A small group of Democrats in the House has re-introduce a bill that would ban corporations from participating in stock buybacks, as they believe the practice has “exacerbated inequality” throughout the country.
Corporations use stock buybacks as an investment strategy, where they re-purchase all outstanding shares, thereby reducing how many shares are out on the market. In doing this, they cause the value of those remaining shares to increase in value.
Democratic Representative Ro Khanna from California, one of the sponsors of the bill, commented recently:
Over the past year, Big Oil companies and other industries drove up costs for consumers while rewarding their shareholders with buybacks. It’s time to put a stop to this greed [and move to] repeal this rule that has only exacerbated inequality in our country.”
The rule that allowed stock buybacks to happen was first implemented during the Reagan administration in the 1980s. That’s when stock buybacks were first allowed by the Securities and Exchange Commission.
There aren’t many limits that are put in place on companies that want to participate in stock buybacks, and it’s been that way ever since Rule 10b-18 of the Securities Exchange Act was put in place by the SEC in 1982.
Under the rule, a corporation’s board of directors is able to “authorize senior executives to re-purchase up to a certain dollar amount of stock over a specified or open-ended period of time, and the company must publicly announce the buyback program,” the Harvard Business Review has written.
This new bill, called the Reward Work Act, would repeal this rule, though, essentially outlawing stock buybacks. The bill was introduced in Congress’ last session, but didn’t go anywhere.
CNBC reported last week that the bill was re-introduced not long after the SEC released new disclosure rules for stock buybacks that were quite stringent.
Supporters of the bill said that banning stock buybacks would also help to level the playing field for employees of these companies by preventing their employers from spending trillions of dollars on increasing the value of their stock instead of boosting employee salaries.
Democratic Representative Jesus Garcia of Illinois, one of the co-sponsors of the bill, said the legislation “also gives workers a voice on corporate boards.”
“Stock buybacks allow corporations to purchase shares of their own stock price at the expense of workers, consumers and the U.S. economy. Almost every corporation has participated in these practices.”
Another co-sponsor of the bill, Democrat Val Hoyle of Oregon, added:
“It’s also critical and an important part of this bill that we give workers a voice that is proportional to the value that their labor provides to the corporation.”
Earlier in May, Gary Gensler, the chairman of the SEC, said that corporate stock buybacks in the U.S. grew to $1.25 trillion in 2022, a big increase over the $950 billion total for 2021.
Despite the Democrats having strong words for why they believe this bill is necessary, it faces an uphill battle to even make it out of the Republican-led House.