Rep. Alexandria Ocasio-Cortez, D-N.Y., targeted the use of stock buybacks by large public corporations during a congressional hearing on Wednesday, deriding the practice as a way for CEOs to overinflate their compensation at the expense of serving customers.
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During a House Financial Services Committee hearing, Ocasio-Cortez questioned the practice of corporations buying back their own stock from investors, noting that stock price is commonly tied to executive pay. Because of that, she argued, CEOs are incentivized to make sure the stock price is as “sky-high as possible”, even at the sake of the consumer or employees.
“Stock price doesn’t always, immediately or directly correlate to the actual value of the product that I’m selling,” she said. “It’s not as though my product is getting more valuable if the stock price increases.”
A frequent tool on Wall Street that can contribute to higher share prices, the New York Democrat said, is for companies to take money they received from the 2017 Tax Cuts and Jobs Act (which slashed the corporate tax rate to 21 percent from 35 percent) and buy their own stock, rather than put that money toward long-term investments, such as hiring and wage increases.
“And that would effectively increase the stock price, right? And I’ve done nothing to change my company, right? Nothing to make my product more valuable, my employees happier, I haven’t invested in training for the workforce to make the company inherently more valuable, but I’ve inflated the stock price,” she said. “How is this different than a pyramid scheme?”
Essentially, instead of using that capital to grow the company or funnel it back to employees, corporations use it to reduce the number of outstanding shares by reabsorbing them, thereby increasing the earnings per share of the company. Repurchases became controversial after major U.S. companies laid off employees last year, while simultaneously using savings from the tax overhaul to make share repurchases.
Ocasio-Cortez joins a slew of high-profile and bipartisan legislators, including Sens. Bernie Sanders, I-Vt., Chuck Schumer, D-N.Y., and Marco Rubio, R-Florida, in criticizing the ability of companies to purchase stock buybacks. Rubio has endorsed a plan to discourage corporations from buying their own stock, while Sanders and Schumer have said they plan to propose a plan to bar companies from buying back their own stock unless they offer other incentives to employees first.
Between 2015 and 2017, the five biggest U.S. tech groups -- led by Apple and Microsoft -- spent $228 billion on stock buybacks and dividends, as reported by The Financial Times.