Business, investor groups criticize proposals to restrict stock buybacks

Leaders of the Business Roundtable and the Council of Institutional Investors on Monday pushed back against proposals to put restrictions on stock buybacks, as lawmakers have taken aim at share repurchases in recent weeks.

“While the proposals are billed as solutions to promote inclusive economic growth and sound corporate governance, attempts to restrict buybacks and dividends are misguided,” Business Roundtable President and CEO Joshua Bolten and Council of Institutional Investors Executive Director Ken Bertsch said in an op-ed in The New York Times. “They would undermine economic security rather than enhance it.”

Democrats have highlighted companies’ stock buybacks over the past year to argue that President Trump’s tax-cut law is benefiting wealthy corporations and individuals rather than the middle class.{mosads}

Senate Minority Leader Charles Schumer (D-N.Y.) and Sen. Bernie Sanders (I-Vt.) said last month that they plan to offer legislation to prevent companies from buying back their own stock unless they invest in their workers by doing things such as paying all of their workers at least $15 per hour and providing at least seven days of paid sick leave.

“When corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest profits more meaningfully in the company in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining,” the senators wrote in the Times last month.

But Bolten and Bertsch said that if it’s harder for companies to buy back their own stock or issue dividends, companies could be forced to use some of their money on “projects with a low potential for success.”

They also said that investors use the money they get returned to them through buybacks to make other investments or purchases, and that both buybacks and business investment increased last year.

“It is a myth that buybacks and dividends displace investments that companies would otherwise make to grow or develop innovations,” the trade association leaders wrote.

Bolten and Bertsch said that it’s possible for buybacks to be abused, such as if a company bought back its own shares to artificially inflate its stock prices in the short run. They said that companies should have strong corporate governance policies to be sure that buybacks are done for purposes of helping businesses in the long run.

“By contrast, imposing federal limitations on how companies decide to use their capital would stifle innovation and opportunity in America,” they wrote.

Schumer wrote in an essay on Medium last month that he wants critics of his idea on buybacks to suggest solutions to growing income inequality, wage growth lagging behind productivity growth, and a decline in the startup rate.

“Our solution may not be the only one or the best one, but it is intended as a wake-up call to corporate America that they must be part of the solution, not part of the problem,” he wrote.