Stock Buybacks are the Only Real Goal
Plus, ticker prices and Earnings per share (EPS) are the only KPIs that matter.
“We need to acquire the startup to stay competitive. Unfortunately, that means restructuring.“
“Who needs two of the same engineers or two project managers or two human resource personnel, cut one or both.“
“There is no alternative.“
“We need to cut costs. The economy is forcing us to stay lean and mean.“
“Layoffs are necessary.“
“We had to pause hiring.“
…..
If you had heard one or the other of the statements above in the past few years and believed them, you are not alone.
If you wonder at the discord between what your boss is saying and what is going on in the economy, you are not alone.
If you feel confused, lost, and financially battered, you are not alone.
What the hell is going on?
In the past four years, both the economic Armageddon failed to materialize and tech stocks have blown through the roof making their CEOs and principal shareholders amongst the wealthiest people on earth.
According to Oxfam, the world’s FIVE richest men saw their wealth double in the past FOUR years to a combined total of $869 billion USD, while simultaneously, 60% of humanity have been pushed further into poverty. The former five includes the likes of Jeff Bezos, Elon Musk and Warren Buffett. The same people that had a hand in cutting thousands of jobs over the past four years.
The study also notes that if each of the five wealthiest men were to spend a million US dollars daily, it would take 476 years to exhaust their combined wealth. Clearly, they have the money to take care of their business costs and every other excuse that they had provided to the public. Instead, layoffs have been weaponized into a strategic tool used by the rich to get even richer. The deregulation of Wall Street and weakened union power have further accelerated this trend.
The numbers don’t lie. But people do.
Meanwhile, these same companies have been touting AI as the next big technological advancement. They brandish the rise of AI as an excuse for these job losses. However, they have also cut entire product lines, high tech teams, and whole swaths of engineers well versed in AI.
If they were concerned about AI and wish to develop products in AI, one would assume that they would use their profits towards developing these teams and products. Tellingly, their internal actions contradict their publicly broadcasted promises and goals.
Indeed, AI teams are being consolidated and let go similar to other tech teams. Robots are nowhere close to dreaming about electric sheep with the entire industry gutted and in tatters. Amazon is looking away from its Computer Vision centered grocery stores; Tesla has unplugged its backbone: the superchargers; Google has hacked together a barely coherent Gemini; and Apple is moving away from self-driving cars.
So, if the extra cash they hoarded through layoffs and restructurings is not being used for product development, where is all the money really going?
Answer = stock buybacks.
Stock Buybacks, in a nutshell
The easiest way to increase the value of an item is to decrease its availability.
Companies use stock buybacks, i.e., they buy back their own shares from the open market in order to boost the prices of their own stock. This provides benefits in exactly two ways: increased take-home pay for CEOs and other executives who are primarily compensated with stocks, and secondly, increasing the profits made by the company’s principal shareholders.
Unlike dividends, which provide a yield to all shareholders, stock buybacks increase the realized gains of sharesellers, including senior corporate executives, with their copious stock-based pay, and hedge-fund managers, who are in the business of timing the buying and selling of shares on the stock market.1
Conveniently, the very two entities that benefit from stock buybacks are also the same ones who may make up a company’s board of directors.
For additional context, before the 1980s, stock buybacks were seen as a sign of failure. It was an indication by management that they had failed to find new areas for investment. It was also largely considered as a means to manipulate the stock value and definitely not a respectable way to increase a company’s valuation.2
But in 1982, stock buybacks were helped along by the SEC through Rule 10b-18 which allowed companies to buy back large quantities of their own stock on any given day. Or as Economist William Lazonick likes to call it the rule that legalized stock market manipulation and gave corporations the license to loot. The Tax Cuts and Jobs Act (TCJA) of 2017 further accelerated the trend, resulting in companies that buy back more stock (through open-market buybacks and share retirement due to mergers, acquisitions and layoffs) than they issue.3
Since then a rapidly growing proportion of a company’s profits have been diverted towards stock buybacks rather than reinvestment on labor, equipment, and R&D, or sharing the profits via dividends amongst all shareholders including the company’s workers and retail investors.
Stock Buybacks, in Tech
One major factor behind the billionaires’ recent billions within this short decade has no doubt been due to stock buybacks. When a CEO’s base salary is set at $1 and the remaining 24 Million per year awarded via stock options and “personal security” they are more than motivated to heed the advice of venture capitalists and hedge-fund managers. The same people who were once known as corporate raiders.
In 2023 alone, Zuckerberg received $14 million USD in pre-tax dollars for “security” and nearly $1 Million USD for the use of the company’s private jet.4 In fact, all of Meta’s top executives received over $23 million in compensation last year, with $22 million coming from stock awards, providing further incentive for the company’s leaders to jack up the stock price via buybacks.
On the other hand, the average salary of the laid-off tech worker stands at around $150,000 USD. So even a thousand employees could have been satisfied with just $15 Million dollars. Or the price of one man’s so called security.
Within the past two years alone, the 5 firms above have used $413 billion in stock buybacks to boost their stock prices. Amongst them only Amazon has focused on diverting its massive profits towards reinvestment and business development. But sadly, there are talks of buybacks scheduled further this year at Amazon too.
Through the mechanism of mass layoffs tech companies both freed up cash and reclaimed stocks that would have otherwise vested and gone to the employees.
And once the execs and boards saw how lucrative this mechanism was they have begun employing it with increased frequency.
There was a reason behind the mass layoffs. No, it was not the mythical recession that failed to materialize. And no, it was not the need to cut costs and invest further in AI. It was the unadulterated greed and the complete hedonistic attitude that has taken over Wall Street and Silicon Valley with AI unwittingly ending up as the scapegoat.
The American political system is keenly aware of this issue. Biden and other prominent Democrats like Schumer and Sanders promised an end to buybacks in 2020 but have yet to pass the required bills5.
The solutions already exist. But as long as Big Tech and other mega-corps continue to wield influence over Capitol Hill, progress can happen only once lawmakers are wrested out of their control.
As Les Leopold states in his incredibly astute book6, “Shareholders are not the only stakeholders that matter. Workers and their communities should also shape productive corporations. More workers need to unionize and counter corporate power. Moreover, worker-owned businesses should also spread and be supported.”
Otherwise, corporations are going to get even more autocratic. And the internet, even more of a boring and destructive monoculture.
Sources:
There are many amazing resources that I used to research this article and create the adjoining tables and charts. Please check them out if you are interested:
Growing Inequality Research by Oxfam.
Profits without Prosperity by Prof. William Lazonick (HBR article)
Wall Street’s War on Workers by Les Leopold.
Please Read:
On a more personal note, its been a year since I started posting on Substack! Thanks to all my wonderful readers.
I have now decided to add in the option to get substituted for my Substack. I devote considerable amount of time in researching and writing this newsletter and I am thrilled and grateful for the the support I have received so far. I hope to continue shedding light on the tech industry and I would love it if you are willing to become a patron and support my work. My posts will continue being available to all. I am hoping that those who can afford to patronize me can help subsidize those who cannot.
PS: Substack forces me to choose higher rates that may be out of reach for my Indian readers. Instead, I give you my paypal link, so feel to contribute an amount that pleases you! (Let’s see how long Substack allows this.)
The Scourge of Corporate Financialization: Income Inequity, Employment Instability, Productive Fragility by William Lazonick, 2023.
Is a Share Buyback Right for Your Company?, HBR (2001)
Understanding Stock Buybacks by the Roosevelt Institute, 2019.
Mark’s compensation details are available in this SEC filing for 2023.
White House Press Release on Mar 7, 2024.
Wall Street’s War on Workers by Les Leopold (2024).