[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                    EXAMINING CORPORATE PRIORITIES:
                    THE IMPACT OF STOCK BUYBACKS ON
                  WORKERS, COMMUNITIES, AND INVESTORS

=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON INVESTOR PROTECTION,

                 ENTREPRENEURSHIP, AND CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 17, 2019

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-58
                           
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]  

                                __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
42-361 PDF                  WASHINGTON : 2020                     
          
--------------------------------------------------------------------------------------





                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           PETER T. KING, New York
WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia                 BILL POSEY, Florida
AL GREEN, Texas                      BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri            BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
BILL FOSTER, Illinois                SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio                   ROGER WILLIAMS, Texas
DENNY HECK, Washington               FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan              TED BUDD, North Carolina
KATIE PORTER, California             DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa                     TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts       JOHN ROSE, Tennessee
BEN McADAMS, Utah                    BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York   LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia            DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts      WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
        Subcommittee on Investor Protection, Entrepreneurship, 
                          and Capital Markets

                CAROLYN B. MALONEY, New York, Chairwoman

BRAD SHERMAN, California             BILL HUIZENGA, Michigan, Ranking 
DAVID SCOTT, Georgia                     Member
JIM A. HIMES, Connecticut            PETER T. KING, New York
BILL FOSTER, Illinois                STEVE STIVERS, Ohio
GREGORY W. MEEKS, New York           ANN WAGNER, Missouri
JUAN VARGAS, California              FRENCH HILL, Arkansas
JOSH GOTTHEIMER. New Jersey          TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
KATIE PORTER, California             TREY HOLLINGSWORTH, Indiana, Vice 
CINDY AXNE, Iowa                         Ranking Member
SEAN CASTEN, Illinois
ALEXANDRIA OCASIO-CORTEZ, New York
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 17, 2019.............................................     1
Appendix:
    October 17, 2019.............................................    27

                               WITNESSES
                       Thursday, October 17, 2019

Coffey, Derik D., CFA, Portfolio Specialist, Channing Capital 
  Management.....................................................    10
Fried, Jesse M., Professor of Law, Harvard Law School............     5
Grice, Janie, United for Respect at Walmart......................     8
Lewis, Craig M., Madison S. Wiggington Professor of Finance and 
  Professor of Law, Vanderbilt University........................    12
Palladino, Lenore, Senior Economist and Policy Counsel, Roosevelt 
  Institute......................................................     6

                                APPENDIX

Prepared statements:
    Coffey, Derik D..............................................    28
    Fried, Jesse M...............................................    35
    Grice, Janie.................................................    50
    Lewis, Craig M...............................................    54
    Palladino, Lenore............................................    67

              Additional Material Submitted for the Record

Garcia, Jesus ``Chuy'':
    Written responses to questions submitted to Jesse M. Fried...    89
    Written responses to questions submitted to Craig M. Lewis...    91

 
                    EXAMINING CORPORATE PRIORITIES:
                    THE IMPACT OF STOCK BUYBACKS ON
                  WORKERS, COMMUNITIES, AND INVESTORS
                  
                               ----------                              


                       Thursday, October 17, 2019

             U.S. House of Representatives,
               Subcommittee on Investor Protection,
             Entrepreneurship, and Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Carolyn B. 
Maloney, [chairwoman of the subcommittee] presiding.
    Members present: Representatives Maloney, Scott, Foster, 
Vargas, Gottheimer, Gonzalez of Texas, Porter, Axne, Casten; 
Huizenga, Hill, Emmer, Mooney, Davidson, and Hollingsworth.
    Ex officio present: Representatives Waters and McHenry.
    Also present: Representatives Green and Garcia of Illinois.
    Chairwoman Maloney. The Subcommittee on Investor 
Protection, Entrepreneurship, and Capital Markets will come to 
order. Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of this subcommittee are authorized to 
participate in today's hearing.
    Today's hearing is entitled, ``Examining Corporate 
Priorities: The Impact of Stock Buybacks on Workers, 
Communities, and Investors.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    This hearing will examine the use of stock buybacks, which 
has grown dramatically over the past 2 decades, and has grown 
especially quickly in the past 2 years. When companies have 
excess cash on hand, they face a choice about what to do with 
the money. They can use it to invest in research and 
development, purchase new equipment, raise their employees' 
wages, or they can pay their own shareholders.
    Now, I want to be clear. I have nothing against companies 
returning capital to their shareholders. Shareholders invest 
their money in promising companies, and if those companies are 
successful, then shareholders deserve a return on their 
investment. But how companies return capital to their 
shareholders is what we are going to discuss today.
    Companies essentially have two options to do this: they can 
pay a cash dividend to all shareholders; or they can buy back 
stock from any shareholder willing to sell their stock back to 
the company.
    Prior to 1982, public companies very rarely engaged in 
stock buybacks because the legality of buybacks was 
questionable. When a company buys back its own stock, it 
temporarily drives up the price of its stock, which could be 
considered a form of illegal market manipulation, so companies 
primarily return capital to shareholders by paying dividends.
    Then, in 1982, the SEC adopted a rule that gave companies a 
safe harbor when they engaged in stock buybacks. Ever since the 
SEC adopted that rule, companies have used stock buybacks more 
and more, and have used dividends less.
    There are a number of reasons why companies prefer buybacks 
to dividends. One reason is that buybacks are slightly more 
tax-efficient than dividends. But the most important reason, I 
believe, is that executives at public companies have a personal 
incentive to favor buybacks over dividends. Because executives 
are often compensated in company stock, executives can use a 
buyback program to boost the company's stock price right before 
selling their own stock at these artificially inflated prices.
    In fact, a study by SEC Commissioner Robert Jackson found 
that executives at public companies sold up to 5 times more 
stock than usual immediately following a buyback announcement, 
which strongly suggests that executives have been abusing stock 
buybacks for personal gain. In addition, if a company is in 
danger of missing its earnings-per-share target, then the 
executives can simply announce a stock buyback program to 
temporarily boost the company's earnings per share and hit 
their target.
    Unfortunately, the use of buybacks has grown significantly 
in the past 2 years due almost entirely to the 2017 tax bill. 
Even though many large companies claimed that they would use 
their tax cuts to reinvest in their businesses or raise their 
employees' wages, in reality companies spent roughly 40 to 60 
percent of their tax breaks on stock buybacks.
    Companies in the S&P 500 spent roughly $811 billion on 
buybacks in 2018, which was a 50-percent increase from 2017, 
and buybacks are on pace to increase even more in 2019 to 
nearly $1 trillion. With this surge in stock buybacks, I think 
this hearing is very timely, and we will be examining several 
pieces of legislation on stock buybacks in this hearing.
    First, we have a bill by Mr. Garcia called the Reward Work 
Act, which would prohibit companies from engaging in open 
market stock buybacks. The bill would also require at least 
one-third of the directors at public companies to be elected by 
ordinary workers in order to give them a stronger voice in how 
the company is run.
    Second, we have the Stock Buyback Reform and Worker 
Dividend Act, which is the companion to a bill that Senator 
Sherrod Brown, the ranking member of the Senate Banking 
Committee, has introduced in the Senate. This bill would 
require public companies that engage in stock buybacks to also 
reward their workers by issuing a so-called worker dividend 
every time they engage in stock buybacks. For every $1 million 
the company spends on buybacks, they would have to issue a 
special $1 dividend to all of their ordinary workers, too.
    Third, we have a bill that would require increased 
disclosures for companies engaging in stock buybacks and would 
also require SEC approval for the buybacks.
    Lastly, we have a bill that would require companies to make 
disclosures about executives' participation in stock buyback 
programs and how the buybacks will affect executive 
compensation.
    I look forward to hearing from all of our witnesses on this 
important topic.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Michigan, Mr. Huizenga, for 5 
minutes for an opening statement. Thank you.
    Mr. Huizenga. Thanks, Madam Chairwoman, and I look forward 
to having this discussion regarding these stock buybacks and 
the impact on workers, communities, and Main Street investors.
    Recently, as you are hearing, the practice of stock 
buybacks has attracted some scrutiny from some on Capitol Hill. 
In fact, this scrutiny seems to be based on a bit of a myth, so 
I believe we should first start with the facts on what a stock 
buyback really is, and we can just call that, ``Stock Buyback 
101.''
    When a private company goes public, it has an initial 
public offering, through which a company divides itself into 
shares that can be sold to investors. Thus, the members of the 
public can invest in this company and become shareholders. 
Shareholders earn regular dividends based on the company's 
performance, which are generally the incentive for an investor 
to purchase a company's stock.
    Shareholders are free to buy and sell shares, thus earning 
money when they sell their shares, based on the price at which 
they initially bought the shares. After the initial public 
offering (IPO), the company, or the issuer, can then opt to 
issue more shares called share dilution. When the company 
issues more shares, the value of each share decreases because 
each share represents a smaller percentage of the company.
    Alternatively, a company may repurchase shares of its own 
stock, thus reabsorbing that portion of its company and 
reducing the number of shares on the market, increasing the 
value of each stock and each share. That is just basic 
economics. This is commonly referred to as a stock buyback or 
stock repurchase.
    Companies use stock buybacks to make shares available for 
dividend reinvestment, stock options, employee stock ownership 
plans, to provide liquidity in the marketplace, and, many 
times, as a preferred and efficient way of returning capital to 
shareholders.
    Stock buybacks are important to businesses and the economy 
because: one, they provide managers with a tax-efficient means 
of returning excess capital to shareholders; and two, they 
allow managers to signal to investors that the firm is 
undervalued when strong.
    Returning excess capital is value-adding for two reasons: 
first, it helps prevent companies from pursuing growth in size 
at the expense of profitability and value; and second, by 
returning capital to investors, repurchases, like dividends, 
play the critically important economic function of allowing 
investors to channel their investment from mature or declining 
sectors of the economy to more promising ones.
    In 1982, to address concerns over market and price 
manipulation by issuers, the SEC adopted Rule 10b-18, which 
created a safe harbor from liability for market manipulation 
for companies engaged in stock buybacks. However, issuers must 
adhere to limitations on manner, timing, price, and volume 
conditions that are intended to minimize the impact that 
buybacks have on the company stock price. That was the speed 
bump that was put in place by the SEC.
    Additionally, public companies are required to disclose any 
purchases of their own stock in their quarterly and annual 
reports, providing a table showing month-by-month statistics, 
including the number of shares purchased, the average price per 
share paid, the total number of shares purchased under the 
repurchase program, and the maximum number of shares or maximum 
dollar amount the company can repurchase under its publicly 
announced programs. Again, publicly announced programs, so this 
should not be a mystery or somehow be hidden from anybody.
    Essentially, a stock buyback program is just another way, 
like dividends, that a publicly traded company can return money 
to their shareholders. Although dividends provide shareholders 
with the ability to remain invested in a company while 
receiving a regular income stream, a business may instead 
prefer stock buybacks over dividends because of tax 
considerations, but also because it promotes a more efficient 
allocation of capital by redistributing excess cash to more 
productive uses.
    While some continue to create strongman arguments about 
stock buybacks because they believe it feeds into their 
political narrative, the fact remains that stock buybacks are 
just another tool used by companies and managers to promote 
economic opportunity for their employees, while providing 
sufficient benefits for American workers and Main Street 
investors, like ``John and Jane 401(k).'' In fact, stock 
buybacks lead to an increase in the value of their retirement 
portfolios, 401(k) plans, pension funds, and college savings 
accounts. How is that a bad thing?
    The proposals that we are considering today will do more 
harm than good by encouraging more companies to choose to stay 
private and shy away from the public market. We have had 
extensive conversations about that. Instead, let's work 
together on proposals that will promote more capital formation 
and economic opportunity, that give these mom-and-pop investors 
more choices and increases their ability to grow their savings 
and retirement accounts.
    With that, I yield back.
    Chairwoman Maloney. Thank you.
    Today, we welcome the testimony of a distinguished panel of 
witnesses.
    First, we have Jesse Fried, who is a professor of law at 
Harvard Law School.
    Second, we have Lenore Palladino, who is a senior economist 
and policy counsel at the Roosevelt Institute, which is located 
in my district in Manhattan.
    Third, we have Janie Grice, who is a leader at United for 
Respect at Walmart.
    Fourth, we have Derik Coffey, who is a portfolio specialist 
at Channing Capital Management in Chicago.
    And last, but not least, we have Craig Lewis, who is the 
Madison S. Wiggington Professor of Finance and a professor of 
law at Vanderbilt University.
    Witnesses are reminded that your oral testimony will be 
limited to 5 minutes, and without objection, your written 
statements will be made a part of the record.
    Professor Fried, you are now recognized for 5 minutes to 
give an oral presentation of your testimony.

