The Economist Who Put Stock Buybacks in Washington’s Crosshairs

In 1984, an economics professor named William Lazonick joined the faculty at the Harvard Business School, just in time to witness a shift in economic thought. Lazonick, who is seventy-four, had grown up in Toronto and earned a Ph.D. in economics, at Harvard, in 1975. He specialized in economic development, focussing on the ways that companies make innovations in order to attain global dominance of their industries. When he started teaching, the prevailing view in business schools was that companies should take their earnings and reinvest them in their operations, in part by investing in the well-being of their workers. But the business school had recently hired a professor named Michael Jensen, who believed in a theory of corporate management holding that companies exist solely to deliver profits to their shareholders, and that managers should make decisions to maximize those profits at all times. The theory was gaining ground quickly. In 1984, Lazonick said, “no one was talking about ‘shareholder value.’ ” But, by 1986, “everyone was talking about it.”

Jensen and his ideas proved to be hugely influential. Through the rest of the decade, as President Ronald Reagan pushed for tax cuts and eliminated business regulations, the shareholder-value philosophy became the norm. Companies began giving much of their extra capital back to investors in the form of dividends rather than investing it in areas that could have strengthened the business in the longer term, such as new facilities, new products, worker training, and employee raises. In fact, layoffs were often greeted with enthusiasm because they cut costs and caused stock prices to rise. Corporations also found more creative ways of funneling money to their shareholders. In 1982, the Securities and Exchange Commission passed a rule allowing companies to buy back their own stock (without being charged with stock manipulation), which reduced the number of shares in the market, causing their price to go up. In the late eighties, Lazonick noticed a sharp increase in stock buybacks. It made sense: buybacks, like dividends, enriched investors, including company executives, who received much of their compensation in company stock.

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