Tuesday, April 28, 2015

Stock buybacks: From retain-and reinvest to downsize-and-distribute By William Lazonick

Stock buybacks are an important explanation for both the concentration of income among the richest households and the disappearance of middle-class employment opportunities in the United States over the past three decades,” says University of Massachussetts at Lowell economics professor William Lazonick in a new paper published by the Brookings Institution. “Over this period, corporate resource-allocation at many, if not most, major U.S. business corporations has transitioned from “retain-and-reinvest” to “downsize and distribute model.

 It is unlikely that the transformation of the U.S. business corporation from downsize-and-distribute to retain-andreinvest can occur without the leadership of the more visionary of current corporate board members, CEOs among them. In 2001, Jack Welch, upon his retirement as CEO of General Electric, published a book, Jack: Straight from the Gut, about his experience as a business leader.85 But it took Dr. Welch another eight years and a financial crisis to get his gut to speak to the absurdity of the ideology of maximizing shareholder value. In March 2009 Welch told a Financial Times reporter: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy…Your main constituencies are your employees, your customers and your products.” Perhaps the interviewer had a shocked look because Welch saw fit to reiterate: “It is a dumb idea. The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees.”86 Any business executive, business school professor, or business consultant who understands what it is that makes an enterprise innovative should know that, in this case at least, Jack Welch was right. Read this thought provoking article at


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