The $5.3 Trillion Question Behind America’s COVID-19 Failure

By William Lazonick and Matt Hopkins

JUL 24, 2020

That’s the amount of buybacks U.S. corporations funneled to shareholders during the past decade—rather than invest in technologies for the common good.

This article is being published jointly by INET and The American Prospect
The United States has been woefully inept in responding to the COVID-19 pandemic. Clearly, the Trump administration’s ignorance, incompetence, and malfeasance have exacerbated the death and destruction.

But putting in place a new administration that heeds the recommendations of science and effectively carries out the necessary containment policies would only remedy part of the nation’s failure to deal with the pandemic. The successful implementation of a national response to the COVID-19 pandemic requires collaborations between federal government agencies and those business enterprises that have accumulated the capabilities for the development, production, and delivery of countermeasures—vaccines, therapies, diagnostics, ventilators, and personal protective equipment (PPE). For such government-business collaborations (GBCs) to successfully confront the COVID-19 pandemic, the prime purpose of the companies themselves must be the development, production, and delivery of safe, effective, and affordable countermeasures.

That’s not their prime purpose now. How can it be, when senior corporate executives have an obsession with doing whatever it takes to boost the company’s stock price?

For a business corporation to be a reliable partner in a GBC, it must reject the ideology of “maximizing shareholder value” (MSV) and shift its purpose to corporate governance for the common good. The belief that corporations should be run according to the dictates of MSV poses a formidable obstacle to the collective action needed to confront not only a pathogen pandemic but also the scourges of income inequity and climate change.

As it happens, in August 2019, without any premonition that a pathogen pandemic would soon plague us, the Business Roundtable—an association of corporate CEOs formed in the late 1970s—issued a “stakeholder” Statement on the Purpose of a Corporation, signed by 181 senior executives of leading companies. The 2019 Roundtable statement replaced one from 1997 that espoused “shareholder primacy” as the purpose of the corporation. The new Roundtable statement declared that business should serve the needs of customers, employees, suppliers, and communities, in addition to “generating long-term value for shareholders.” Guided by this new purpose, a corporation could be a partner in a GBC and could respond effectively to the COVID-19 pandemic.

For business corporations to become reliable partners in GBCs that can confront crises such as COVID-19, their senior executives and board members would have to cease distributing virtually all of the companies’ profits to shareholders in the form of stock buybacks and cash dividends and show genuine commitment to a stakeholder governance model. In the decade 2010–2019, companies in the S&P 500 Index, which make up about 80 percent of the total market capitalization of companies listed on U.S. stock exchanges, distributed $5.3 trillion—54 percent of profits—to shareholders as stock buybacks, almost entirely for the purpose of giving manipulative boosts to the companies’ own stock prices. The prime beneficiaries of buybacks are share sellers, including the companies’ senior executives and professional stock traders, both of which groups are positioned to know precisely when buybacks are being executed and, accordingly, time the sale of their shares to pocket the gains. In addition to the $5.3 trillion devoted to enriching share sellers through buybacks, companies also distributed $3.8 trillion (another 39 percent of profits) as dividends to shareholders.

The funds that U.S. government agencies spent in preparing the nation for a pandemic pale in comparison. Over the decade 2010–2019, the federal government allocated a total of $13.2 billion to R&D countermeasures, managed by the Biomedical Advanced Research and Development Authority (BARDA) and Project BioShield, and to procurement of countermeasures by the Strategic National Stockpile (SNS). These agencies depend on GBCs for countermeasure development, production, and delivery. A business contribution to the pandemic preparedness effort of just 1 percent of the $5.3 trillion that the S&P 500 corporations dissipated on buybacks over the same ten years would have represented four times the countermeasure funding provided by the federal government.

As we demonstrate in a report, “How ‘Maximizing Shareholder Value’ Minimized the Strategic National Stockpile,” published by the Institute for New Economic Thinking (INET), a corporation that prioritizes allocation of its profits to boost its stock price is bound to be an unreliable partner in a GBC. Its senior executives focus on price-gouging and cost-cutting to increase the so-called “free cash flow” that can be devoted to buybacks rather than on investments in the capabilities that GBCs require to develop, produce, and deliver safe, effective, and affordable pandemic countermeasures.

In our INET study, we analyze two successive BARDA-led GBCs, the first launched in 2010 and the second in 2014, to develop an innovative ventilator and deliver 10,000 units to the national stockpile. The strength of these GBCs resided in the innovative capabilities of the two manufacturing companies involved: Newport Medical Instruments, based in California, and Respironics, based in Pennsylvania. But these manufacturing companies came to be controlled by highly financialized corporations in the medical-device industry: In 2012, Newport Medical was acquired by Covidien, which was in turn acquired by Medtronic—both U.S.-based companies using Ireland as a tax haven—and in 2008 Respironics was bought by Royal Philips, based in the Netherlands. As of mid-July 2020, not a single ventilator from the contracts had been delivered to the SNS.

The failure of these GBCs to deliver ventilators to the national stockpile provides a useful window into the problem of national preparedness and response to the COVID-19 pandemic. Of all the countermeasures to a pandemic, solving the problem of the surge in demand for ventilators is the most tractable. In matters of diagnostic testing and contact tracing, reliance on financialized companies such as Quest Diagnostics and LabCorp—never mind the completely unqualified vendors—also has posed problems, such as weeklong delays in providing COVID-19 test results. In 2010–2019, Quest distributed just over 100 percent of its profits to shareholders (74 percent as buybacks), while LabCorp paid out 63 percent of its profits (all as buybacks).

