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How Corporations Scam Their Shareholders and Screw over Workers
- msoad 6y agoAuthor raises a lot of good points but fails to mention CEO pay gap that was introduced in Clinton era. That started all of this madness with stock compensation
- pnutjam 6y agoIntroduced on accident, then cherished during the Bush years and no changes could be made during the Obama years due to the GOP's lock on the Senate.
- mixmastamyk 6y agoWhat are the "changes that could be made?"
- pnutjam 6y agoFix the law, just like they could fix the ACA if the GOP would pass bills.
- clairity 6y ago> "...shares are constantly being diluted by stock options granted to corporate executives, which were given a tax preference in 1981." 1. remove these tax preferences. if we wanted to retain some of the incentive for startups, we could phase out the tax benefits based on the valuation of the company at time of grant. so a grant of stock options for a $1MM startup might grant you a tax preference, but not for a (mid-sized) $100MM company. (however, phase-outs need to be continuous functions to remove the gaming potential, and politicians hate that.) 2. remove the tax advantage of debt 3. remove carry-forward/-back losses 4. remove the separate capital gains/carried interest rates and all related exemptions (like 409's) 5. remove accelerated depreciation/amortization and more. in short, remove tax loopholes, thereby dramatically simplifying the tax code.
- tandr 6y agoDo you know if there were there proposed bills to have these items addressed?
- clairity 6y agomy memory is dim, but my impression is 'not really'. outside of a vague sense of token efforts that died quietly, both major parties seemingly only pushed through giveaways to various lobbies in exchange for political donation/support. it's pretty easy to slip in such small, innocuous-seeming riders without much pushback because it takes more than cursory economic knowledge and real interest to work out the first-order effect, nevermind the higher order ones, or even pick them out of huge, drab appropriations bills in the first place. there doesn't seem to be a valued constituency on the other side to push through counteracting legislation however.
- tandr 6y agothank you
- refurb 6y agoGOP’s lock on the senate during the Obama administration? https://en.m.wikipedia.org/wiki/111th_United_States_Congress https://en.m.wikipedia.org/wiki/111th_United_States_Congress
- rstupek 6y agolet's not bring up facts that might alter their worldview
- sharkmerry 6y agoHowever, the majority was only filibuster proof for a period of 72 working days while the Senate was actually in session. and yet January 29, 2009: Lilly Ledbetter Fair Pay Act of 2009, Pub.L. 111–2 February 4, 2009: Children's Health Insurance Program Reauthorization Act (SCHIP), Pub.L. 111–3 February 17, 2009: American Recovery and Reinvestment Act of 2009 (ARRA), Pub.L. 111–5 March 11, 2009: Omnibus Appropriations Act, 2009, Pub.L. 111–8 March 30, 2009: Omnibus Public Land Management Act of 2009, Pub.L. 111–11 April 21, 2009: Edward M. Kennedy Serve America Act, Pub.L. 111–13 May 20, 2009: Fraud Enforcement and Recovery Act of 2009, Pub.L. 111–21 May 20, 2009: Helping Families Save Their Homes Act of 2009, Pub.L. 111–22 May 22, 2009: Weapon Systems Acquisition Reform Act of 2009, Pub.L. 111–23 May 22, 2009: Credit CARD Act of 2009, Pub.L. 111–24 June 22, 2009: Family Smoking Prevention and Tobacco Control Act, as Division A of Pub.L. 111–31 June 24, 2009: Supplemental Appropriations Act of 2009 including the Car Allowance Rebate System (Cash for Clunkers), Pub.L. 111–32 October 28, 2009: National Defense Authorization Act for Fiscal Year 2010, including the Matthew Shepard and James Byrd, Jr. Hate Crimes Prevention Act, Pub.L. 111–84 November 6, 2009: Worker, Homeownership, and Business Assistance Act of 2009, Pub.L. 111–92 December 16, 2009: Consolidated Appropriations Act, 2010, Pub.L. 111–117
- pnutjam 6y agoNow imagine one a law that takes money of of CEO's pockets. It's not going far.
