Senator Elizabeth Warren on Tuesday condemned share buybacks as market manipulation to increase executive compensation and labeled it as a poor use of excess corporate profits that could instead be reinvested in a company or employees.
When asked by CNBC’s Joe Kernen whether buybacks could be utterly bad if they add value to existing stocks by long-time investors or pension funds, Warren doubled down.
“This is nothing more than paper manipulation. ‘Everyone is better’? Listen to yourself!” she told the co-host of the “Squawk Box”. “Nothing has changed in the business. They are still making the same number of widgets at the same cost and selling them to the same customers.”
She argued that share buybacks did nothing to improve the quality of a company or the goods and services it produces.
“They have a little fluff and buff in their inventory. And how did they do it? By taking their excess money and saying, ‘Gosh, we can’t figure anything out to do with that money. We won’t walk.” We will make the investment decision that the only investment in America that makes sense is to buy back our own stocks. ‘”
Presidential candidate Elizabeth Warren speaks to her supporters in Manchester.
Preston Ehrler | LightRocket | Getty Images
Instead, she claimed that buybacks were a convenient way to pump remaining corporate profits into the market to increase the wealth of the company’s top shareholders, who often include executives and senior management.
Becky Quick, co-host of Squawk Box, asked Warren the difference between a board of directors approving a $ 1 billion share buyback program and a business partner buying up a partner who wants to sell their equity in their hypothetical company to explain.
“If you want to buy your partner’s stock and hold your partner’s stock, that’s fine,” said Warren. “But that’s not what share buybacks are. Share buybacks go into the market and increase the price of your shares using your own money, not to invest in business.”
The Massachusetts Democrat suggested that quarterly dividends are a better, less manipulative way of returning corporate money to stakeholders.
Buybacks and dividends are considered two of the most proactive ways a company can return assets to its stakeholders and reinvest excess money in itself. When a company buys back outstanding shares, it reduces those available in the market and increases the relative participation of each existing investor.
The motivations for buybacks given vary, but are almost always based on management’s belief that the market is falsely undervaluing a promising business. Berkshire Hathaway CEO and billionaire Warren Buffett has for years touted the benefits of buybacks, which allow management to return capital only when the market underestimates business.
“We are by no means of the opinion that Berkshire stock should be bought back at any price,” Buffett said in his annual stakeholder letter released on Saturday. “I emphasize this point because American CEOs have an embarrassing record of spending more corporate funds on buybacks when prices are up than when they are fueling up. Our approach is exactly the opposite.”
Warren’s opposition to buybacks and her advocacy of better business practices and worker protection are not new. Warren, a member of the Senate Banking Committee, has advocated legislation requiring companies with sales above $ 1 billion to allow employees to choose 40% of their board seats.
Warren’s appearance on CNBC came the day after she and Senator Bernie Sanders, I-Vt., Proposed a 3% total annual tax on assets over $ 1 billion. They also called for a lower annual wealth tax of 2% on the net worth of households and trusts between $ 50 million and $ 1 billion.
The stated goal of the Ultra-Millionaire Tax Act is to fill a growing US wealth gap, the wealth gap between the richest and poorest households. The gap has widened further in the face of the Covid-19 pandemic as higher-income employment recovers faster than the low-wage labor market.
According to Emmanuel Saez and Gabriel Zucman, economists at the University of California at Berkeley and advisor to Warren, about 100,000 Americans would be subject to wealth tax in 2023.
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