When Was I Radicalized? (Boeing edition)
November 5, 2019·Money
The 737 MAX disaster brought no criminal charges against Boeing's leadership, no clawback of executive compensation, and no real consequence to the company deemed too important to fail. Yet during the same years the crisis unfolded, Boeing's management extracted historic levels of personal wealth through a mechanism that looks legitimate but functions as pure self-enrichment.
• Stock buybacks are presented as returns of capital to shareholders, but the numbers tell a different story. Between 2016 and 2018, $5.4 billion of Boeing's $25.2 billion in buyback spending didn't go to shareholders at all. It went to neutralize the dilution created by management's own stock compensation.
• The buyback machine scales directly with executive stock grants, not company performance. In 2002 and 2003, when Boeing didn't do buybacks, management exercised stock options worth $31 million and $19 million respectively. Once buybacks resumed, that figure climbed into the hundreds of millions, then billions.
• In 2017, a single year of decent stock performance, nearly 30 percent of Boeing's operating cashflow went to sterilize management's stock issuance. The board restructured the entire compensation system to accomplish this, then locked in those gains for executives with no clawback provisions.
• The system creates perfect alignment between executive self-interest and the destruction of shareholder value. The more stock you issue to management, the more you need to buy back. The more you buy back, the more you hide the dilution and boost the share price that makes those grants valuable.
• This pattern isn't unique to Boeing; it's the story of every major American corporation over the past five years. The greatest transfer of wealth in a century has gone not to founders or innovators, but to managers who weaponized buybacks to hide the true cost of their compensation.
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Comments
When do the marches start? Yellow Vests? Tires burning in the streets? Oh yeah they do that in Argentina, not Murica! Yay Capitalism!
Really, buyouts fail on a simple question: Why is it better to give company money to share sellers rather than to shareholders?
Go Ralph Tnader!!
Slap top management with serious prison time. After a trial of course. That is more likely to change company behavior than levying huge corporate fines while letting senior management off with scant punishment. “Privatizing gains and socializing losses” reeks of well, sadly post-modern capitalism/plutocracy.
Interestingly the WaPo just published an article on this exact issue today: https://www.washingtonpost.com/business/economy/company-insiders-are-selling-stock-during-buyback-programs-and-making-additional-profits-when-stock-prices-jump-and-its-legal/2019/11/06/fc592f58-e493-11e9-a331-2df12d56a80b_story.html
Does this call for a “Why am I reading this now?” or a “Yay Journalism” moment?
Asking for a friend.
IMO share buybacks should be prohibited, for just this reason. The grant sterilization issue is probably why so many buybacks are done near stock price peaks. Also, share based compensation (which might become less attractive) should have a long vesting period, at least 5 years (if not the 100 years that Muilenburg claims to be his planning horizon lol).
Absolutely drives me nuts when companies BORROW money for stock buybacks to reduce share counts to drive up EPS. Everyone knows that everyone knows that debt (esp non-productive debt) in lieu of equity weakens companies…right? If I were king for a day, the C-suite would not be judged for comp on EPS but Earnings as a Percentage of Enterprise Value (equity plus debt). You borrow $1b for a $1b stock buy-back, share count drops, but Enterprise Value remains the same…no smoke and mirrors financial engineering. Just sayin’.
Agree. And they were illegal, up until 1982 (SEC Rule 10b-18). I’ve heard the (weak) argument that halting stock buybacks would prevent a public company from working towards eventually going private. If a company wants to take itself private, let them reverse the process and do an LBO. Stock buybacks have been weaponized, and there are now more cons than pros in this type of compensation.
But Ben - I think even you’d admit that this is absolutely rational behavior by private sector actors in response to terrible public sector policy. Why should we regulate private sector behavior? Why not “regulate” this horrible government (read Fed QE/balance sheet expansion) policy to eliminate the incentives for this type of activity. Regulating the private sector on exec comp/share buybacks without getting to the root problem will only result in the excess liquidity making its way into another sector, which you’ll then advocate regulating…rinse/repeat.
Stock buy backs used in this way are just a symptom.
There are two problems.
There’s no way that the Justice Dept. will ever bring a criminal case against Boeing, not one that hits top management or really shackles the company.
Boards which are supposed to be there in order to represent owner interest, does nothing of the sort and has become part of the management.
Without addressing 1, you will continue to get management that does bullshit things.
Without addressing 2, you will continue to get management that does bullshit things.
Killing buy backs would just cause management to get more creative, and even less transparent. At least you can see the bullshit now.
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