In 1982, the Securities and Exchange Commission (SEC) adopted Rule 10b-18, granting
corporations a safe harbor to repurchase their own stock without fear of being charged with market
manipulation provided they adhered to specific conditions. At the time, the change was billed as a
clarification of murky legal waters. But in practice, Rule 10b-18 unleashed a tidal wave of corporate
behavior that has distorted how capital is allocated, how executives are compensated, and how
companies think about their responsibilities not just to shareholders, but to society.
In the four decades since its adoption, buybacks have evolved from a rarely used tool to a central
feature of corporate financial strategy. But their rise has come at a cost borne not by
shareholders, but by employees, innovation, and the long-term vitality of American capitalism itself.
The Myth of Nothing Better to Invest In
Supporters of buybacks often argue that they’re just a rational use of excess capital. If a company
has no high-return investment opportunities, the logic goes, it should return the money to
shareholders. But that idea rests on a narrow and in many cases, flawed assumption: that there’s
genuinely nothing better to do with the money.
In truth, when companies say they lack reinvestment opportunities, what they often lack is vision or
courage. Because while one company sits on the sidelines claiming no viable options, others in the
same industry are taking calculated risks: investing in emerging technologies, entering new markets,
retraining their workforce, or improving systems and processes. To default to buybacks is to say,
we’d rather do nothing than try something.
This mindset reflects the slow death of long-term thinking in corporate boardrooms. Buybacks are
easy. They’re safe. They boost earnings per share without having to grow actual earnings. But they
don’t create value. They merely reshuffle it and often concentrate it into the hands of executives and
large shareholders
Reinvestment vs. Buybacks: What the Numbers Show
According to S&P Dow Jones Indices, in 2022, S&P 500 companies spent $922.7 billion on stock
buybacks. In the same year, they spent about $1.2 trillion on capital expenditures and research and
development combined. That might look like a healthy balance, but it actually highlights the problem.
Nearly half of the available discretionary capital went not toward future growth or employee wages,
but to financial engineering.
What if just half of the money spent on buybacks were used to raise wages particularly in a time
when inflation has eroded purchasing power across the board? Or what if that money had been
used to fund internal ventures or next-generation product development? The answer isn’t just
hypothetical. It’s about the opportunity cost of how companies choose to deploy their profits.
And while defenders of buybacks will often point to companies like Apple who conduct large
repurchase programs while also investing billions in R&D, Apple is the exception, not the rule.
Moreover, Apples broader reinvestment goes well beyond its R&D line. The company has
committed over $500 billion to domestic investment in chip design, AI, and infrastructure between
2018 and 2028. These are visionary, multi-pronged investments not simply buying back stock to juice
EPS.
A Case Study in Corporate Short-Termism: Bed Bath & Beyond
Few examples are more telling than Bed Bath & Beyond. Between 2004 and 2022, the company
spent an astounding $11.7 billion repurchasing its own stock cutting its outstanding shares by over
75%. All the while, it neglected to modernize its stores, failed to invest in e-commerce, and didn’t
adapt to shifting consumer behaviors.
By the time competitors had embraced digital transformation, Bed Bath & Beyond had missed the
moment. In 2023, the company filed for Chapter 11 bankruptcy, with over $5 billion in debt and a
store footprint and tech infrastructure that felt like they were frozen in 2004.
Critics argue that poor strategic decisions sank the company. Thats true. But one of those decisions
was using nearly $12 billion in profits to repurchase shares rather than reinvest in itself. Buybacks
didn’t cause Bed Bath & Beyond’s collapse but they absolutely accelerated it by starving the business
of the resources needed to evolve.
The Financial Efficiency Argument Falls Apart
Another popular argument in favor of buybacks is that they help make companies leaner by
reducing share count and boosting EPS. But reducing share count doesn’t make a company leaner
in any operational sense. It doesn’t cut costs, improve workflows, launch products, or open new
markets. It’s simply math: fewer shares divided into the same earnings results in a higher EPS.
This number, in turn, is often used to justify executive bonuses or attract investor interest. But it’s
just financial optics, not real improvement. And unfortunately, that optical boost is frequently timed
with executive stock sales.
A 2018 study presented by SEC Commissioner Robert Jackson Jr. found that in half of the
buybacks examined, at least one executive sold stock in the month following the buyback
announcement. Even more striking, executives were twice as likely to sell stock in the eight days
following a buyback announcement compared to ordinary trading days. In other words, just as
companies are publicly declaring their shares under valued executives are quietly cashing out. That
may not meet the legal definition of market manipulation, but ethically, it’s hard to defend.
Buybacks and the Inequality Gap
The rise of stock buybacks is part of a broader trend of shareholder-first economics that has
coincided with widening income inequality. Since Rule 10b-18s passage in 1982, we’ve seen:
- Median wages stagnate even as worker productivity continues to rise.
- CEO compensation explode, now averaging 351 times the median workers salary, according to the
Economic Policy Institute. - A concentration of wealth among corporate insiders and institutional investors, who reap the lions
share of buyback-driven gains.
Critics may argue that this is all coincidentalthat globalization, automation, and the decline of unions
are more to blame. But the timing is too consistent to ignore. Buybacks didnt start these trends, but
they supercharged them by redirecting capital away from wages and long-term investments into
mechanisms that benefit a small financial elite.
The End of Shareholder Primacy
All of this points to a deeper problem: the shareholder primacy model of capitalism. Popularized by
Milton Friedman in the 1970s and institutionalized in boardrooms by the 1980s, this model argues
that a company’s sole purpose is to maximize returns for its shareholders. Everything
else employees, customers, suppliers, communities are secondary.
That model is increasingly outdated.
Companies don’t operate in isolation. They depend on the trust and well-being of workers, the
stability of their supply chains, and the loyalty of their customer base. They’re part of a larger
system and when that system is weakened by inequality and short-termism, everyone suffers,
including the shareholders.
It’s time to move toward a stakeholder model of business ethics where success is measured not just
by quarterly EPS, but by a company’s ability to create long-term value for all its stakeholders.
Time to Rethink the Safe Harbor
Eliminating Rule 10b-18 wouldn’t ban stock buybacks. It would simply remove the legal insulation
that currently allows companies to execute them without scrutiny. In doing so, it would force
executives and boards to be more transparent, more deliberate, and more accountable in how they
use capital.
It would also rebalance incentives away from short-term manipulation and toward long-term growth,
innovation, and value creation. And that’s exactly what our economy needs right now.
Stock buybacks are not inherently evil. But they’ve become a crutch a shortcut for companies that
lack vision, and a tool for executives to game financial metrics for personal gain.
In an era of economic disruption and rising inequality, it’s time to ask harder questions about how
companies use their profits and who benefits. It’s time to retire the myth of shareholder supremacy
and build a new model of capitalism, one that prioritizes innovation, resilience, and shared prosperity.
And it starts with ending the safe harbor.
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