  STATEMENT OF JESSE M. FRIED, PROFESSOR OF LAW, HARVARD LAW 
                             SCHOOL

    Mr. Fried. Chairwoman Maloney, Ranking Member Huizenga, 
members of the subcommittee, thank you for inviting me to 
testify. I am honored to be here.
    In my 5 minutes of remarks, I will discuss the overall 
level of dividends and repurchases by public firms and explain 
why it is unlikely to be too high; it might, in fact, be too 
low; explain how the current disclosure rules around share 
buybacks are too lax and enable executives to enrich themselves 
at the expense of public investors; and suggest how such abuses 
could be limited by a simple fix, which is requiring 
corporations to disclose trades in their own shares within 2 
days, just like corporate insiders are required to disclose 
their own trades. I am happy to share my views on the bills 
under consideration in the discussion that will follow.
    Let me begin by addressing the aggregate level of payouts 
by public companies. U.S. public companies distribute in cash 
about $1 trillion a year. About 40 percent takes the form of 
dividends, and 60 percent takes the form of repurchases. But 
this is important. Dividends and repurchases do not actually 
reflect actual cash flows between shareholders and public 
companies. Public companies issue huge amounts of stock, and 
those issuances absorb cash from shareholders and put it back, 
directly or indirectly, into companies.
    The way to think about capital flows between firms and 
public shareholders is to look at net shareholder payouts, 
which is dividends, plus repurchases, minus equity issuances. 
For example, in 2018, U.S. public companies distributed about 
$1.4 trillion in cash through dividends and repurchases, but 
they simultaneously issued about $750 billion in equity. So, 
the net shareholder payouts to public investors was about $650 
billion.
    Now, $650 billion sounds like a lot of money, but it is 
only a portion of the profits that these firms have generated. 
My research with Professor Charles Wang at Harvard Business 
School indicates that there is no reason to think that firms 
are distributing too much cash. Investment measured as capital 
expenditures, plus research and development expenses, are at an 
all-time record.
    You might say, maybe they would be even higher if firms had 
more cash, but firms have been accumulating $5 trillion of cash 
through 2018, even though they have been making record payouts 
and spending record amounts on investment.
    There might be individual public firms that do not have a 
lot of cash, but those firms can simply issue more stock in the 
public markets. That is one of the reasons why firms go public, 
so they can easily finance themselves. And, in fact, Charles 
Wang and I have found that if you look at the smallest public 
companies, they are routinely absorbing more capital from 
public investors than they are distributing capital through 
dividends and repurchases.
    Another thing to remember, and this echoes what 
Representative Huizenga said, is that the capital that flows 
out of these companies is not wasted. It is available for 
investment in private companies, which are smaller, faster 
growing, and absorb hundreds of billions of dollars of capital 
each year.
    Everybody is focused on public companies because they are 
big and they disclose information to investors in the public, 
so we see them. But companies that are not traded are just as 
important a part of the economy. They account for about half of 
the fixed investment in the economy, and they employ 70 percent 
of the workforce, of the non-government workforce. Capital that 
flows out of public firms can flow into private firms. So, 
there is $5 trillion sitting in these companies, and it is 
unlikely that that money is better left there than being 
distributed.
    So, while the overall level of distributions is probably 
not too high, there are problems with the use of repurchases to 
distribute cash. The first is that they can be used for 
indirect insider trading. Executives who own stock in the 
company can profit by having the company buy stock at a low 
price. This can systematically transfer value to insiders. I 
have estimated that the value transfer is on the order of 
several billion dollars a year. In addition, companies can use 
buybacks to prop up the stock price as executives are selling, 
and this can help executives sell their shares at a higher 
price.
    Both of these abuses are facilitated because of the 
disclosure rules--
    Chairwoman Maloney. Time has expired, so please wrap up 
quickly.
    Mr. Fried. Okay. Basically, the disclosure rules around 
repurchases are very lax. You have to disclose trades, but not 
individually, and after a couple of months. If you require 
firms to disclose their trades immediately, or within 2 days 
and in detail, you would be able to curb a lot of these abuses.
    [The prepared statement of Mr. Fried can be found on page 
35 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Ms. Palladino, you are now recognized for 5 minutes for 
your testimony.

