Can companies buy back better?

From: POLITICO's The Long Game - Tuesday Aug 02,2022 04:01 pm

Aug 02, 2022

By Lorraine Woellert , Jordan Wolman and Debra Kahn

THE BIG IDEA

A pedestrian walks past the New York Stock Exchange.

Who are buybacks good for? | John Minchillo/AP Photo

BUY BACK BETTER — ExxonMobil Corp. and Chevron Corp. reported record earnings Friday. And if that weren’t enough for shareholders, the companies and their European rivals added a sweetener: Massive share buybacks.

A buyback, or share repurchase, is exactly what it sounds like – a company uses excess capital to buy its own stock and boost its share price. Buybacks have been around for decades and they’re all but routine at many companies.

But what used to be a quotidian corporate governance tool has ballooned into a $700-plus billion practice that some say rewards the wealthy at the expense of innovation and workers.

On Friday, Chevron raised the top end of its 2022 share repurchase plan to $15 billion from $10 billion. ExxonMobil, which has spent $6 billion on buybacks so far this year, recently upped its target to $30 billion over this year and next.

Stakeholder capitalism was supposed to encourage long-term corporate value by taking into account the needs of workers, the community and society. Buybacks seem to counter that philosophy by directing windfalls to wealthy shareholders ( and yes, nearly all of them are wealthy ).

Now policymakers are asking a question: When multiple stakeholders — employees and shareholders — stand to benefit, who takes precedence?

Here’s some history. Companies can spend their money on almost anything: research and development, employee bonuses, increased investment. But they couldn’t easily send excess capital to shareholders until 1982, when the Securities and Exchange Commission made it easier to execute buybacks.

The practice started taking off in the early 2000s. In 2019, share repurchases hit a record $1 trillion, according to the SEC . In the first three months of 2022, companies reported a record $281 billion in buybacks, breaking a record set in the prior quarter, according to S&P Dow Jones Indices .

(Their portion of the value of outstanding public company shares has remained steady at around 2 percent, according to the SEC, which wants more transparency from companies on the rationale and timing of buybacks.)

Washington is stepping in. The U.S. has one of the world’s biggest divides between rich and poor, and buybacks increasingly are seen by Democrats and some Republicans as a giveaway to the wealthy at the expense of rank-and-file workers.

On Thursday, the House passed the CHIPS Act, a $280 billion measure aimed at boosting U.S. competitiveness. It includes language prohibiting companies from using the federal aid for buybacks.

The provision's impact likely will be minimal, but the move shows how a once-obscure financial tool has become a mainstream political talking point. When critics labeled CHIPS corporate welfare, the Biden administration pointed to the anti-buyback provision.

In the Senate, Finance Committee Chair Ron Wyden (D-Ore.) is investigating why Abbott Laboratories executed a buyback instead of upgrading its baby formula plants. Banking Committee Chair Sherrod Brown (D-Ohio) intends to raise the issue of corporate executives profiting from buybacks at a hearing Thursday.

As politics has always shown , in any debate over how to put money to its best use, there’s no one right answer. Trapping capital inside a corporation can make big, powerful companies even more big and powerful. Boosting the pay of low-wage workers has big economic benefits. Sending money to shareholders can help retirees and small business owners.

“It’s not a black-and-white issue,” said Tim Doyle , a senior policy adviser to the Bipartisan Policy Center and former Republican congressional aide. “At some point you have to rely on the board and management to be making the right economic decisions.”

In a paper published Wednesday, Doyle makes the case that any policymaking on share repurchases should take multiple, macroeconomic factors into account.

“Warren Buffett said it’s better to do share repurchases than make questionable investments,” Doyle said. “You need to look at share repurchases and stock buybacks in a not-so linear way.

It has much bigger impacts than on one individual company’s shareholders and employees.”

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CORPORATE PROMISES

FULLER DISCLOSURE – There’s a climate disclosure policy in the works that’s roiling some of Washington’s major trade associations. No, not the SEC's proposed rule .

