Draw Scrutiny From Politicians
AUG. 10, 2015
corporate stock buybacks be regulated? Or made illegal?
the questions not-so-quietly being floated in Washington by a group of
elected officials and others trying to get elected, including most recently,
Hillary Rodham Clinton.
government really going to outlaw buybacks, which over the past decade have
become one of the business world’s favorite corporate finance tools?
On its face,
the issue may seem like a nonstarter. But a growing debate has emerged
around the topic of buybacks that increasingly has Wall Street and corporate
Sachs sent out a note to its clients earlier this summer, warning that
Washington was raising concerns over buybacks. “Some lawmakers have linked
share repurchases with stagnant wages and a lack of business investment,”
the note said.
companies have spent nearly $7 trillion
purchasing their own stock — often at inflated prices, according to data
from Mustafa Erdem Sakinc of the Academic-Industry Research Network.
to about 54 percent of all profits from Standard & Poor’s 500-stock index
companies between 2003 and 2012,
according to William Lazonick, a
professor of economics at the University of Massachusetts Lowell.
craze, in which virtually every big company from Apple to General Electric
to Walmart has participated, has led to a backlash from some investors and
government officials, who have questioned whether such use of profits is a
productive way to deploy capital rather than reinvesting in businesses and
Fink, the founder of BlackRock, the largest asset manager in the world, with
more than $4 trillion under management,
started a debate about the topic this
year among chief executives, suggesting the buyback phenomenon “sends a
discouraging message about a company’s ability to use its resources wisely
and develop a coherent plan to create value over the long term.”
focus on the issue has taken place recently as a result of one of Mrs.
Clinton’s speeches, in which she discussed all the money that companies are
pouring into buybacks. “That doesn’t leave much money to build a new factory
or a research lab, or to train workers, or to give them a raise,” Mrs.
next sentence in her
speech really got the attention of
industry: “We also have to take a hard look at stock buybacks. Investors and
regulators alike need more information about these transactions. Capital
markets work best when information is promptly and widely available to all.”
offered what some think is her first salvo in the regulation of buybacks:
“Other advanced economies — like the United Kingdom and Hong Kong — require
companies to disclose stock buybacks within one day. But here in the United
States, you can go an entire quarter without disclosing. So let’s change
raises an interesting point about the disclosure rule, one that, if changed,
would most likely make it much tougher — or at least more expensive — for
American companies to buy back shares. Indeed, international companies have
done a lot less of it.
tiptoes around a more explosive claim from Senator Elizabeth Warren and
Senator Tammy Baldwin that buybacks might be a form of market manipulation.
Both senators have urged the
Securities and Exchange Commission to
investigate the practice.
discussing buybacks in
an interview with The Boston Globe, Ms.
Warren provided a bit of a history lesson: It wasn’t until 1982 that the
S.E.C., under the chairmanship of the Reagan appointee John S. R. Shad, gave
companies so-called safe harbor against charges of manipulation if they
bought their stock in the open market under certain circumstances. (The
provision is known as Rule 10b-18.)
buybacks were treated as stock manipulation for decades because that is
exactly what they are,” Ms. Warren said. “The S.E.C. needs to recognize
was that rule change that led to the surge in buybacks, which were
considered shareholder friendly. And it’s considered tax efficient: Unlike a
dividend, there is no tax to be immediately paid.
companies were also driven to pursue buybacks by executives seeking to lift
their pay. Buybacks enable companies to issue more stock to executives
without diluting other shareholders because they can buy shares to offset
the dilution that occurs when executives exercise their stock options.
It also led
to another point of contention in
executive compensation plans because
buybacks have the effect of increasing earnings per share, a metric that
some compensation committees use to determine the pay of their executives.
It also has the impact of increasing the stock price in the short term
irrespective of operational success, potentially letting executives cash out
of some of their shares at artificially high prices.
enticing for corporate executives, but they can create other problems,
including the risk that they repurchase their companies’ shares at the exact
wrong time, when their stock prices are too high. Worse, some companies take
on debt to buy their own shares.
Warren E. Buffett, the investor, has repeatedly said he is a big fan of
buybacks — but only when used prudently: “I favor repurchases when two
conditions are met: First, a company has ample funds to take care of the
operational and liquidity needs of its business; second, its stock is
selling at a material discount to the company’s intrinsic business value,
conservatively calculated. We have witnessed many bouts of repurchasing that
failed our second test.”
could the S.E.C. actually do about buybacks?
research note said that the two most obvious policy changes would be
“securities rules related to the transactions themselves, or tax changes
that increase the relative cost to corporations of buying back their own
stock instead of paying dividends or making investments in productive
Those may be
worthy goals. But it is hard to tell a company how it can or cannot spend
its money. Ultimately, the pressure for companies to invest in their
operations and new jobs is only going to come when managements see a real
business opportunity — and shareholders demand it.
A version of this article appears in print on August 11, 2015, on page B1 of
the New York edition with the headline: Stock Buybacks Draw Scrutiny From
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