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Shareholder voting expert's views of investor concerns about use of corporate capital for stock buybacks


The editorial below was published in the client subscription quarterly, The Shareholder Service Optimizer, and is provided for Forum participants with permission of its editor, Carl T. Hagberg, who had served as an invited expert in the Shareholder Forum’s 2010 “E-Meetings” program that established marketplace standards for Electronic Participation in Shareholder Meetings.

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Source: The Shareholder Service Optimizer, First Quarter 2016 editorial


At long last, the problems and perils of poorly-conceived and poorly executed share-buyback programs are starting to get the attention they deserve.

Leading experts, including many from the business community itself, like Larry Fink of BlackRock, are blaming excessive buyback programs for the sluggish economic recovery, for artificially hyping executive bonuses, for contributing to expanding income inequality and for causing U.S. companies to lose their competitive edge by underinvesting in things like R&D, in improving and expanding their basic infrastructure, and by failing to invest enough cash in regular employees themselves. The upcoming elections promises to throw these issues into even higher relief. Even the SEC has been quietly hinting that maybe buyback programs need more sunlight cast upon them - a sentiment we have been expressing for over five years now: “We’re looking at our disclosure regime for buybacks…as part of our disclosure effectiveness review” Chairman Mary Jo White told an industry conference in March.

Apropos, a February 4th article on Marketwatch cited two big buyback flops in recent months, illustrating how much buyback money literally goes up in smoke these days - while failing to mention, we’d note, the historic propensity of U.S. companies to buy back at the highs and to sit the bench at the lows, which further exacerbates those buyback busts:

In February, GoPro said that it spent $35.6 million to buy back stock during the fourth quarter, at an average price of $23.05, but to little avail. The company still reported a surprise fourth-quarter loss, and provided a dismal first-quarter sales outlook…the stock ended the fourth-quarter [at] $18.01, which was 22% below the average price the company paid to buy them back… On Thursday, it tumbled 8.5%, toward a record closing low, that was nearly 60% below what the company paid just a few months ago.”

Apple Inc. came under the Marketwatch microscope too: “The technology giant repurchased 281.12 million shares in open-market transactions over the past five quarters, at a weighted average price of $117.48, according to an analysis of data provided in the company’s latest quarterly filing. The stock was trading at $96.60 in afternoon trade Thursday, or 18% below the average price the company paid.”

The inimitable Gretchen Morgenson of the New York Times also weighed-in in March with a column on “Sacrificing the Future for a Mirage” – which homed-in on buybacks at Yahoo and McDonald’s and offered a very interesting way to look at the results, citing studies by Corequity, an equity valuation firm used by institutional investors. Since 2008 McDonald’s spent almost $18 billion on buybacks…which “helped [emphasis ours] produce 4.4% increases kin annual earnings per share over the period.” But…“to equal that growth in overall earnings, the company would have had to generate just a 2.3 percent return on the money it spent buying back stock” according to the developer of the Corequity methodology, Robert Colby.

It’s been five years now since the OPTIMIZER first predicted that “The Next Big Thing in Corporate Governance” will be “Activists holding Directors’ feet to the fire over their stewardship of corporate assets”… And yes, while activists held their feet to the fire, for sure, many of them called first and foremost for big buyback programs, where increases in stock price were often fleeting, and benefitted only short-term investors who took the profits and ran off - and where a lot of the assets ultimately went up in smoke - yet again!

The time has come, we say, to focus on the STEWARDSHIP part - and to call for full and complete accountings of director stewardship of corporate assets - and especially the corporate cash register - on a quarterly, annual and five-year basis.


■ First and foremost, public companies should develop, and disclose in plain English, their carefully-considered estimate of the “intrinsic value” of their stock: They should be forced to explain exactly how they calculated it - and how often they plan to review and revise if necessary. They should also be required to disclose revisions promptly - along with the impact the revisions will have, if any, on existing buyback programs.

■ Second, companies should promise never to repurchase a single share of stock at a higher price per share than the intrinsic value - and keep that promise - as Warren Buffett has done at Berkshire Hathaway. While shareholder money may still go up in smoke, it will never do so because of a badly conceived and executed buyback program.

■ Third, whenever shares are selling at or above their intrinsic value - and after all alternative investment opportunities have been considered by the board, as it always should when the stock is selling at a premium to intrinsic value - and after establishing prudent reserves for unexpected opportunities and contingencies, of course - public companies should adopt a policy to dividend all “excess cash” directly to shareholders – to whom the “extra cash” rightly belongs.

■ Lastly, all public companies that have repurchased shares be required to report on their “stewardship” of the corporate cash-box in detail: They should clearly explain in plain English - on a quarterly basis, as well as on an annual basis, and over a five year period - exactly how well their “investment” of “excess capital” in share repurchases actually fared - in terms of (1) “total net returns on investment” of the buyback dollars and (2) how these returns compare to other investments they made - such as investments in new capacity, new product development and launch, advertising and marketing - and, of course, (3) vs. any and all acquisitions they made along the way.

This exercise requires deep thinking - and some somewhat elaborate math that needs to be ‘made simple’ for readers who are not professional economists. But shareholders truly deserve no less from the corporate directors they elect and from the senior officers and directors whose pay they are asked to approve….and honestly, it ain’t rocket science to do it right.

We will make yet another prediction on this subject: Look for more and more analyses of buyback programs to be made - and to hit the news, as the Apple and GoPro buyback flops did - and look for this to result in more No votes on pay - and on Votes No against comp-committee directors too, as well there should be.


This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

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