  STATEMENT OF LENORE PALLADINO, SENIOR ECONOMIST AND POLICY 
                  COUNSEL, ROOSEVELT INSTITUTE

    Ms. Palladino. Thank you, Chairwoman Maloney and Ranking 
Member Huizenga, for inviting me to speak today. It is an honor 
to be here.
    I join you today to discuss the causes and consequences of 
stock buybacks. Stock buybacks may sound like a technical 
matter of corporate finance. Why does it matter whether or not 
corporations repurchase their own stock?
    When a company executes a stock buyback, they prop up their 
share price for the benefit of share sellers, but the funds 
spent on buybacks are then unavailable for the types of 
corporate activities that could make the company more 
productive over the long term, investments in future 
productivity, and in workers.
    Stock buybacks are virtually unregulated. Even though 
Congress has recognized their potential for market 
manipulations, and companies are spending billions of dollars a 
year, stock buybacks have reached record volume. Corporations 
spent roughly $900 billion on them in 2018, and projections for 
2019 are even higher. The volume of stock buybacks explains why 
more money has flowed out of our public capital markets than 
has flowed back in for the non-financial sector for years.
    Let me explain why stock buybacks are virtually 
unregulated. SEC Rule 10b-18, the stock buyback safe harbor, 
gives companies the go-ahead to spend up to 25 percent of their 
trading volume on buybacks without liability for market 
manipulation, but also states that there is no presumption of 
liability for companies spending above that limit. Furthermore, 
the SEC does not collect the kind of information necessary to 
even determine if companies are staying within the daily safe 
harbor limit.
    Importantly, there are no meaningful limits to stop 
executives from using corporate money on stock buybacks to 
raise share prices for their own short-term gain. Executives 
are not required to disclose if they have conducted a buyback 
until the next quarter's filing. Meanwhile, there are no 
substantive limits to stop them from selling their own personal 
shares in the same quarter as they are executing buybacks. This 
is why there is an urgent need for new policies.
    Congress and the SEC recognized decades ago that this kind 
of practice could manipulate the market. Rule 10b-18 was a 
sharp departure from the proposals made by the SEC in the 1970s 
that clearly recognized that the large volume of stock buybacks 
could have a manipulative effect.
    Companies are conducting stock buybacks in the midst of 
layoffs, calls by their workforce for an end to poverty wages, 
and clear, alternate uses for corporate funds. Let me give a 
few examples.
    Boeing spent $43.1 billion on stock buybacks from 2013 to 
2019, raising the company's stock price to a record-high just 
10 days before the second crash of its 737 MAX, yet the company 
reportedly avoided spending the estimated $7 billion it would 
have needed to engineer a safer plane.
    Less than 10 years after a public bailout, GM has spent 
$10.6 billion on stock buybacks while engaging in layoffs and 
plant closures. That amounts to roughly $220,000 for each GM 
worker who has been on strike.
    Walmart spent $9.2 billion on stock buybacks in the last 
year, which could have been used to give a raise of roughly $5 
an hour to each of its one million hourly workers.
    Some have argued that stock buybacks serve the stock market 
by moving capital from companies that have no use for it to 
companies with a higher need for funds. This requires companies 
to issue new shares rather than for shares to simply trade on 
the secondary markets, yet we have seen fewer shares issued 
than shares repurchased for years.
    This also begs the question, could it really be the case 
that so few American corporations have innovative ideas, could 
pay down debt, or invest in their workforce? I argue there is 
another motivation for the high volume of stock buybacks: 
propping up stock prices for the benefit of short-term share 
sellers, which can include corporate executives.
    I recommend that Congress ban stock buybacks, or in the 
alternative, place low bright-line limits on their use. A ban 
is the clearest mechanism to ensure fairness and investor 
confidence in our capital markets by removing the ability of 
corporations to manipulate the price of their own stock.
    In the alternative, Congress should limit the volume of 
permissible buybacks to a bright-line percentage of outstanding 
shares and remove the safe harbor so as to dampen both the 
potential for stock price manipulation and encourage the use of 
corporate funds for productive purposes.
    At a minimum, policy reforms must prohibit corporate 
insiders from selling their personal shares in the aftermath of 
a buyback before it is disclosed, and any buyback program 
should be immediately disclosed.
    I applaud the committee for taking a hard look at stock 
buybacks, and I look forward to your questions. Thank you.
    [The prepared statement of Ms. Palladino can be found on 
page 67 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Ms. Grice, you are now recognized for 5 minutes for your 
testimony.

    STATEMENT OF JANIE GRICE, UNITED FOR RESPECT AT WALMART

    Ms. Grice. Thank you, Chairwoman Maloney and Chairwoman 
Waters, for inviting me here to speak today. I am honored to be 
here.
    My name is Janie Grice, and I am from Marion, South 
Carolina. I worked at Walmart as a cashier and later as a 
customer service manager while I was raising my son as a single 
mother. I am here today as a leader with United for Respect to 
speak on behalf of the 1.4 million associates who work for 
Walmart.
    Most of you do not know Marion, South Carolina. We are a 
small town in the American south that many have forgotten. When 
our first Walmart came to town, everyone was so excited. We had 
lost so many jobs when manufacturing factories shut down and 
moved overseas. Finally, we had jobs that paid well and where 
management treated you well.
    Then, our little Walmart became a supercenter, and 
everything changed. All of a sudden, there were half as many 
available hours but twice as much work for each associate. I 
had been trying to work at Walmart for years because people 
said it was a good company to work for, and I was promised 
full-time hours. So, I started out as a cashier, working for 
$7.78 an hour. In my 4 years there, I never got to full-time 
employment or a stable schedule.
    Do you know how hard it is to spend time with your family 
or pay your bills when you have no clue how many hours of work 
you are going to get or when you are going to work? I always 
had to choose my job at Walmart over time with my son, because 
without me working, we could not have had the things that we 
had.
    I want my son and grandson to have a better future, so I 
left to find something else, even though I love my Walmart 
family. That is why I was so mad when I read about the $20 
billion in buybacks from Walmart that made the executives and 
Walton heirs even richer. I don't mind investors making 
profits. I do mind when associates, like me, who have been 
putting the work in day after day, year after year, do not get 
to share in those profits.
    This is exactly why I filed a shareholder proposal at 
Walmart last year that will reward associates for our 
dedication and commitment to the company by getting a share of 
the profits from buybacks. Shockingly, my proposal did not 
pass, but it started a real conversation about how 
corporations, like Walmart, need to make different choices 
instead of squeezing workers.
    Lenore Palladino's research shows that $10 billion in 
buybacks that Walmart authorized could have been used to give a 
million associates a $5 hourly wage increase. If I sat on 
Walmart's board of directors, I would not think twice about 
approving that decision. Can you imagine how much turnover we 
could reduce or how many part-time associates could get off of 
public benefits? It is so painful to think that this could have 
been a reality, but a small group of people at the top decided 
not to prioritize associates like me.
    This is not just happening in retail, but also in other 
industries. At Wells Fargo, one-third of their workers make $15 
an hour, while the bank has authorized over $40 billion in 
buybacks since the 2017 tax bill.
    At AT&T, the hedge fund, Elliott Management, is trying to 
strip down the company and use that money for buybacks, money 
that could be used to bring internet access to workers and 
businesses.
    What these companies are doing with buybacks is both wrong 
and harmful to the majority of us, and we don't get a say in 
any of it. Think about what corporate America would look like 
if workers at Walmart, Wells Fargo, AT&T, Sears, and other 
companies actually had a seat at the table. We would invest the 
corporate profits back into the company, the workers, and the 
investors.
    This is what my fellow United for Respect leader Cat Davis 
was saying when she filed a shareholder proposal at Walmart 
this year to have hourly associates on the company's board. Her 
proposal makes the case that having hourly workers on the board 
could lead to long-term profitability for all of us.
    Right now, Walmart is paying so low that a full-time 
associate earning a starting wage still falls below the Federal 
poverty line for a family of three. How shameful is that, that 
we have to live in poverty while working for the largest 
private employer in the world, which has billionaire owners who 
are worth $175 billion?
    So, what this committee is doing on regulating buybacks is 
really important. I am here to ask you to seriously consider 
who you stand with: working people like me, who work hard and 
reap little rewards; or corporate billionaires, who will 
exploit every loophole to get richer. By regulating how 
corporate profits are spent and who benefits from them, you are 
putting workers first and letting corporate America know that 
we matter.
    You are saying that if a company can issue billions in 
buybacks, it can afford a living wage and full-time employment 
for its workers.
    You are saying that it is time to end economic inequality 
in the U.S. so that working mothers, like me, can save for a 
better future for our kids.
    These days, we have to work two or three jobs to make ends 
meet. We catch hell with all of the expenses and taxes we have 
to pay. We do not have billion-dollar inheritances to fall back 
on like the Waltons do, but we have the power of our voices to 
call out corporations like Walmart for doing wrong by us.
    Buybacks are a rigged game. They are not good for workers 
or for American companies. We need bold, decisive action from 
all of you to rein in corporate America and level the playing 
field. Working people like me deserve a better shot at fairness 
and equality. Thank you.
    [The prepared statement of Ms. Grice can be found on page 
50 of the appendix.]
    Chairwoman Maloney. Thank you very much.
    Mr. Coffey, you are now recognized for 5 minutes for your 
testimony.

