ANNE MARIE WATERS’ SUNDAY COLUMN
Why we must ban the buyback of shares
Sunday April 12th 2020
The coronavirus crisis has once again necessitated a government bailout of business. While this one was caused by biology (and the negligence of China), market forces have also brought us to the brink of economic catastrophe, such as the financial crash of 2008 when taxpayers were called upon to save major banks.
What started as a housing boom in the United States ended in global financial meltdown. US investment giant Lehman Brothers collapsed following a period of ‘easy lending’ that boosted the housing market but that crashed when unemployment rose. This sent shockwaves through the financial world and in the UK, Northern Rock building society fell, while Royal Bank of Scotland and Lloyds bank were rescued by government bailout. The story therefore was this; risky banking led to a global financial collapse, but the banks could not afford to save themselves when the crisis came, and so the taxpayer stepped in.
Now, we see a similar situation in response to the coronavirus outbreak.
Let us take an example.
In the United States at present, the airline industry is calling upon the Trump administration for help to survive the global coronavirus pandemic lockdown. As part of Trump’s multi-trillion dollar bailout, the airline industry will receive around $50 billion, but there is some disquiet; airlines have “used 96% of their cash flow on buybacks over the past 10 years”.
What this means is that the airline industry has used up 96% of its cash to buy its own shares. This has depleted its cash balance and left it unable to cope financially in a downturn such as this one. So the question is, why should big companies be able to spend their money so readily and then call on the tax payer to replace that money when times turn bad?
Big business that finds itself without cash when it’s needed will very often lose a large section of its workforce to cut back. The workers then represent more victims of thoughtless spending undertaken by companies in the years prior. Had they kept money in the bank, they may not be forced to lay off workers during a rainy day.
Why share buybacks?
So why would a company want to buy its own shares?
The short answer is to please shareholders as it increases the value of shares. To put it another way “Because there are fewer shares on the market, the relative ownership stake of each investor increases”.
Furthermore, when a company announces that it intends to buy back its shares, this sends a positive message to the markets and causes the share value to rise. Stock buybacks therefore provide a short term boost to the company and to the shareholders, while draining the company of cash.
Short-term boosts to shareholders will often mean a hefty bonus for directors, so everyone is a winner except the cash balance of the company. Buybacks furthermore allow companies to provide bigger payouts to shareholders but without the company actually performing any better.
President Donald Trump also announced his support for restrictions on buybacks in a press conference Saturday afternoon. “I want money to be used for workers and keeping businesses open, not buybacks,” the president said, adding that he is “strongly recommending a buyback exclusion.”
How did this come about?
Share buybacks had been illegal in the UK until 1982. Considered to be manipulation of the stock market, the practice was banned until the Companies Act 1981 came in to force. This Act allowed share buybacks for the first time, and now, companies spend billions of pounds per year acquiring their own shares.
The change occurred in the US at around the same time. The American Securities Exchange Act of 1934 also considered share buybacks as a manipulation of the stock market. This changed also in 1982 when buybacks were allowed under certain conditions.
In our upcoming economic manifesto Moral Money, For Britain argues for a return to pre-1982 rules and a consequent return to ‘responsible capitalism’.
Share buybacks represent a failing in the modern world economy – a “get rich quick” philosophy of stock manipulation and enormous debt. This attitude has spread from the boardroom to society as a whole where debt is now ‘a given’ and solvency a thing of the past. We must begin to put this in to reverse.
Financial responsibility is crucial, we have seen what recklessness can cause. It is not limited to big business and finance however, in the modern world, people are encouraged to place themselves in enormous debt, and savings or solvency are not rewarded as they once were, or ought to be.
This responsibility needs to be encouraged, and an example set by those at the top of the financial heap. Big business and banks must be required to spend more wisely and to understand that if their funds are used to enrich themselves during the good times, they cannot assume to call on the taxpayer when those good times come to an end.
The UK taxpayer is already overburdened quite enough. When big business finds itself needing a bailout, the burden becomes ever greater. Banning share buybacks is just one way in which we can help to ensure financial responsibility, keep jobs safer, and make sure the poorest in society do not have to continue to come to the rescue of the richest.
Anne Marie Waters