Economics Prof. William Lazonick
recently earned top honors from Harvard Business Review for an article that looks at the long-term impact of stock buybacks on the nation’s economy. Lazonick’s article, “Profits without Prosperity” was recognized with the McKinsey Award
as the top article published in the Harvard Business Review in 2014. Lazonick concludes that the practice is damaging job growth and wages and undermining the country’s economic health.
Lazonick analyzed years of data from publicly traded companies. According to his analysis, the 449 companies in the Standard & Poor’s 500 that were publicly traded from 2003 to 2012 used 54 percent of their earnings, or a total of $2.4 trillion, to repurchase their own stock. This, he says, cut deep into resources that could have instead been invested in innovation, production capabilities or higher wages for workers.
“Trillions of dollars that could have been spent on innovation and job creation in the U.S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation,” the article states.
What’s driving the massive buybacks? According to Lazonick, pressure from Wall Street and stock-based incentives that are now common in executive compensation are the key factors. Buybacks lift stock prices in the short term, which can help a company hit quarterly earnings-per-share targets while boosting executive pay. This has led to excessive CEO compensation and exacerbated income inequality, Lazonick maintains.
There are a number of steps that would limit the practice of massive stock buybacks, including having taxpayers and workers on corporate boards, tax law changes and creating stronger Securities and Exchange Commission regulations, Lazonick says.
In announcing the award, Harvard Business Review described the article as a “meticulously researched piece that offers a bold and compelling view of why corporate profitability has not translated into widespread economic prosperity."
The McKinsey Award, given out annually since 1959, recognizes the article published in the Harvard Business Review that is most likely to have a major influence on managers around the world. Past winners include such prominent economic and business luminaries as Peter Drucker, Clayton M. Christensen, Rosabeth Moss Kanter and Michael E. Porter.
Lazonick’s research is already generating discussion, especially among lawmakers, at think tanks in Washington, D.C. and from media worldwide.
The attention is a welcome upside to the getting the award, Lazonick said.
“It’s opened people’s eyes. It’s been gratifying,” he said.