   STATEMENT OF DERIK D. COFFEY, CFA, PORTFOLIO SPECIALIST, 
                  CHANNING CAPITAL MANAGEMENT

    Mr. Coffey. Thank you, Chairwoman Maloney. By way of 
background, Channing Capital Management is a Chicago-based 
investment management firm serving institutional investors, 
that was founded in 2003. We currently have over $2 billion in 
assets under management, and a diversely owned firm, with the 
majority of our equity held by African Americans. We focus on 
small, midcap products with domestic and international 
exposure. It is worth noting that while we have a diverse 
client base, a large portion of our clientele consists of 
defined pension benefit plans, many of whom are union workers, 
policemen, firefighters, teachers, and city and State municipal 
workers, all whom also benefit from stock buybacks.
    Let me quickly just outline what are stock buybacks and why 
companies use them. When discussing capital allocation 
strategies such as dividends or stock buybacks, the old maxim, 
``a bird in the hand is worth two in the bush,'' is often 
quoted. In short, investors view the certain up-front cash as 
less risky and generally prefer the assurance of receiving some 
cash in hand, which gives them options to decide when, where, 
and how to deploy cash received to generate a higher return.
    When capital exceeds a company's expenditure needs, 
returning this capital to shareholders is considered a prudent 
strategy that empowers investors to redeploy excess cash to 
areas where they can find better growth opportunities. In 
short, buybacks help companies to manage a capital structure; 
they provide more flexibility relative to dividends for capital 
allocation or capital return; they offset dilution from 
employee stock options; and they provide important share price 
signaling that is important, particularly in cases where the 
market has a more pessimistic view of a company relative to 
actually the company's internal management.
    Let me discuss how buybacks benefit our clients. As I read 
earlier, a large number of our clients are defined benefit 
pension plans, but we also have a decent and growing exposure 
to endowments, foundations, wealth management firms, and 
corporate plans. The common thread across all of these clients, 
including people who invest in 529s because they are saving for 
college plans for their children, and just regular investors 
who are saving for retirement, is that they all benefit from 
buybacks.
    Buybacks encourage better alignment of management with 
shareholders, addressing the agent-principal issue. When 
managers of a company actually own the shares, they can act 
more in the interest of the long-term shareholder value.
    Buybacks help boost share price, which again helps our 
clients.
    Buybacks provide tax benefits, being that they are taxed at 
the capital gains rate, whereas non-qualified dividends are 
taxed at the ordinary income rate.
    Buybacks offer investor choice. For investors who are 
looking for an opportunity to deploy capital to higher returns, 
buybacks provide that liquidity to go and find that 
opportunity.
    With that said, there are definitely instances where 
buybacks do warrant greater scrutiny or could potentially be 
harmful to investors. Buybacks that are exclusively used to 
achieve short-sighted goals via financial engineering are 
especially harmful.
    A second example are instances where a company has a long 
history of share repurchases but continues to lose shareholder 
value despite these efforts. We, at Channing, have very little 
patience for management teams that use buybacks or other means 
to engage in short-sighted financial engineering schemes. Good 
companies, in our view, productively utilize their capital to 
hire employees, invest in their businesses, and expand their 
market share. And companies that do not do these things do not 
deliver shareholder value, and their shares are sold.
    Let me briefly address why buybacks have surged over the 
past several years, and there really are two reasons: the 
extended duration of the bull market that started in 2009; and 
the tax reform legislation that has encouraged more 
repatriation of overseas profits.
    It is no surprise that buybacks have surged across large 
and small capitalization stocks since the beginning of the 
current economic crisis. Typically, buybacks increase during 
periods of economic expansion, and they are less robust in 
periods of economic contraction. And, so, when we take a look 
at buybacks, it really reflects the fact that repatriation 
creates an opportunity to bring a lot of excess cash from 
overseas into the United States. More importantly, this is most 
prominent amongst large cap companies, particularly companies 
in the technology sector.
    Small capitalization companies did not have as much cash 
overseas, and so this issue was exacerbated, particularly among 
companies that are large cap companies that have a lot of 
overseas cash held overseas. And it is also the long duration 
of the bull market.
    With that said, let me talk a little about the risk of 
increased restrictions on buybacks. Any proposed legislation 
that is designed to stymie or retard buyback activity could 
result in negative consequences for investors, the economy, and 
the optimum allocation of capital. The key question one should 
ask is whether it is better to legislate an issue that is 
cyclical, or one that reflects a structural imbalance. I would 
argue that the recent buyback activity is much more cyclical in 
nature.
    Allow me to outline some of the potential pitfalls of 
legislation that could potentially curtail buybacks.
    Restrictions could trap capital in businesses, leading to 
inefficient allocation of capital; they could impede the 
movement of capital to future growth opportunities; they could 
force businesses to use inefficient means to distribute cash to 
shareholders; and ultimately, another consequence is the 
restriction on buybacks, you lose the powerful signaling tool.
    In conclusion, I would like to thank the subcommittee for 
inviting me to address this important topic, and I am open to 
any questions. Thank you.
    [The prepared statement of Mr. Coffey can be found on page 
28 of the appendix.]
    Chairwoman Maloney. Professor Lewis, you are now recognized 
for 5 minutes for your testimony.

STATEMENT OF CRAIG M. LEWIS, MADISON S. WIGGINGTON PROFESSOR OF 
      FINANCE AND PROFESSOR OF LAW, VANDERBILT UNIVERSITY

