is S. 2605?

(Updated March 11, 2019)

This bill would prohibit publicly traded companies from repurchasing their shares on the open market and require that public companies allow one-third of their board to be elected by their employees (a practice known as codetermination). Current law allows publicly traded companies to “buyback” their shares, which has the effect of bolstering the stock’s price; and whether employees elect members of the board is left to individual companies’ discretion.

This bill would repeal the Securities and Exchange Commission (SEC) 10b-18 rule, which currently makes it easier for corporations to buy back their stocks. It would also ends corporations’ abilities to buy their stocks back on the open market, although repurchases through tender offers (which are subject to greater disclosure) will remain allowed.

Argument in favor

Stock buybacks help companies artificially boost their stock prices, manipulating the market to reward corporate executives and shareholders instead of workers. Empowering employees to elect members of their corporation’s board would align companies’ and employees’ interests.

Argument opposed

Stock buybacks are a healthy part of financial markets that benefit investors, including the more than 50% of Americans who directly or indirectly own stock. That money can then be reinvested or used to start businesses or purchase goods and services — all of which boost the economy.

Impact

Employees of public companies; stockholders of public companies; public companies; and Securities and Exchange Commission (SEC).

Cost of S. 2605

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sen. Tammy Baldwin (D-WI) introduced this bill to rein in corporate America’s addiction to stock buybacks by giving workers a say in how their company’s profits are spent.

“Corporate profits should be shared with the workers who actually create value. It’s just wrong for big corporations to pocket massive, permanent tax breaks and reward the wealth of top executives with more stock buybacks, while closing facilities and laying off workers. The surge in corporate buybacks is driving wealth inequality and wage stagnation in our country by hurting long-term economic growth and shared prosperity for workers. We need to rewrite the rules of our economy so it works better for workers and not just those at the top. This legislation makes it clear that empowering the voices of our workers and investing in our workforce is more important than using tax breaks and corporate profits to reward shareholders with more stock buybacks.”

Those who support buybacks contend that when they give money back to shareholders, many of the beneficiaries are ordinary people (over 50% of American families own stock, directly or indirectly). Moreover the profit that investors gain can be reinvested in entrepreneurship or new stocks or spent on goods and services; all of which benefits the economy.

This bill has three cosponsors, all of whom are Democrats. This bill is supported by the Roosevelt Institute, AFL-CIO, Communication Workers of America, Public Citizen, Take on Wall Street, and Americans for Financial Reform, as well as multiple media outlets.

Of Note: Since the enactment of the Republican tax bill (aka the Tax Cuts and Jobs Act), corporations have announced over $225 billion in stock buybacks, overwhelmingly benefiting corporate executives and shareholders. Corporate boards, often driven by activist investors, spend a significant amount of their profits buying back their own stock and issuing dividends — resources that detractors argue would be better suited to long-term investments in workers, training and innovation.

Codetermination is practiced in 19 of the EU-28 nations, foremost of which is Germany. Typically, German companies have two boards: an executive board composed of the CEO and other senior executives, and a supervisory board representing both workers and shareholders, fulfilling a similar role to corporate boards in the U.S.

Economists have studied Germany’s codetermination system’s effects on the country’s economy, and while the results are mixed, studies have generally found that codetermination and “works councils” (workers’ representative organizations) lead to higher wages, less short-termism, greater productivity, and higher levels of income equality. However, codetermination may reduce profitability and lower returns for shareholders, suggesting that codetermination shifts power and corporate earnings away from shareholders and towards workers.

Media:

• Sponsoring Sen. Tammy Baldwin (D-WI) Press Release
  
• Daily Signal (Context - Opposed)