Maybe it’s just coincidence, but the news Monday that Starbucks’ CEO Howard Schultz is suspending its stock buyback program to focus on investment in workers and stores comes right on the heels of President Joseph Biden’s proposal to discourage the pace of stock buybacks, which are on track to reach record levels this year.
The vote to unionize an Amazon warehouse in New York City may also be a factor in resetting priorities at Starbucks. Regardless of the CEO’s motivation, the reaction from Wall Street to the company’s announcement was both predictable and unforgiving – Starbucks shares were down about 5 percent at mid-day Monday.
The administration’s proposal to restrict executives from selling their own shares for a period of three years after repurchasing shares is an attempt to curb any personal incentive to goose the stock price by reducing the number of shares outstanding.
The proposal undoubtedly faces a challenge in Congress, but the data on growth in share buybacks makes one thing clear. Despite the protestations of chief executives about the importance of their workforce and commitments on climate, shareholders still rule the day. In fact, as I recently told the bipartisan, bi-cameral Congressional Joint Economic Committee, shareholder primacy—putting the stock price first—is firmly entrenched. And it represents the biggest obstacle to addressing inequality in a meaningful way.
Removing the immediate incentive for CEOs to run up the stock price by limiting buybacks is a good step—but more is needed. The intense focus on shareholders remains the dominant view in finance, is taught in law schools and business classrooms, and is reinforced by narrative and practices and protocols and expectations of—and rewards for—executives. Shareholder return is the primary way we measure corporate performance, structure executive compensation, and perceive the role of directors.
The CEO is literally tethered to the stock price, and shareholders like it that way. But that status quo system shortchanges society and drives inequality.
A look at another name brand company illustrates the connection between shareholder primacy and inequality. In February, Target, the Minneapolis-based retailer, earned headlines by announcing it would raise the minimum wage to $24 per hour in some markets—roughly the federal poverty line in high-cost markets like New York—and extend health care to employees working at least 25 hours a week.
The plan to boost employee retention is estimated to cost the company $300 million. “We want to continue to have an industry-leading position” CEO Brian Cornell stated. “The market has changed.”
In contrast, six months earlier, the company authorized a $15 billion program of stock buybacks to assure that share repurchases can continue apace once a prior authorization is depleted. Even as more companies like Target raise wages to attempt to ease labor shortages, the gap between the haves and have-nots widens each year.
Target is hardly a rogue player, and the problems that result from shareholder primacy are not limited to retail. In tech, the pressure to maximize profits and stock price is evident in the rampant use of contract workers, who work in the shadow of the company but at lower wages and benefits and with little financial security, economic mobility, or rights. At Google where the contract work force tops 130,000, only about 10 percent make it on to the payroll, to realize the kinds of opportunity for advancement that come with a regular job.
With employment models like this, it is no coincidence that tech companies like Apple, Microsoft, Alphabet, Amazon have among the highest stock market valuations in the world.
Shareholder primacy contributes to wage suppression, but the intense focus on the stock market itself is a recipe for the growth in inequality. Stock ownership is highly concentrated among a tiny fraction of shareholders. The belief that the stock market is ‘widely held’ is a canard.
According to the studies by the Federal Reserve, the bottom 50 percent of American families own only 1 percent of public equities. In contrast, the top 1 percent hold 38 percent of overall equities (and 51 percent of direct ownership of stock). Half the country doesn’t participate in the market at all, and only 30 percent of Black and Hispanic households own any shares. For families in the top 10 percent income bracket, the median stock portfolio tops $430,000 – versus $15,000 for the typical middle-class household. These middle-class investors may pray for high returns, but what matters most is their current income.
Inequality is only the tip of the iceberg when it comes to the societal problems that result from shareholder-first thinking. The COVID pandemic has unleashed supply chain shocks triggered by “just-in-time” inventory management that is contributing to higher inflation. Meanwhile, a health care system subject to demands for shareholder returns has left hospitals and assisted-living facilities with too few staff and supplies. With every penny paid out to satisfy shareholders, cash reserves needed in crisis become a luxury.
Shareholder primacy also helps explains our tepid response to climate change. Share repurchases dwarf climate-related spending, while maximizing profits and stock prices looms large in corporate scandals with disastrous results, from Boeing’s 737 Max tragedies to Wells Fargo’s fraudulent sales practices.
Equally pernicious are the measures taken by business to avoid taxes and seek protections and unfair advantage for a specific company or industry.
Meanwhile, stock analysts celebrate decisions that reek of short-termism. The stock price goes up when a company lays off workers or puts jobs out to contract, and it falls when companies do the reverse—invest in wages, benefits, and training. Like the current example of Starbucks, back in 2011, when Google announced its intention to create 1,600 new jobs, the stock price fell 5 percent overnight.
The costs of the status quo are abundantly clear. But the challenge of unwinding the system built over four decades is complicated. We need to start the process—in the halls of Congress, yes, but also in boardrooms where conventions about CEO pay bump up against common sense definitions of fairness, and where “long term” can mean as little as three years.
There are many companies, some private, some public, that manage to do things differently—who put employees at the center of the bullseye to deliver on customer service, manage supply chain risks, and assure that quality—i.e., sustainable design and complex tasks like wise use of technology—is implemented throughout the business.
But these are the exceptions that buck the rules under which we operate now. We can hope that Mr. Schultz’s courageous move inspires the kind of systemic change that is needed. To combat inequality—and climate change—we need a system that shares prosperity and invests in the future by design.
Judy Samuelson is executive director and founder of the Aspen Institute’s Business & Society Program, and author of “The Six New Rules of Business: Creating Real Value in a Changing World.”