    Mr. Lewis. Chairwoman Maloney, Ranking Member Huizenga, and 
members of the subcommittee, thank you for inviting me to 
appear today to discuss corporate priorities as they relate to 
share repurchase programs, workers, communities, and 
investment.
    The House Financial Services Committee is considering a 
number of regulatory initiatives designed to reduce or even 
eliminate the ability of corporations to repurchase shares. In 
my written testimony, I discuss the economic substance of share 
repurchase programs, or stock buybacks, and argue that they 
represent a highly efficient way to distribute excess cash to 
shareholders.
    There are four House bills under consideration: the Reward 
Work Act; the Stock Buyback Reform and Worker Dividend Act of 
2019; the Stock Buyback Disclosure Improvement Act of 2019; and 
a fourth stock buyback disclosure bill. All of these bills 
reflect an implicit perspective that share repurchase programs 
represent a market failure that cannot be resolved through 
private action.
    Opponents of share buyback programs typically argue that 
they artificially inflate share price, crowd out investment, 
result from managerial short-termism, and disproportionately 
benefit the wealthy and corporate insiders. I argue in my 
written testimony that these conjectures are either not 
supported by empirical analysis or are based on misconceptions 
about how share repurchase programs actually operate.
    Although similar to ordinary dividends, share repurchases 
differ in several important ways. The most compelling examples 
include: their ability to signal undervalued share price; their 
role as a mechanism for distributing excess cash; individual 
income tax advantages; and reallocation effects. This last 
point is particularly important because the cash paid to 
shareholders does not disappear. The reallocation of excess 
cash into consumption and other investments potentially 
redirects it to activities that have a higher value than the 
incremental investments that are available to firms.
    These examples contrast sharply with critics who view stock 
buybacks as nothing more than financial gimmicks that crowd out 
investment and artificially inflate share price. Although I 
will be happy to discuss this in detail should you have 
questions, I would, however, like to emphasize that the 
empirical evidence is inconsistent with the notion that stock 
buybacks in some way constrain investment in the future.
    With respect to the bills that are the topic of today's 
hearing, allow me to first discuss the two bills that are 
designed to reduce the ability of corporations to repurchase 
shares: the Reward Work Act; and the Stock Buyback Reform and 
Worker Dividend Act of 2019. The Reward Work Act calls for the 
outright prohibition of share repurchase programs. The second 
bill would require firms that repurchase shares to pay workers 
an amount proportional to the amount spent on buybacks.
    Both bills are based on the premise that if share 
repurchase programs are curtailed or become more expensive, 
firms will elect to increase investment in tangible and 
intangible assets, like R&D, and pay workers more. If 
regulation creates incentives for firms to reinvest rather than 
distribute excess cash, it would likely lead to an over-
investment problem in which firms would make inferior 
investments that would be unlikely to benefit the economy in 
the long run.
    The second set of bills, namely the Stock Buyback 
Disclosure Improvement Act of 2019, and a second stock buyback 
disclosure bill, are designed to increase transparency around 
share repurchase programs. The first of these bills is largely 
a response to SEC Commissioner Robert Jackson's views regarding 
executive participation in share repurchase programs. For 
reasons I discuss in my testimony, I believe that the 
underlying research that informs these concerns fails to 
document a significant market failure.
    The second bill seeks to increase mandatory disclosure 
about the nature and purpose of planned share repurchase 
programs. This bill includes the requirement that firms must 
pre-announce a repurchase program 15 days prior to its 
execution. Since repurchase programs are typically executed 
over relatively long periods of time, it is unclear how, in the 
context of the existing empirical evidence, mandatory pre-
announcement is preferable to the existing 8-K and insider 
trading disclosure requirements and 10-Q filings.
    The most surprising aspect of this bill is that the SEC 
would be required to approve buyback programs before they can 
be implemented. The decision to require a disclosure-based 
regulator like the SEC to become involved in financial 
decisions is unprecedented. Not only does the SEC lack the 
expertise to make such determinations; it is unclear how this 
serves the Commission's tripartite mission of investor 
protection, the maintenance of fair and orderly, and efficient 
markets, and the facilitation of capital formation. Thank you 
very much.
    [The prepared statement of Mr. Lewis can be found on page 
54 of the appendix.]
    Chairwoman Maloney. Thank you. I now recognize myself for 5 
minutes for questions.
    Ms. Palladino, you mentioned in your testimony that stock 
buybacks are a driver of income and wealth inequality. Can you 
talk a little bit more about how buybacks are contributing to 
increased inequality?
    Ms. Palladino. Yes. Thank you for the question.
    It is important to recall that gains from share selling 
flow disproportionately to a small group of wealthy households, 
and I will give you a few numbers from the Federal Reserve's 
distributional financial accounts.
    As of the second quarter of 2019, the top 1 percent of the 
wealth distribution owns 52 percent of corporate equities, 
while the bottom 50 percent owns just 2.2 percent. In other 
words, the gains flow disproportionately to those in the very 
top of the wealth distribution. It is also important to note 
that 92 percent of corporate equities are held by white 
households. So, when we look at the combined effects of income 
and wealth, we can see the disproportionate flow to the top.
    Chairwoman Maloney. Okay. Thank you.
    Ms. Grice, you mentioned in your testimony that you think 
it is a very good idea for large companies to have ordinary 
workers represented on their boards. Can you talk a little bit 
about the benefits of having worker representation on corporate 
boards, and what sort of perspective would the worker 
representative bring to the boards that current board members 
do not have?
    Ms. Grice. Thank you, Chairwoman Maloney, for that 
question. Hourly associates are the closest one to the problems 
at the company, so we are also closest to the solutions. For us 
to have a voice at the top means that we could tell the 
executives what the other associates and consumers think and 
how to solve these issues immediately, instead of waiting 
years.
    Take family leave policies, for example. We have that at 
Walmart, because we fought for it. We told the home office that 
this is what associates need, and they just ignored us. Imagine 
how much they could have saved on turnover if they listened to 
us sooner. This could have been a real partnership where we 
have the power to guide in better, more humane decisions.
    Chairwoman Maloney. Thank you. Thank you so much.
    Mr. Coffey, you talked about how, as an investor, you have 
to distinguish between buyback programs that are beneficial and 
those that are being used for short-term financial engineering. 
How do you distinguish between these two types of buybacks?
    Mr. Coffey. At Channing, one of the things we do is we look 
at our companies, we talk to management teams regularly, and we 
have financial models. We can see very clearly when a company 
is using buybacks to typically, when they are using these 
tools, they use it to shrink their shares outstanding, and that 
increases their return on equity.
    We have models that can tell us very clearly what a 
company's real return on equity is when you sort of adjust for 
stock buybacks. And, so, any sort of financial engineering that 
does not increase the long-term value of the company, which is 
sort of how we look at long-term intrinsic value of the 
company. And if actions are not necessarily increasing that, 
but they are increasing the short-term metrics, we can call 
them out. And we can also see that when we look at proxy 
statements with compensation. We can see whether those goals 
are short-sighted and they are motivating management to move to 
short-term goals. So, our models allow us to see that.
    Chairwoman Maloney. Professor Fried, you mentioned in your 
testimony that other countries have rules similar to the 2-day 
disclosure rules that you are proposing: Japan, Hong Kong, and 
the U.K. already have similar disclosure rules. What were the 
effects in these countries when they implemented those rules? 
Did stock buybacks decline? Did executives' trading behavior 
change? What happened?
    Mr. Lewis. I have not studied what happens in terms of the 
implementation of these rules in these other countries. 
Generally, the level of buybacks in the U.K., Hong Kong, and 
Japan is much lower than in the United States. The point is 
that it is possible to require companies to disclose this 
information within 2 days. Other countries have figured out how 
to do this, so there is no reason that we cannot do it.
    Chairwoman Maloney. What has been the effect on capital 
markets, if at all?
    Mr. Lewis. I do not know if there has been a study that 
looks at the effect of the imposition of these disclosure rules 
in these other countries. As far as I know, these disclosure 
rules have been used in these countries for decades, so I do 
not think it was something that was recently done that would 
allow like an econometric test to see what the effect was.
    Chairwoman Maloney. Thank you. I yield back, and I now 
recognize the distinguished ranking member for 5 minutes for 
questions.
    Mr. Huizenga. Thank you, Madam Chairwoman.
    Mr. Coffey, I want to start with you. I love the term, the 
``financial engineering decisions,'' and I am curious, you were 
talking about how you have models that identify those people or 
those entities. What percentage of companies that you invest in 
would you say have some sort of short-term, short-sighted, 
harmful financial engineering decisions versus longer term?
    Mr. Coffey. I would say, given that we have a long holding 
period for our companies, our turnover is about 30 percent. We 
hold our companies in 3- to 5-year periods, and it is trying to 
buy high-quality companies with free cash flow and long-term 
objectives. I would say essentially less than 1 percent. It is 
a long-term focus. And management teams that shift their focus 
to short-sighted objectives are removed from our portfolio.
    Mr. Huizenga. That was going to be one of my questions, how 
do you deal with that? You identify them and you remove them 
from your portfolio and no longer invest in them?
    Mr. Coffey. That is correct.
    Mr. Huizenga. Okay. And this is one of my general questions 
as we are talking about this. Whether it has been repatriation 
that you brought up, whether it has been a booming economy that 
has brought in additional cash to companies and their workers 
and others, what are these entities supposed to do with this 
additional cash? At some point, if you have the equipment that 