- MrPowers 6y agoThis section of the article is great: > Over time, share repurchases became a substitute for dividends. Managers rationalized the practice by saying they were doing shareholders a favor: Dividends were taxed as ordinary income, whereas capital gains were taxed much more lightly. Moreover, capital gains taxes weren’t payable until shares were sold, while taxes on dividends had to be paid annually. Assuming a share repurchase raised share prices by the same amount as would be the case if the money were paid out as a cash dividend, taxable shareholders would prefer share buybacks. Dividends are taxed as ordinary income and the top marginal income tax rate was incredibly high at various points in history (94% in 1944 and more than 50% till 1986). Capital gains taxes are lower so the government has given corporations a massive incentive to pay less dividends. The article is very critical of corporations, which is fine, but let's not forget about the bizarre incentives that governments give, for no apparent reason. "Managers rationalized the practice by saying they were doing shareholders a favor" could easily be rephrased as "Corporations were pressured to change shareholder payouts due to tax laws...". Angelo Mozilo's story is a great example of misaligned incentives and minimal consequences: https://en.wikipedia.org/wiki/Angelo_Mozilo https://en.wikipedia.org/wiki/Angelo_Mozilo Buffett has a great criticism of stock option compensation: https://www.nytimes.com/2002/03/11/business/stock-options-are-faulted-by-buffett.html https://www.nytimes.com/2002/03/11/business/stock-options-ar...
- zoolily 6y agoWhile unqualified dividends are taxed as ordinary income, qualified dividends are taxed at much lower rates. Qualification status basically requires you to have owned the stock for a couple months. You can see the details in layman's language at https://www.nerdwallet.com/blog/taxes/dividend-tax-rate/ https://www.nerdwallet.com/blog/taxes/dividend-tax-rate/
- MrPowers 6y agoThis is a great point, thanks for commenting. Still thing my main point stands, but more because capital gains taxes can be deferred. It's amazing how convoluted / confusing dividend taxation is.
- 6y ago
- wtvanhest 6y agoThe math is the same regardless, and slightly more favorable if you consider tax implications to do buybacks. This article is so light on insight and information that the title is clickbait.
- pnutjam 6y agoAmerica runs on managementism, not capitalism. It's been this way forever. Read this, "The Big Change" published in 1952 by Frederick Lewis Allen. http://gutenberg.net.au/ebooks05/0500881h.html http://gutenberg.net.au/ebooks05/0500881h.html Looking at this segment of American business, we would almost find it appropriate to call our present economic system "managementism" rather than "capitalism."
- anm89 6y agoFunny to see this downvoted to hell because it's a very astute observation. It's very popular for Americans to portray capitalism in a negative light these days but in my experience if you get these people to define how they are using the word capitalism it has almost zero overlap with a traditional text book definition of the word relating to open capital markets and the ability to exchange goods in markets with money, and what they are angry about is something more like your "managementism", financialization, or crony capitalism. There is a contrarian money manger who does some good blogging on this topic which shows up on HN from time to time who has written extensively on this topic: https://www.epsilontheory.com/this-is-water/ https://www.epsilontheory.com/this-is-water/ His style can be off putting sometimes but I think his underlying messages are usually pretty astute.
- quadrangle 6y agoI agree almost fully. But Capitalism is about the private ownership of capital and means-of-production as opposed to state-owned. And if the state is actually run democratically, then that non-capitalist approach could be a democratic economy. That has its own set of issues, but it's not exclusive of the free exchange of goods in markets with money. See, e.g. Market Socialism. Capitalism does not equal markets. Markets predate capitalism. Capitalism can well have totally non-free dysfunctional markets controlled entirely by monopolists. That's today's situation. See https://mattstoller.substack.com https://mattstoller.substack.com for great reporting on this. It's just as much a mistake to assert that Capitalism is synonymous with markets as to assert that it's synonymous with today's crony-capitalism with regulatory-capture etc.
- beezle 6y agoA share buyback should be stock price neutral at the time it is done - there is no change in the value of the company. Cash goes out the door while also reducing shareholder equity. Avoiding the shananigans that management play with the buybacks alone is a laudable reason to eliminate them. But the more important reason is they are long term detrimental to the well being of most companies. Funds used to finance a buyback could be otherwise spent on r&d, new products and/or services, hiring better talent, etc. If the IRR of such activities is so low that a buyback is better, management is very poor or the company has no growth prospects (and possibly entering an end of life period).
- skybrian 6y agoIt seems like this proves too much? By this argument, no company should pay dividends either and Apple has very poor management. It's not a given that every profitable company should spend all the money they earn and try to grow at the maximum rate possible.
