What Happens When Corporate Places Greater Emphasis on Stock Buybacks Rather than Quality?

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If you did not figure out where I am going by just reading the title, then I will explain a bit. Stock buybacks do not trump Quality. It is that simple. When you sacrifice Labor so as to have funding to buy back stocks, you may have picked the wrong person to toss. The person who inspects the product or builds that particular portion of the product correctly. This issue was in assembly somewhere along the way and was missed as an essential assembly to be doubled checked. Not Labor’s fault. Management . . .

Did Stock Buybacks Knock the Bolts Out of Boeing? Les Leopold

On January 5^th, a door plug blew out of the side of a Boeing 737 Max 9 plane flying for Alaska Airlines from Portland, Oregon, to Ontario, California.  (A door plug is a section of the plane’s fuselage bolted in to take the place of an optional emergency exit. It is meant to be an integral part of the plane’s body.)

Miraculously, during the twenty minutes it took for the plane to circle back and land, no one was sucked out of the gaping hole. But for two decades leading up to the incident, wealth has been sucked out of the company via legalized stock manipulation to benefit Wall Street and Boeing CEOs.

Since 2013, the Boeing Corporation initiated seven annual stock buybacks. Much of Boeing’s stock is owned by large investment firms which demand the company buy back its shares. When Boeing makes repurchases, the price of its stock is jacked up, which is a quick and easy way to move money into the investment firms’ purse. Boeing’s management also enjoys the boost in price, since nearly all of their executive compensation comes from stock incentives. When the stock goes up via repurchases, they get richer, even though Boeing isn’t making any more money.

As a result, Boeing has two missions:

1) Producing profitable and safe products for their airplane-buying customers, and

2) Producing stock buybacks for Wall Street and CEOs.

Unfortunately, for the rest of us, these missions are in conflict.

Finding the money for stock repurchases inevitably leads to cost-cutting. Most often, the first move is to lay off as many workers as possible. But other more subtle strategies include cutbacks in preventive maintenance and environmental controls, the outsourcing of work to lower-wage firms, skimping on health and safety protections, and underfunding quality-control. The goal is to become lean and mean, skating out to the very edge of cost reductions without jeopardizing the product. Or, well, at least not harming it too much.

You’d think that Boeing would not compromise on safety, given that one small production error or software glitch could down a plane worth hundreds of millions of dollars while killing hundreds of people in one blow.  But you’d be wrong.

Boeing is a world leader in stock buybacks. 

Between 1998 and 2018, the plane manufacturer also manufactured a whopping $61.0 billion in stock buybacks, amounting to 81.8 percent of its profits. Add in dividends and Boeing’s shareholders received 121 percent of its profits. (Data compiled by William Lazonick and The Academic-Industry Research Network, from Boeing 10-K SEC filings.)

How much is that really?  Well, according to Lazonick and Mustafa Erdem Sakniç, writing in The American Prospect in 2019, Boeing facing the obsolescence of its 737 planes, could have created an entirely new airplane from scratch with fully modern technology. Instead, the company decided to re-engineer the older model, name it the 737 MAX, and save $7 billion dollars. Perhaps not coincidentally, the $7 billion dollars “saved” is the amount of the stock buybacks Boeing made each year between 2013 and 2019.

Rather than reinvesting more deeply in the company’s products, Boeing chose to pay off stockholders and Boeing executives. In the three years before Boeing software glitches caused two 737 MAX crashes in 2018 and 2019 that killed 346 people, Boeing’s CEO Dennis A. Muilenburg received $95.9 million in gross pay. Lazonick and Sakniç report that nearly all of it was via stock incentives, since his annual salary never exceeded $1.7 million. (Perhaps again, not coincidentally, a Texas court ruled in October 2022 that the passengers killed in the two 737 MAX crashes are legally considered “crime victims.”)

And just to make sure that stock buyback production would always be a top CEO priority, Boeing announced that “beginning in 2014, a significant portion of our named executive officers’ long-term incentive compensation will be tied to Boeing’s total shareholder return as compared to a group of 24 peer companies.”  If shareholder return is the metric used to judge executive performance, stock buybacks become an executive’s most valued tool.

What CEO could possibly resist pushing stock buybacks, given that nearly all of his or her income is based on stock incentives?

Of course, every CEO, especially in the airline industry, will say that safety is their top priority.  If pressed about stock incentives, they say there is no conflict between stock buybacks and safety. They say that the door plug blow-out had nothing at all to do with years and years of massive stock buybacks, nor all the cost-cutting to find the money for those repurchases.

Give me a break!

Between November 1998 and January 2024, Boeing filed 491 Worker Adjustment and Retraining Notifications (WARN) amounting to approximately 45,000 layoffs. This is in a company with about 140,000 employees. Might those layoffs have had something to do with why the FAA grounded 171 Boeing 737-9 MAX airplanes after the door plug blew out of the fuselage?  Might that be a reason why the FAA is now investigating “manufacturing practices and production lines, including those involving subcontractor Spirit AeroSystems, bolstering its oversight of Boeing, and examining potential system change?”  

And it gets worse, because Boeing’s subcontractor, Sprit AeroSystems, subcontracted the faulty door plug production to another facility based in Malaysia, reports the National Transportation Safety Board.  Good luck with that investigation.

Will government regulators have the guts to expose the chain that connects Wall Street-induced stock buybacks to cost cutting to layoffs to subcontracting to safety problems?  The jury is out.

While the door-plug investigation will certainly put the spotlight on Boeing, the problem is systemic. In research for my book, Wall Street’s War on Workers, we found that more than 30 million workers have lost their jobs in the last three decades due to mass layoffs. Money that could have been spent on research, development, safety, and employee compensation in all kinds of industries was instead used to enrich shareholders. Literally trillions of dollars in stock buybacks have killed jobs and corporate reinvestment, leading to countless production problems throughout the economy. And that’s in addition to how workers, their families, and their communities have suffered indirectly during mass layoffs.  

It’s a massive problem. Overall, approximately 70 percent of all corporate profits go into stock buybacks, up from 2 percent in 1982. (Data compiled by the Academic-Industry Research Network.)

Until stock repurchases are outlawed, as they essentially were before 1982, Wall Street and its CEO partners in corporation after corporation will continue to deploy what Lazonick correctly calls a license to loot.

Next time you stuff yourself into an airline seat that is ridiculously cramped, just remember that seat you’re sitting on was shaped by stock buybacks. And if you get a coveted exit row seat to stretch out a bit, you’d better think good thoughts about the underpaid, overworked, sub-contracted workers who may have made and installed the door.

Les Leopold is the Executive Director of the Labor Institute, and author of Wall Street’s War on Workers: How Mass Layoffs and Greed are Destroying the Working Class and What to do about it. (Feb. 2024).