you need; if you have the right number of employees that you 
need; and you have increased wages, which we have seen 
statistically have gone up; you have done bonuses; you have 
done all of these things. What else are you supposed to do with 
this cash?
    And Mr. Lewis? Mr. Fried? I'm curious. Mr. Coffey? What 
else should they do with this? Because it seems like you are 
suddenly into a question of reallocation and maybe a 
misallocation of those resources.
    Mr. Coffey. I will start. As you have already mentioned, 
when a company exhausts all their sort of means of deploying 
capital--they have invested in plant equipment, they have done 
research and development, they have invested in human capital, 
and they have also considered mergers and acquisitions to gain 
market share in a particular industry--the best thing to do is 
to find a way to distribute that capital, because it introduces 
opportunities for a business to actually destroy shareholder 
value. You can make an acquisition, or you can overpay for an 
acquisition, or you could engage in activity that is just not 
lucrative to shareholders.
    Basically, you think about the term, ``capital osmosis.'' 
When you have excess capital after you have kind of exhausted 
your needs, that capital should be recycled to other growth 
opportunities so you can get the future companies that we think 
about today that are going to drive shareholder value in the 
future.
    Mr. Huizenga. Mr. Lewis, how does a healthy stock market 
benefit seniors and the middle class?
    Mr. Lewis. I think Mr. Coffey talked about how a lot of his 
clients participate in defined benefit pension plans. And, so, 
the way that stock buybacks benefit investors is that companies 
announce stock buybacks when they believe their firm's stock 
price is undervalued. And it turns out that that is a credible 
signal.
    Investors interpret stock buybacks as a credible signal, 
largely because management owns significant equity stakes in 
the company, and they would be reluctant to overpay for shares 
in a stock buyback program when they are directly subsidizing 
the shareholders that sell. So, it benefits seniors. It 
benefits retirees to the extent that stock prices go up, and 
the value of their portfolios increases.
    Mr. Huizenga. And do additional regulations help achieve 
economic growth?
    Mr. Lewis. In this case--I was a Chief Economist at the 
SEC, and one of the important factors for basically 
promulgating or proposing any rule is to demonstrate that there 
is a market failure that cannot be resolved through private 
action. And, so, in this case, it is unclear to me what the 
market failure actually is.
    Mr. Huizenga. Okay. I only have a few seconds left.
    Professor Fried, you had a post on a Harvard Law School 
Forum on corporate governance and financial regulations which 
stated that some of these bills that would prohibit buybacks 
are based on a ``profound misunderstanding of how the U.S. 
economy works.'' I am curious if you could explain what that 
means; and then, do you believe that, or do you agree with some 
of the thinking that cash on the balance sheet would either go 
to buybacks or directly to workers?
    Mr. Fried. Thank you for that question. I think there are a 
lot of misconceptions in the conversation around buybacks. The 
first is that we do not have good ways of thinking about how to 
measure them. That is why you have to look at equity issuances. 
If you look at like net repurchases, which are repurchases 
minus equity issuances, they are much smaller. About 80 percent 
of the cash that is distributed through repurchases comes back 
in through equity issuances. And about 40 percent of 
repurchases are used to repurchase shares that are given to 
employees and executives.
    Mr. Huizenga. I'm sorry. My time has expired. I would like 
to follow up on that, and I am curious to continue the 
conversation on this today, disclosure, whether it is front-end 
or post-fact. But we will follow up.
    And, Madam Chairwoman, I will take a moment, as well, to 
just ask unanimous consent that a letter from the National 
Association of Manufacturers be inserted in the record.
    Chairwoman Maloney. Without objection, it is so ordered.
    Mr. Huizenga. Thank you.
    Chairwoman Maloney. The gentleman from Georgia, Mr. Scott, 
is recognized for 5 minutes.
    Mr. Scott. Chairwoman Maloney, listening to this very 
informative discussion, I really think that the heart of the 
issue here today is this: Why would a company, any company, 
make the choice to give back money to their shareholders rather 
than making an investment in the future growth of the company?
    Companies could choose to improve workers' benefits, 
increase training. They could also choose to invest in new 
technologies and other actions that would expand the growth of 
the company. But why would they not choose these opportunities? 
Why do they find them less attractive than returning money to 
shareholders through a buyout?
    And, so, I think that I want to ask you first, Ms. 
Palladino, why is this? What are the factors? It seems to me, 
if I am a CEO, how do I gain?
    Here is what I think, and I believe the statistics will 
point out, that when you buy back that stock, does the price of 
the stock increase? That is the bottom line. Could you expound 
on that?
    I will get to you, too, Mr. Lewis, because I think 
fundamentally, this is where we are to get to the truth of the 
matter. Because if I am a CEO and I have to make a choice, I 
think we need to be honest with this situation. It is clear 
that the CEO is the CEO to make more money and profits. I think 
that is why they buy back the stock. But correct me if I am 
wrong, Ms. Palladino.
    Ms. Palladino. No, thank you. That is an excellent point, 
and I appreciate the question.
    I think that we see really two reasons why executives are 
engaged in the volume of stock buybacks that we see today. One 
is the issue that both myself and Professor Fried spoke about, 
which is that corporate executives have to increase their own 
compensation because they do not have to disclose that they 
have conducted stock buybacks until about 10 or 11 weeks after 
the close of the quarter.
    I think at a deeper level, though, we are talking about an 
imbalance of power in our economy where we have activist 
investors, we have large pools of capital, that are putting 
tremendous pressure on boards and CEOs to return capital as 
quickly as possible to shareholders without considering the 
effect that has on the workforce.
    Mr. Scott. Mr. Lewis, do you have a counter to what she is 
saying, or do you agree with her?
    Mr. Lewis. I actually do not agree with her. My view is 
fairly simple. I think CEOs have particular expertise in things 
that they are very good at, and they make investments in the 
businesses that they know best. The idea of taking excess cash 
that they no longer have productive investments in their own 
business and finding new investment opportunities probably 
leads to less valuable investment choices in the long run than 
if you were to give it to somebody who actually is an expert at 
evaluating those new technologies. So, it is one way of taking 
money from firms that really do not have a good use for it and 
putting it in the hands of other entrepreneurs who actually 
have a valuable use for it.
    Mr. Scott. Mr. Fried, where do you come down on this?
    Mr. Fried. People invest in new companies with the hope of 
making a profit. They bargain for arrangements that give them 
the right to throw out the board if the board does not hire a 
good CEO and does not deploy the money wisely. That is why 
people invest in companies.
    When a company no longer has a way to profitably deploy 
money, then the right thing to do, from the point of view of 
the shareholders who originally put money in, is to send it 
back. And that is why we see capital flowing out of companies.
    Mr. Scott. And Ms. Grice? My time has expired?
    Chairwoman Maloney. Your time has expired. We will go to a 
second round.
    Mr. Hill, you are recognized for 5 minutes.
    Mr. Hill. Thank you, Madam Chairwoman, and I appreciate 
your great leadership of this subcommittee and picking this 
timely topic to talk about. I think this is the third time that 
we have addressed the stock buyback issue during this Congress.
    I have some slides I wanted to run through quickly just to 
set the stage.
    This first one talks about growth investment, because I 
have heard from my friends that people are not investing in 
their companies; that instead, they are using that money 
imprudently to invest in stock buybacks. This is since 1990, 
and you can see in 2018 that we are at a really almost all-time 
high at 17 percent in the S&P 500.
    Let's go to the next slide. Stock buybacks, as was noted in 
everybody's opening testimony, did increase after tax reform. 
In my view, this is a positive thing. Buybacks are tied to the 
growth in profits in corporate America, so the more profitable 
companies are, the more they might consider a stock buyback. 
And certainly, the 2017 impact of the tax reform caused, in the 
S&P 500, more cash to be re-invested in the United States. And 
in addition to investing in people and capital investment, they 
did invest in buying their stock back. So, I view this as sort 
of a transitory period.
    Most of that money, I would say, when you look at it, came 
from just 20 stocks in the S&P 500, Madam Chairwoman, and those 
20 stocks had the most money trapped offshore. So, that money 
came back into the United States and they did participate in 
the stock buybacks.
    Let's go to the next slide. The pace of investment, as I 
say, over the long haul is still in that range. Investing in 
companies, you see the December 2017 tax enactment, but growth 
has only grown. This is growth in companies in R&D, capital 
expenditures, and research. It has all been a positive story in 
the last 30 years.
    Let's go to one more slide. And then, the S&P 500 cash 
return payout ratios, a dividend's net of buybacks. You can see 
that the return of cash historically is still in that historic 
range where it has been. And I just would argue whether it is 
paid back in stock buybacks or dividends, it is good for 
investors, and who does gain here are the investors in our 
pension plans and our 401(k) plans. This money does not go 
nowhere. It goes back out into our economy, as Mr. Coffey 
argued.
    And I read in your materials that you have a great 
background in intrinsic investing. I wanted to read a quote 
from someone whom you admire, that you put in your marketing 
materials, Warren Buffett. Warren Buffett, CEO at Berkshire 
Hathaway, says, ``Stock buybacks are sensible for a company 
when its shares sell at a meaningful discount to conservatively 
calculated intrinsic value--which you have in your testimony--. 
Indeed, disciplined repurchases are the surest way to use funds 
intelligently. It's hard to go wrong when you're buying dollar 
bills for 80 cents or less.''
    Do you agree with that, Mr. Coffey?
    Mr. Coffey. Absolutely.
    Mr. Hill. Good. And he says, don't forget, companies who do 
that inefficiently are what? Are they punished by the market if 
they overpay?
    Mr. Coffey. Absolutely.
    Mr. Hill. Thank you, Mr. Coffey.
    Also, I noted that a company in my State was referenced. 
And Ms. Grice, thank you for coming and advocating today on 