California's SB 260, which would require large companies doing business in the state to disclose their greenhouse gas emissions, is on the move, with a key hearing scheduled Wednesday.

It's drawing ire from a broad swath of industry groups, including the American Chemistry Council, American Bankers Association, Household and Commercial Products Association, Alliance for Automotive Innovation, American Forestry and Paper Association, and the American Property Casualty Insurance Association.

The state measure goes further than the SEC proposal. It would require all companies to report pollution from their supply chains, what's known as Scope 3 emissions. It also would apply to some 5,500 public and private companies, according to its sponsor, Sen. Scott Wiener (D-San Francisco).

Jeff Sigmund, a spokesperson for the American Bankers Association, said the California bill would have national implications. He said he’s concerned the Scope 3 requirements aren’t good indicators of transition risk and that requiring the disclosures will “drive up costs without providing investors or average consumers with useful or reliable information."

Wiener said he'd tried without success to appease industry groups by allowing companies to use already-established formulas to estimate their supply-chain emissions.

“I think it’s a microcosm of why we have a climate crisis,” he said in an interview. “You have corporations that are opposing federal action and then going to the statehouse and saying, ‘Don’t do it at the state level, do it at the federal level,’ while killing the federal action. They just don’t want anything. And that’s just not an option anymore."

SCOTUS looms large here. The high court’s June decision to restrict the federal government’s ability to impose rules to limit pollution could throw the SEC’s proposed rule into legal jeopardy. Even if it survives litigation, it could be revoked by a Republican appointee.

Wiener said his bill is on "exceptionally strong legal footing."

"We’re not regulating their emissions that someone could argue violates [the] interstate commerce clause," he said. "We’re not saying you have to reduce their footprint. All we’re saying is you have to file a document.”

BUILDING BLOCKS

A trash can prototype from the San Francisco Department of Public Works.

Would you pay $2,000 for this trash can? | Debra Kahn, POLITICO

TRASH TRAVAILS — Is a $2,000 trash can sustainable?

For all the focus on techno-fixes to our broken recycling infrastructure, it's easy to forget about the front end of the refuse business. But cities are still trying to build a better wastebasket.

In San Francisco, where Mayor London Breed is under pressure to address quality-of-life issues, the city's Department of Public Works is test-driving six different receptacles designed to reduce scavenging and stand up better to graffiti and vandalism.

City officials unveiled prototypes of three new stainless-steel models at a community meeting in the Mission neighborhood last week, along with the estimated price tag: $2,000-$3,000 per can. With 3,000 cans to replace, that's as much as $9 million total.

The cost is justified, officials said, by the fact the cans are intended to last for 25 years. The new cans will also have sensors to let the city's trash haulers know when they're full, saving on labor.

Still, the designs drew grumbling from meeting attendees, who questioned the lifecycle cost. "Do we really want trash cans to live on for 30 years, knowing technology's going to be very different?" asked one.

Comparisons were drawn to New York City, which is in the process of selecting new cans to better resist rummaging by rats. (Its new bin , in the neighborhood of $800, is currently out for bids and is designed to last at least five years, a Department of Sanitation spokesperson said.)

One block east, at Mission and 16th streets, a prototype of the "Soft Square" model — the most expensive to develop, at around $20,000 — wasn't doing so well. Its back door hung open, contents fully accessible, and trash surrounded it.

"There's no perfect can," said Carla Short, DPW's interim director. "We don't necessarily come out of this with one clear winner."

YOU TELL US

Welcome to the Long Game, your source for news on how companies and governments are shaping our future. Team Sustainability is editor Greg Mott , deputy editor Debra Kahn and reporters Lorraine Woellert and Jordan Wolman . Reach us all at gmott@politico.com , dkahn@politico.com , lwoellert@politico.com and jwolman@politico.com .

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WHAT WE'RE CLICKING

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— Meatpacking giant Smithfield Foods is citing California's animal-welfare laws in closing an L.A. plant that employs 1,800 people.

— Heat pumps haven't gotten much of a boost from the Defense Production Act. Maybe the Inflation Reduction Act will help .

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