Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration. This post was authored by Professor Fried and Professor Wang. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Professor Fried and Professor Wang (discussed on the Forum here).
Last month, Senator Chuck Schumer, along with Senator and presidential candidate Bernie Sanders, declared they would introduce “bold” legislation to prohibit a public firm from repurchasing its own stock, unless the firm first invests in employees and communities, including paying workers at least $15 per hour and offering “decent” pension and health benefits. Welcome to Washington’s newest political ritual: Senators seeking to demonstrate their concern for workers by proposing bills that severely restrict—or even outlaw—buybacks. Unfortunately, these proposals appear motivated by misleading measures of corporate capital flows, as well as on a profound misunderstanding of how the U.S. economy works. If enacted, such bills could threaten not only the capital markets but the employees and communities the Senators claim to care about.
Leading Senate Democrats appear to believe that repurchases, when added to existing levels of dividends, harm workers and impair long-term investment by starving firms of needed capital. The Schumer-Sanders bill would join legislation introduced by Schumer and Senator Tammy Baldwin to give the Securities and Exchange Commission authority to reject buybacks that, in its judgment, hurt workers. It also would require boards to “certify” that a repurchase is in the “best long-term financial interest of the company.” Senator Baldwin has introduced another bill, co-sponsored by Senator (and presidential candidate) Elizabeth Warren that goes even further: It bans all open-market repurchases.
