The Dirty Little Secret of How CEOs Enrich Themselves at Your Expense
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William Lazonick is a leading expert on the history of the American business corporation. A professor of economics at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness, he has long been watching a trend that has only recently been attracting media attention and forcing many to reassess the nasty form of capitalisim that has been unleashed on us in recent decades.
In an email interview with Lazonick, I asked him about how the widespread and little-understood obsession with stock buybacks among American executives is driving inequality and pushing prosperity further away from everyone except those at the very top. (Lazonick's in-depth exploration of this topic is available in the current issue of the Harvard Business Review.)
His answers are a clarion call for changing the way America does business.
Lynn Parramore: You’ve been studying stock buybacks over the last 30 years. What exactly are they and why are you so interested in them?
William Lazonick: Let me start by answering the second part of your question first (in part because if I had just been studying stock buybacks over the past 30 years, I would be bored out of my mind by now).
In the mid-1980s, I was at Harvard Business School (HBS), working with the Business History Group led by the preeminent business historian Alfred D. Chandler, Jr. Previously I had spent 14 years as a graduate student and faculty member in the Harvard Economics Department where the main focus of my work was, as it remains, the role of business enterprise in the development of the economy. In working closely with Chandler, who in 1977 had published his pathbreaking book The Visible Hand: The Managerial Revolution in American Business, I learned five crucial lessons about my subject.
1) From the last decades of the 19th century, the growth of major business corporations drove the development of the U.S. economy.
2) Professional salaried managers controlled resource allocation in these business corporations, and hence their decisions determined the direction and intensity of corporate investment strategies.
3) The key investments that these executives made were in organizational structures made up of employees who had the abilities and incentives to engage in collective and cumulative learning.
4) The financial foundation for making these long-lived investments in organizational capabilities was after-tax earnings retained out of profits.
5) Public shareholders who received a portion of after-tax profits in the form of dividends were rentiers who had nothing to do with the investment strategies and organizational structures that would determine the success, or possibly the failure, of these companies.
By the mid-1980s, I was already a longstanding critic of the conventional theory that argues the "invisible hand” of markets will allocate resources to their most efficient uses in the economy. Rather, in line with Chandler’s notion of the "visible hand,” employment opportunities and standards of living depend on the resource-allocation decisions of executives who run large business corporations.
Based on 2007 data (the most recently collected), 1,925 companies in the United States that employed 5,000 or more people represented just 32-thousandths of one percent of all companies, but had 33 percent of all business employees, 37 percent of all business payrolls, and 43 percent of all business revenues. How the executives in control of these very large corporations allocate resources has a profound impact on how the economy performs.