behalf of the workers at Walmart. I live in Arkansas, which is 
the home to Walmart's headquarters, and I am proud to have them 
headquartered there in our State.
    And I don't think anybody has worked harder to meet this 
dual effort of trying to invest in their employees since the 
tax plan was announced. They have made over $4.5 billion in 
workforce increases and raised wages, and tried to address many 
of the challenges that you talked about in your experience in 
South Carolina, which I really took quite fully from your 
testimony.
    Doug McMillon, who is the CEO there, started out as a 
teenager earning minimum wage, unloading trucks in the 
distribution center up there in northwest Arkansas, so I really 
believe that he understands that balance that is so important 
to raise wages, which is why 60 percent of their employment is 
now full-time, which I think is one of the highest in the 
retail industry. They are a major employer, and I think, in a 
major way, committed to expanding opportunity for their 
managers and for their workers. I was looking at total wages 
and benefits of their hourly, full-time employees, and when you 
include the benefit package that Walmart offers, it looked like 
it was over $19 per hour.
    Professor Lewis, I wondered--and ``Anchor Down,'' by the 
way; I am a Vanderbilt graduate, so God bless Vanderbilt Law 
School.
    SEC Chairman Jay Clayton said it was not in the purview of 
the SEC to make these decisions about capital allocation, when 
he has testified and been in public. Do you agree it is not the 
Commission's view to try to determine asset allocation?
    Mr. Lewis. Yes, I do.
    Mr. Hill. Well, my time is running out, Madam Chairwoman. I 
will follow up in writing, and I thank the witnesses. This has 
been an excellent hearing. Thank you.
    Chairwoman Maloney. Thank you.
    The gentleman from California, Mr. Vargas, is recognized 
for 5 minutes.
    Mr. Vargas. Thank you very much, Madam Chairwoman, and I 
want to thank all of the panelists who are here today.
    My good friend from Arkansas just said that companies are 
punished if they do not buy a dollar for 80 cents, and I think 
that certainly would be true. But, Mr. Coffey, I think I have a 
timing issue here. Now, you said, if I heard you correctly, 
that if a company had a short-term financial scheme in your 
portfolio, you would remove them from your portfolio if they 
did that. But how would you know that before they repurchased 
their stock? How would you define that if there is no notice to 
you? How would you know that as opposed to the rest of the 
market?
    Mr. Coffey. That is a fantastic question. Actually, one of 
the things that companies are required to file, in addition to 
the 10-K and 10-Q, which provides a quarterly and annual 
reporting, is also the proxy statement, which outlines the 
board-approved compensation plan for the executives. And, so, 
we look at that, and we look at it when buying a company. We 
look at executive compensation. We look at how companies are 
incentivized. And then, we also look at their activities, and 
it takes time. It is not immediate. It takes time. If we bought 
a company in a quarter--
    Mr. Vargas. But that is my point, if I may interrupt you 
just for a second. You find out about it afterwards, right? I 
think you would find out about it after it happened.
    Mr. Coffey. Or, before we purchase it.
    Mr. Vargas. By that point, the executive could have in fact 
enriched himself or herself. You are finding out about it and 
you want to remove them from the portfolio, which is fine, but 
it has already happened.
    Mr. Coffey. Or, we find out before we even purchase it. In 
our due diligence, we are looking at a company and we are 
reviewing those results and we are trying to make a decision as 
to who we buy, and we do a risk-reward assessment, and we pick 
the company that has the best corporate governance.
    Mr. Vargas. Thank you. I don't want to run out of time.
    Mr. Fried, I want to ask you about that, because you talked 
about timing, and I do have that concern. It does seem like an 
executive--and you noticed that a number of the actual 
repurchases are from employees, executives. Isn't there 
potentially a real timing issue here?
    Mr. Fried. The timing issue that I focus on in my written 
testimony is the timing of disclosure around the firm's 
repurchases of its own stock. So, if you are a corporate 
insider, you have to disclose within 2 days the details of 
every trade. If you are a firm, you disclose several months 
later, and it is on an aggregate monthly basis, so you cannot 
see individual trades.
    That means that the people who are making the repurchase 
decisions can go into the market when the stock is dipped, buy 
up a bunch of shares, which benefits them because they own 
stock in the company, but it comes at the expense of public 
investors, generally.
    They can also apply pressure to the price when they are 
selling to boost the price. We cannot see it. We cannot see it 
because we do not see the individual trades. We cannot apply 
Rule 10b-5. We cannot apply the anti-manipulation laws because 
we cannot see what is happening.
    Mr. Vargas. Would you disagree with that, Mr. Coffey?
    Mr. Coffey. There are a couple of ways that we do know. 
There are obviously 8-K disclosures. There is also Form 4, 
which indicates insider buying and insider purchasing. We do 
not know it immediately, but we know it within enough time to 
react to it. And investors do find--
    Mr. Vargas. But you are reacting after.
    Mr. Coffey. Of course, after. We don't know that--
    Mr. Vargas. I think that is the problem.
    Mr. Coffey. But I do not think it prevents us from actually 
acting in a way that is in the best interest of our 
shareholders. The information is given to us, and the Street 
reacts to it. In Form 4, we see it. We know insider buying; we 
know insider selling. It is a powerful signal.
    Mr. Vargas. Ms. Palladino, would you agree with that?
    Ms. Palladino. No. I think the fact that buybacks are not 
disclosed until the end of the quarter, and they are only 
disclosed on a monthly basis--and I have looked at this in my 
own research--means there is simply no way to know if 
executives are taking advantage, as Professor Fried said, of 
the fact that they have used corporate funds to conduct a 
buyback and personally benefitted. And in my own research, I 
have found a strong, significant relationship between increases 
in use of corporate funds on stock buybacks and the increase of 
insider share selling for their own personal gain.
    Mr. Vargas. I think I will end it right there with one 
caveat. My good friend from Arkansas did mention Vanderbilt, so 
I have to mention, Mr. Fried, that I think you were one year 
behind me at Harvard Law School. You were Class of 1992?
    Mr. Fried. Thank you for paving the way for me, yes.
    [laughter]
    Mr. Vargas. You had more black hair then, and so did I. 
Thank you.
    Chairwoman Maloney. Thank you.
    The gentleman from Ohio, Mr. Davidson, is recognized for 5 
minutes.
    Mr. Davidson. Thank you, Madam Chairwoman. And thank you to 
our witnesses. I appreciate the discussion of an important 
feature of America's capital markets frankly, the private 
ownership of capital.
    Let's be clear. The owners of the firm are not the 
managers. The owners of the firm are the shareholders, and so 
the shareholders own that capital. And, of course, they hire 
the managers collectively to find a return on it. In fact, the 
return on the invested capital is largely the point of putting 
the capital at risk.
    And I guess I would just like to make the point that, when 
you look at the capital structure--let's go straight to the 
balance sheet. Some of the viewers maybe are not familiar with 
the standard assets equal liabilities plus equity. And, so, the 
firm might have some cash on the books, and a whole host of 
other assets, but the capital structure is largely comprised of 
a combination of liabilities and equity, the equity being the 
shares, and the liability potentially being the debt.
    Right now, in the current capital markets, debt capital is 
far less expensive than equity capital. Far less expensive. So 
if your job, as a manager of a firm, is to get a return on the 
invested capital, wouldn't it be rational to use less expensive 
capital as long as you don't hurt the performance of the firm 
by over-levering the firm?
    Anyone might find in their own personal household, for 
example, that some debt might make some sense. Maybe it is okay 
to have a mortgage on the house. But too much debt creates real 
risks. But, if you are in an all-cash position, you are all 
equity, it is more expensive to operate. You can get a better 
return on the invested capital. You can certainly get a better 
return on equity.
    Mr. Coffey, you highlighted that, frankly, at the time 
people buy shares back, you cannot really be sure whether their 
decision to buy them back is righteous or not. It might make 
sense for a firm to buy the capital back and lower their cost 
of capital and put the returns there, and over time, you can 
see the fruit of that.
    What do you find is in the data that you have collected, 
under the current rules of the game, what is the holding period 
that you can start to see, did that share buyback prove to be 
the right decision by management on behalf of the shareholders 
or not?
    Mr. Coffey. Over the course of our experience, again, we 
are long-term holders; we are lower turnover. I think, within 
our first year, we will be able to start seeing results.
    The first thing that we will do, and this is important in 
our process, is we actually go visit management. If you are 
engaging in a share buyback or any other capital allocation 
activity we do not agree with, we have a conversation. If we do 
not see the results showing up in quarterly earnings after a 
certain period after we made our initial investment, usually 
after that first year, we are asking, where are the results, 
and are we making progress, and are there better investment 
opportunities?
    Mr. Davidson. Right, and that is one of the things. When 
you look, you are buying equities, frankly. When you look at 
publicly traded companies, there is that pressure, you have to 
deliver results inside a year. Inside a quarter in some cases, 
right? But some of the capital projects that are out there, 
depending on the industry, take aerospace or energy for 
example, you are not even looking at a positive cash flow event 
for 5 to 10 years.
    You are looking at, how do you assess that? And who is in 
the best place, who is supposed to be in the best place, to 
assess the performance of the firm? The owners are supposed to 
be. That is why they hire or fire the management.
    Mr. Lewis, as you have highlighted the important functions 
of share buybacks, I guess that is one thing I had not heard as 
much, is the cost of capital and how that affects the 
performance of the firm. How does that fit with the rest of the 
analysis that you have provided thus far and the concerns in 
the publicly traded space for the cost of capital?
    Mr. Lewis. You are right. I did not actually address the 
role of using share buybacks to basically optimize your capital 
structure, but it is one of the important features that a CEO 
and a CFO, one of the tools they would have at their disposal 
to try to get to a better mix, a better blending of debt and 