Frontline medical workers in pandemic hot spots have experienced severe PPE shortages. The world’s three largest producers of N95 respirator masks—3M, Honeywell, and Kimberly-Clark—are U.S.-based, with most of their productionbeing done in China. These three companies are all dedicated to MSV—which, along with the inept and conniving Trump administration, may help explain the slow ramp-up in N95 mask production. For 2010–2019, the proportion of profits distributed to shareholders was 121 percent for 3M, 90 percent for Honeywell, and 129 percent for Kimberly-Clark, with, respectively, 72 percent, 47 percent, and 59 percent of those profits going to buybacks. Meanwhile, in 2010–2019, the largest PPE distributor, McKesson, paid out 115 percent of its profits to shareholders, with 100 percent of profits distributed as buybacks; for the second largest, Cardinal Health, these figures were 101 percent and 57 percent, respectively.

It is from the perspective of the debilitating impact of MSV on the nation’s response to the COVID-19 crisis that we pose this $5.3 trillion question to executives and directors of S&P 500 companies that could, and should, be involved in GBCs: Why does your company do stock buybacks?

In the context of the COVID-19 pandemic, it is particularly appropriate to pose this question to business leaders who champion public health as philanthropists and social activists but whose businesses have subverted their potential role as GBCs by adhering to the orthodoxy of maximizing shareholder value. Consider, for instance, Bill Gates, whose involvement with Microsoft since he co-founded the company in 1975 has made him the second-richest person in the world. As head of the world’s second-largest philanthropic organization, Gates is among the most visible proponents of public-health preparedness for a pandemic. In 2015, he gave a now-famous TED Talk in which he warned: “If anything kills over 10 million people in the next few decades, it’s most likely to be a highly infectious virus rather than a war. Not missiles, but microbes.” Gates concluded the talk with the optimistic advice that “there’s no need to panic … If we start now, we can be ready for the next epidemic.”

As CEO of Microsoft until 2000, chairman until 2014, and a director until March 2020, however, Gates had every opportunity to make use of Microsoft’s profits to engage in GBCs to “be ready for the next epidemic.” Yet from fiscal 1996 through the third quarter of fiscal 2020, Microsoft repurchased $244 billion worth of its own shares, equal to 65 percent of its profits, and distributed $161 billion in dividends, representing 43 percent of profits.

On its website, Microsoft calls its buybacks and dividends “Cash Returned to Shareholders.” Yet, as Gates must know, the only funds that Microsoft has ever raised from the public stock market amount to $59 million: all the proceeds of its initial public offering in March 1986. So how can Microsoft “return” cash to parties who never invested in the company’s productive capabilities but simply bought and sold shares already outstanding on the stock market?

Highly profitable companies should, as a matter of course, be returning a portion of their profits to society, recognizing, at a minimum, the contributions of knowledge and infrastructure that society has provided to them. The attention to social crises by a corporation that adheres to MSV ideology, however, will tend to be too little, too late. For example, in the midst of the COVID-19 pandemic and the Black Lives Matter protests, Apple announced a $100 million “Racial Equity and Justice Initiative.” In a Twitter video, CEO Tim Cook declared: “The initiative will challenge the systemic barriers to opportunity and dignity that exist for communities of color and [in] particular for the black community.” Perhaps Apple’s $100 million initiative can be seen as the company’s commitment to the Business Roundtable’s statement of purpose, of which Cook was a signatory in August 2019. But that $100 million is still only 0.26 percent of the $38.5 billion Apple spent on buybacks in the six months after Cook had signed the statement and just 0.03 percent of the $343.9 billion the company has devoted to buybacks since 2013.

Much like Microsoft, Apple has conducted its record-breaking $344 billion in buybacks, along with $96 billion in dividends, under what since 2013 it has called its “Capital Return Program.” But the only time in its history that Apple raised funds from public shareholders was at its initial public offering in 1980, which yielded $97 million for the company. In 2014, when Apple was ramping up its buybacks, in an open letter published on the Harvard Business Reviewwebsite, one of us (Lazonick) asked Cook how Apple could “return” money to parties who had never provided any funds to the company. Some $276 billion in Apple buybacks later, we await the CEO’s response.

Let’s not place all the blame on Tim Cook. He is just one member of Apple’s seven-person board of directors. The Apple director with the longest tenure is Arthur D. Levinson, who has been on the board since 2000 and its chairman since late 2011. Levinson is a scientist who spent most of his career with the pioneering biopharmaceutical company Genentech, joining the firm in 1980 and becoming its CEO from 1995 to 2009 and chairman of its board from 1999 to 2014. Perhaps Levinson has some thoughts about how Apple might have invested a portion of the hundreds of billions of dollars that it has wasted on buybacks in a GBC to develop vaccines for pandemic preparedness.

The Apple director with the second-longest tenure is former Vice President Al Gore, who has been on the board since 2003. Gore, of course, has been one of the world’s leading activists for social awareness of the threat of global warming to human existence. Perhaps Gore has some thoughts about how Apple might have invested a portion of the hundreds of billions of dollars that it has wasted on buybacks in a GBC to combat climate change.

America’s executives and directors must recognize an inconvenient truth beyond the obvious need for corporations to contribute to confronting society’s existential crises: Stock buybacks manipulate the market and make most Americans worse off. Companies such as Microsoft and Apple throw away tens of billions every year on buybacks. It’s well past time for these executives and directors to recognize their responsibility for the failure of corporate America to deal with the key social crises of our times: pathogen pandemics, income equity, and climate change.

William Lazonick
Professor of Economics, University of Massachusetts Lowell
President, The Academic-Industry Research Network

Matt Hopkins
Senior Researcher, The Academic-Industry Research Network

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