How the pursuit of shareholder value weakened the economy

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4) Gaming the system
Putting all emphasis on creating shareholder value as the single measure of success, and tying executive compensation to it via stock options and share based compensation, this opened the way for gaming the system:

• A series of accounting scandals emerged in the late 1990s (Enron, Worldcom, etc.) in which complex accounting tricks were deployed, often with tacit agreement from accounting firms, to keep the share price up.
  
• Companies became enthusiastic buyers of their own shares, this is one way that management can use to boost it share price and hence it's own compensation.
  

There is a pretty good relationship between the share price and the level of buybacks and dividends:



Lazonick again:

Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards.

You'll notice another problem in the graph above, companies tend to buy back their shares when they are expensive. It is often argued that companies buy back their own shares as a signal that they think the shares are undervalued. Reality seems pretty much the opposite..