Soon after economist William Lazonick became a fellow at Harvard Business School in 1984, the world he had studied for decades began to radically change. Instead of plowing their profits back into their businesses, companies were being advised to do everything they could to boost their share price to return those profits to shareholders.
The doctrine of “shareholder value,” which has become part of our lexicon, was just beginning to take hold. But Lazonick was suspicious. He had studied the role of corporations in economic development and began to witness the hollowing out of our economy—the massive buybacks, layoffs and lack of innovation that, he says, were caused by this singular focus on shareholder value.
One of the causes, he later discovered, was a 1982 rule change by the Securities and Exchange Commission that allowed companies to buy back their stock without being charged with manipulating its price, as had previously been the case. (Reducing the shares outstanding not only makes them scarcer and therefore more valuable, it also automatically increases earnings per share, the metric by which companies are analyzed by Wall Street.)
Lazonick’s views on the wrongheadedness of this approach finally got attention in 2014 when he wrote a Harvard Business Review article called “Profits Without Prosperity.” In it, he argued that corporations focusing on their stock price are engaged in behavior that he calls “value extraction” instead of “value creation.”
“By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality,” he wrote.
In recent years, Lazonick’s ideas have been picked up by several progressive Democrats, including presidential hopeful Sen. Elizabeth Warren, who addressed them in her Accountable Capitalism Act. Last year, Sen. Tammy Baldwin, a Democrat of Wisconsin, introduced specific legislation to curb buybacks by rescinding the SEC rule that allowed them to go unchecked. (Lazonick testified at a Congressional hearing on the topic.)
To learn more, please read my Worth interview with Lazonick.