equity financing. And as you point out, debt financing is 
typically less expensive than equity, largely because interest 
payments generate a tax shield, and dividend payments to 
shareholders are not tax deductible at the corporate level. So, 
when you look at the two, there is a natural preference.
    Mr. Davidson. Opposite cash flow consequences for the firm. 
And I think opposite consequences for our economy if we impair 
the ability to just keep part of our capital markets. Thank 
you, and my time has expired. I yield back.
    Chairwoman Maloney. Thank you very much.
    The gentleman from Illinois, Mr. Garcia, is recognized for 
5 minutes.
    Mr. Garcia of Illinois. Thank you, Madam Chairwoman. I 
would like to begin with Ms. Grice and your powerful testimony 
today. Your story is representative of so many workers at 
Walmart and other companies around the country. You described 
doing years of stressful work at low wages, not controlling 
your work schedule and being able to plan around it for family 
purposes. And you said that your starting wage, if I heard you 
correctly, was at $7.78 per hour. For how many years did you 
earn that wage?
    Ms. Grice. Well, I don't even think I made that wage for a 
year because I moved up pretty quickly with the company. I was 
one of those people whom management looked at as a good leader, 
so I did not stay in that position long, making $7.78. That was 
back in 2013 when I started, and I started out with $7.78 an 
hour.
    Mr. Garcia of Illinois. How many years total did you work 
there?
    Ms. Grice. I worked for Walmart for 4 years.
    Mr. Garcia of Illinois. Four years?
    Ms. Grice. Four years; yes, sir.
    Mr. Garcia of Illinois. I can imagine that you were pretty 
outraged to read about the $20 million in buybacks that 
Walmart's board authorized through 2018 and 2019. The Roosevelt 
Institute found that if Walmart had redirected $10 million of 
that toward one million employees, they could have given those 
employees an hourly wage increase of over $5.66 an hour.
    When Walmart issues stock buybacks, the largest gains go 
toward a small handful of wealthy individuals. A single family, 
the Waltons, own roughly half of Walmart's shares. The Walmart 
Company's net worth is estimated to be around $201 billion.
    I also want to focus on the additional stress that an 
unreliable schedule can add when you are working a minimum or 
hourly job like yours, Ms. Grice. Raising a family, arranging 
for childcare, juggling a second job, or taking night classes 
to pursue another career can be challenging enough, even if 
your hours are predictable. It is tougher still when you do not 
have reliable scheduling.
    But, clearly, Walmart is prioritizing shareholders over the 
interests of the millions that it employs. And you mentioned 
your colleague, Cat Davis, who filed a shareholder proposal 
demanding hourly employees be considered for Walmart's board.
    Can you tell me what it would mean for employees like you 
to have more of a voice in how a giant corporation like Walmart 
is run?
    Ms. Grice. Well, it would mean a lot for us. There are a 
lot of things that go on in these stores that the corporate or 
home office has no clue about. So, being able to have someone 
who is inside those stores day to day, who knows exactly what 
goes on--the blatant disrespect, not getting full-time hours, 
not being able to get full benefits because you are part-time--
means there is a lot that an associate would be able to bring 
to the board of directors.
    Mr. Garcia of Illinois. I also want to talk about another 
aspect of your testimony. Last month, the activist hedge fund, 
Elliott Management, launched a campaign to pressure AT&T to 
increase its stock buybacks and split its cash flow between 
debt and payments and buybacks. As of June 30th, AT&T had $22 
billion in free cash flow available.
    Ms. Palladino, when a company like AT&T has a cash flow of 
that size on hand, what are some of the long-term investment 
options available to it?
    Ms. Palladino. I appreciate you bringing that up, because I 
think that the letter from Elliott Management about AT&T really 
highlights the kind of pressure that we know that activist 
investors are bringing on companies like AT&T, in which they 
call for an increase in stock buybacks. Because they are 
virtually unregulated, they are able to call for that increase. 
And, essentially, they called for a reduction in the workforce. 
With that kind of free cash flow, a company like AT&T could 
provide broadband, invest in upgrading our nation's 
infrastructure for the economy that is coming for the 21st 
Century, and, of course, continue to support an innovative and 
developing workforce.
    Mr. Garcia of Illinois. Thank you very much. I think my 
time has run out. Madam Chairwoman, I yield back.
    Chairwoman Maloney. I would like to thank all of our 
witnesses for their testimony today.
    Is Mr. Hollingsworth here?
    Mr. Huizenga. Mr. Hollingsworth is here.
    Madam Chairwoman, I would like to submit a letter from the 
American Securities Association into the record.
    Chairwoman Maloney. Without objection, it is so ordered.
    Mr. Huizenga. Thank you.
    Chairwoman Maloney. The gentleman from Indiana, Mr. 
Hollingsworth, is recognized for 5 minutes.
    Mr. Hollingsworth. I apologize for being late. I wanted to 
ask Dr. Lewis about a few things. Number one, what in the short 
run determines an employee's wage?
    Mr. Lewis. What are the short-run determinants of an 
employee's wage?
    Mr. Hollingsworth. Yes.
    Mr. Lewis. I assume employees' wages are based on a market 
for labor.
    Mr. Hollingsworth. Right. Supply and demand.
    Mr. Lewis. Supply and demand.
    Mr. Hollingsworth. Yes. As demand goes up, and supply is 
relatively static, wages go up, right? As demand falls, and 
supply remains relatively static, most likely it gets 
translated into wages, right? And, ultimately, that price 
clears the market?
    Mr. Lewis. Right.
    Mr. Hollingsworth. It is not an altruistic offering by a 
corporation that determines an employee's wage. In the short 
run, it is the supply and demand.
    In the long run, it is the marginal productivity of labor. 
As we increase the productivity of American workers, which we 
have done a fantastic job of over the last 40 years, that 
marginal productivity of labor continues to go up, and we can 
compensate labor in more enhanced ways through wages. I think 
it is really important to remember this.
    The second thing I want to talk about is, is there any 
impact, is there any material impact, I should say, on a 
company's profit and loss statement, on their income sheet, 
from these corporate buybacks?
    Mr. Lewis. There has been a lot of discussion about the 
ability of sort of share buybacks to increase earnings per 
share.
    Mr. Hollingsworth. It is an increase in earnings per share, 
but that is not an increase in the earnings of the firm.
    Mr. Lewis. You are correct.
    Mr. Hollingsworth. In aggregate, the firm earns X, and then 
it uses a portion of that after-X income/after-X cash flow to 
purchase its shares, and may increase the earnings per share, 
but it does not change the aggregate earnings of the firm?
    Mr. Lewis. I was going to get to that, yes.
    Mr. Hollingsworth. Okay. Sorry. I did not mean to cut you 
off.
    Mr. Lewis. Basically, the argument is that earnings per 
share are sort of artificially increased through a share 
repurchase program. The problem with that thinking is that is a 
completely mechanical adjustment. The firm is exactly the same 
firm before the buyback as it was after the buyback.
    Mr. Hollingsworth. You are just dividing it by fewer 
shares?
    Mr. Lewis. You have a little bit less cash around, but the 
operations of the firm are still intact. You are still 
generating exactly the same cash flows from your business as 
you were before.
    Mr. Hollingsworth. That is exactly right. I think that is a 
really important concept to remember because it would not be in 
a firm's interest--it is not as if a firm says, gosh, we have 
generated a certain amount of aggregate income, and we are 
looking for ways to deploy that aggregate income or cash flow, 
right? We can pay it back in dividends; we can reinvest it in 
the business; or, alternatively, we can buy our own shares 
back, which reduces the denominator of the number of shares 
outstanding.
    But, it is not as though they are going to say, well, we 
should go back and maybe add more costs to our income sheet. It 
is not a choice--it is a fake choice to say, oh, gosh, this is 
a choice between wages and whether we buy more shares back. It 
is a real fake choice, because one is an income sheet-driven 
thing, right? Supply and demand for labor, wages, employee 
costs, personnel costs, et cetera.
    The other is, what are we doing with after-tax cash flows 
in order to reinvest, enhance the returns to investors going 
forward, which makes our shares more attractive over the long 
run, and makes the business better over the long run if they 
plowed that back into the business or they plow that back into 
driving up those earnings over time, right?
    Mr. Lewis. That is right, if they plow it back into 
business in productive opportunities.
    Mr. Hollingsworth. That is exactly right. And, so, I think 
it is really important to remember both. In the short run, 
wages are not affected by company policies. Wages are affected 
by the supply and demand of labor in that particular area, for 
that particular set of skills.
    In the long run, us increasing the skills set of 
individuals, making them more productive--Americans are the 
most productive workers around the world, but we can make them 
even more productive with tools and capabilities, better 
training, better education, et cetera--increases their wages 
over time.
    But it is not companies making a decision that gosh, we 
have some extra money lying around, maybe we should just go pay 
people more. Ultimately, that is going to be determined in 
whether that price, that wage, clears the market or not.
    And I think it is really important to remember that these 
things that affect the income statement are separate than 
decisions about what we do with excess capital after they flow 
through the income statement. We have already made the revenue. 
We have already paid all of the costs of goods sold. We have 
already paid all of our overhead, whatever that may be. We have 
generated X at the bottom line, and now we are going to decide, 
how do we reinvest that?
    Whether we invest that in lowering the number of shares 
outstanding, whether we invest that in buying more equipment, 
whether we invest that in new opportunities--buying new 
businesses, for example--that is a separate decision than, oh, 
gosh, maybe we should go back and use some of this bottom line 
to add more to our costs. They will not do that unless it is 
necessitated by the supply and demand in the market, right?
    Mr. Lewis. I would agree with that.
    Mr. Hollingsworth. Right. Thank you. With that, I will 
yield back.
    Chairwoman Maloney. Thank you. And I would like to thank 
all of our witnesses for your testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 12:05 p.m., the hearing was adjourned.]

                            A P P E N D I X



                            October 17, 2019
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]