- ogre_codes 6y ago> A share buyback should be stock price neutral at the time it is done - there is no change in the value of the company. Cash goes out the door while also reducing shareholder equity. There is no change in the value of the company. There are fewer shares outstanding though which means each existing share is worth more. Share buybacks are absolutely a good deal for shareholders when a company is undervalued. When a company is overvalued, dividends reward shareholders better. If a company is fairly valued, it largely depends on tax rates and whether the shareholder funds are in a tax sheltered account. [1] The problem comes in when executive compensation is based on share-price. Executives have massive motivation to buyback shares even when the company is overvalued. So long as share buybacks are on the table as an option, share value should never affect executive compensation or there is an inherent conflict of interest. Ideally, the company would hire a third party with no conflict of interest to determine best ways to return money to shareholders. [1] Tax incentives around dividends and buybacks are overdue for some reform.
- twmahna 6y ago
- smallgovt 6y ago> How Corporations Scam Their Shareholders and Screw over Workers I don't see how workers are getting screwed. The main charge in the article is that executives take advantage of positive signalling around share buybacks to boost share price prior to selling shares. If this claim is true, the share price should go back down once more material public information is released that suggests a lower valuation. The losers in this scenario are shareholders who purchased in the short period following the buyback. Although some workers may fall into this group, the vast majority do not. Also, the article implies that companies should go back to issuing dividends over share buybacks. This doesn't make sense. The tax advantage nature of share buybacks far outweighs the ill-gotten gains executives reap from this strategy. On average, share price increases ~2% following a buyback announcement. So, while execs can 'scam their shareholders' with this scheme, the loss to shareholders is nowhere near the ~10-20% benefit shareholders get by realizing gains as capital gains instead of income.
- ogre_codes 6y agoMany companies buy back shares when it doesn't really make sense. For example companies with heavy debt loads buying back shares using leverage. The airlines were pretty bad about this. Management often has poor/ short term motivations based on short term share price which can be devastating to companies.
- smallgovt 6y ago> Many companies buy back shares when it doesn't really make sense Many companies also issue dividends when it doesn’t really make sense. The overall level of shareholder compensation (dividends + buybacks) has not increased over the last couple decades.
- clairity 6y ago> "I don't see how workers are getting screwed." FTFA: > "Pressure to maintain corporate payouts may also be responsible for larger-than-necessary layoffs during the COVID-19 crisis." (only common employees get laid off) > "...reduce or postpone investment spending for new projects, research and development, advertising and maintenance" (less money to employees, more to executives) > "Buybacks also tend to raise corporate indebtedness and leverage, which can increase bankruptcies..." (borne by common employees, not executives) also, employees other than executives cannot execute this sort of pump'n'dump. and that's just the immediately obvious stuff.
- hikerclimber 6y agono wonder the world was a happier place about 20 years ago... people enjoyed life not like now... where corporations rule the world... everything can be bought... the entire idea of money is stupid
- deleted 6y ago[deleted]
- abeppu 6y agoIs some of this down to really agreeable shareholders? My layperson's understanding is that there's been a long term trend where more shares are through index and other passive funds, and that these rarely put any pressure on management. Is it possible to have a fund which is passive in the sense of not trying to pick and predict stuff, but is "activist" in the sense of pressuring management based on some general good governance principles?
- legitster 6y agoI think something missing here is that nearly all of the organizations that make use of buybacks do it because they have very seasonal or cyclical revenue. Airlines are a prime example - most of they time they are very unprofitable. It's easier to do buybacks one time than to turn dividends off and on again. > But shareholders don’t benefit a great deal from all this paper revenue because shares are constantly being diluted by stock options granted to corporate executives, which were given a tax preference in 1981. The net benefit to shareholders is much less since much of the share buybacks simply offsets the dilution. While I think the tax preference for stock options is probably misguided overall, this is clearly hyperbole, because we could see the dilution effect on the actual stock price. That is to say, if stock buybacks didn't actually raise the stock price... they wouldn't raise the stockprice? This logic doesn't really make sense. This issue is also not mutually exclusive, and has nothing really to do with stock buybacks themselves.
- BXLE_1-1-BitIs1 6y agoCorporations have been taken over by managers screwing workers, customers, suppliers, shareholders, government in whichever way maximizes their bonuses.