Stock buybacks under scrutiny: The McKinsey Award winner asks tough questions

Corporate profits are at record levels, the stock market is booming, and American workers are at their most productive—but who is enjoying prosperity and why? That's the provocative question William Lazonick considers in "Profits Without Prosperity," winner of the 56th annual McKinsey Award for the most influential article in the Harvard Business Review.

Since 1959, the McKinsey Awards have recognized the Harvard Business Review articles most likely to have a major influence on managers around the world, based on the judgment of an independent panel of business leaders and academics. (McKinsey does not take part in the judging process.) Award winners have touched on every aspect of management.

A few highlights: in 1974, Peter Drucker won for "New Templates for Today's Organizations," which addressed a need for new organizational structures, but warned against excessive reorganizations as a panacea. In 1979, Rosabeth Moss Kanter's influential "Power Failure in Management Circuits," presented ideas about how power is derived and wielded within organizations. In 1995, Joseph Bower and Clayton Christensen coined a term now firmly established in the business lexicon: "disruptive technologies." Other award winners have touched on more personal business concerns, such as John Gabarro and John Kotter's 1980 article, "Managing Your Boss," or Clay Christensen's award-winning article, "How Will You Measure Your Life?" in 2010.

William Lazonick
William Lazonick, winner of the 56th annual McKinsey Award
William Lazonick

This year's winner addresses some fundamental questions about capitalism, finance, and wealth creation—specifically, how and why companies use stock buyback programs to deploy surplus capital, as opposed to investing in their businesses. We asked him a few questions.

Congratulations on winning the McKinsey Award. What reception has the article received, from business leaders and beyond?

"It's been hugely positive. It's been covered in the Financial Times, the New York Times, and other business journals. Harold Meyerson, a columnist for the Washington Post, says it "decodes the Rosetta Stone of America's economic decline." Elizabeth Warren cited the paper at a hearing on inequality. People who manage money are also concerned about the practice, and I've been invited to talk to folks in the investment world, among other invitations I've received."

"People have told me it's an eye-opener, people who didn't necessarily disagree, but who hadn't thought of it. That's what's valuable about the article."

"One of the interesting things is, those that don't agree with me haven't taken it on. Maybe when the prize is announced, some of the people who violently disagree with me—and I know they're out there—will respond. I'd like them to respond."

Are there any business leaders now speaking out on this?

"I have not encountered one sitting top executive of a US industrial corporation who's publicly spoken out against stock buybacks. Either Harvard Business Review has published an article that is wrong—and you're giving a prize to an article that's wrong—or people in places in power recognize that there's a problem."

"I advocate a regulatory fix to stop stock buybacks because business leaders won't regulate themselves. If they would regulate themselves, they wouldn't put themselves under pressure to cut wages or jobs. And that's also how you get effective regulation."

Is this a global issue? Do other countries strike a better balance between the interests of shareholders, executives and employees, in your view?

"It has a tendency to be a global issue. In Germany the board of directors of any company with more than 2,000 employees has to have one less than half of the seats filled by worker representatives and the rest by management representatives. It's a system called codetermination. At one of Sweden's leading global companies there are no stock options for executives. The company adopted stock-option programs in the late 1990s, early 2000s, but they quickly got rid of them."

What are you working on now?

"I'm working on what I call collective and cumulative careers. If we expect to stay in the labor force for 40 years with decent incomes and enough money accumulated to retire on, we're going to have to engage in career-long learning, even if we change companies. In the old economy, once you had a job with a major company, you had it for life. That's not coming back—the world's too competitive and globalized."

"If people in their 40s or 50s lose their jobs for whatever reason, society still needs them, and it's not charity to figure out how to make use of their capabilities. Society needs to make use of the human capital that these people have accumulated, and these people need good jobs. We have to think about how to preserve and enhance human capital over lifelong careers now that the large corporations are not playing that role. My research shows that it's an economic and business issue."

"Stock buybacks have business leaders thinking about what I call 'downsize-and-distribute,' or how to extract value from companies for themselves. We have to get everyone thinking about 'retain-and-reinvest,' or how to make use of productive capabilities to create value for companies and society as a whole."

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