In yesterday’s Washington Post, the main article on page 1 was “Companies Pour Cash Into Buybacks of Their Own Stock: A Boon for Shareholders, Executives.” Not unexpectedly, the article did not exactly conform to the principles of the Just Third Way. What was surprising, however (at least from the Just Third Way perspective), was the rather blithe assumption that allowing shareholders to make a one-time profit on selling their shares to the company they (formerly) owned is somehow a good thing.
Think about it. The earnings of a corporation belong by the natural right of private property to the shareholders, i.e., the people who own shares, and who thus own the corporation. Everything that the corporation owns is owned in reality by the shareholders.
This means that the cash that the company uses to purchase shares from existing shareholders already belongs to the shareholders. The company in a “buyback” is, therefore (to all intents and purposes), using the shareholders’ money to pay for the shareholders’ shares that the company then keeps for itself.
This is a little like the pickpocket who takes $10 out of your back pocket, and uses it to purchase the $5 watch you have in your front pocket. You made $5 on the deal, right?
No. Do the math. The pickpocket made $5 on the deal. You lost $5. And were late for work because you lost track of the time drinking up your profits down at the tavern.
That’s not the worst thing, however. True, the company gets shares by giving existing shareholders money that is already theirs to begin with to purchase their shares. The company loses nothing on the deal.
The shareholders not only lose their shares, however, they also lose any future profits from ownership. Whether or not those profits are paid out, they belong to the shareholders. When they cease being shareholders, they lose all rights to those profits.
A share buy back is thus a win-win for a corporation, and a lose-lose for a shareholder.
Of course, there are a number of much deeper problems involved that we could cover, but that’s enough for one day. After all, do you really feel right now like discussing the problems implied by the assumptions that a corporation is not run for the benefit of the shareholders, but of the corporation, which then becomes a self-realized and self-justifying entity . . . which is one way of characterizing God?
What about the implications suggested by the emphasis on capital gains instead of dividends? The former implies gambling and speculation, the latter, productive activity.
But we can look at that another day. We’ve probably depressed you enough for now.