Wary investors applauding SEC call to
examine stock buybacks
Robert Jackson Jr. is concerned about the reasons behind recent
corporate stock buybacks.
• JUNE 25,
Exchange Commissioner Robert Jackson Jr.'s call for the agency to pay
greater attention to corporate stock buybacks is being watched closely
by institutional investors, including those who have been calling for
at least more disclosure about companies' motives and methods.
buybacks are reaching record numbers: In the first quarter of 2018
alone, American corporations bought back a record $178 billion in
stock, in part due to the cash they are accumulating following tax
cuts enacted in 2017.
While that fact
alone does not alarm Mr. Jackson, he does worry that stock buybacks
increasingly are being used by executives to cash out, rather than to
increase shareholder value or for corporate investments.
One reason for
the growth in buybacks is that, through rules first adopted in 1982
and last updated in 2003, the SEC has offered corporate executives a
safe harbor from securities-fraud liability if the pricing and timing
of buyback-related repurchases meet certain conditions, Mr. Jackson
and others have said.
"The problem is
that we haven't touched them now for 15 years. The least you can do is
update them," Mr. Jackson said in an interview. He has also called on
SEC Chairman Jay Clayton to allow an open comment period to hear other
views on whether the agency should revisit buyback practices.
That sounds like
a good idea to executives of the Council of Institutional Investors in
Washington, whose members — public, corporate and union retirement
funds, foundations and endowments — have a combined $3.5 trillion in
Welcomes the call
long-term shareholders, "CII welcomes Commissioner Jackson's call for
the SEC to review its rules around stock buybacks to make sure
investors are protected appropriately," said CII Deputy Director Amy
Borrus. "The evidence that executives are taking advantage of bumps in
the company's stock price after a buyback to cash out is unsettling.
We don't want executive incentives to skew decisions about capital
allocation that are not in the company's long-term interest.
Executives should not be timing buybacks to benefit themselves at the
expense of the company's shareholders. ... The evidence suggests
opportunism could be playing a role."
Rees, deputy director of corporations and capital markets at AFL-CIO
in Washington, with $653 in assets under management: "We strongly
agree that we need to review the safe harbor. Stock buybacks do lead
to share price increases over the short term … but that may not be in
the long-term interests of the company. You certainly don't want to be
incentivizing executives" at the company's expense, Mr. Rees said.
"Retained earnings are how companies reinvest to grow."
As part of a
continuing focus on executive compensation, officials at the AFL-CIO
and its member pension funds have started talking about holding
requirements for executives' stock, including through retirement age,
"so they won't be tempted," said Mr. Rees, who notes that some
European stock options are only exercisable after 10 years.
"Shareholders want executives to have as much skin in the game as
possible. There's always going to be that tension," he said.
trading is not necessarily illegal, Mr. Jackson does find it
"troubling, because it is yet another piece of evidence that
executives are spending more time on short-term stock trading than
long-term value creation," he said.
To spur a closer
look, Mr. Jackson's staff
buybacks over the past 15 months and matched those actions
to executive stock sales available in SEC filings. They found a jump
in stock price of more than 2.5% in the 30 days after the buyback
announcements. In half of the buybacks studied, at least one executive
sold shares in the month following the buyback announcement. They also
found twice as many companies with insiders selling stock in the eight
days after a buyback announcement compared with an ordinary day.
research paints a troubling portrait, analogous to the stock option
abuses we saw a couple of decades ago. It may be providing an undue
incentive," said Mr. Rees.
the New York-based managing director of the CFA Institute's division
of standards and financial market integrity, is glad that Mr. Jackson
"is taking on some of the sacred cows. I think active investors
everywhere are very interested in this long debate about whether share
buybacks are good long term. There is research on both sides, but I
think there are so many things about it that could be manipulative,"
said Mr. Schacht, adding "there are more efficient ways to return
capital to investors."
Not jeopardizing growth
Tapestry Networks and the Investor Responsibility Research Center
Institute asked corporate directors on the boards of 95 public U.S.
companies worth $2.7 trillion about their buyback decisions. In their
responses, directors said that buybacks do not jeopardize corporate
growth, and they do not unjustly enrich top executives. The survey
also found that, since the global financial crisis, buybacks hit a
high in the first quarter of 2016.
increased when performance metrics such as earnings per share or stock
prices rise. But directors said they are aware of the potential
conflict and that they take steps to ensure executives are not
rewarded for financial manipulation of share prices. Still, the study
found, only 20 S&P 500 companies disclose how they make buyback
something investors hope to change.
"At a market
level, it's a black hole. Companies undertake these but we don't have
any disclosure," said Maureen O'Brien, vice president and corporate
governance director for Segal Marco Advisors, Chicago.
It is a
company-by-company quest "because the SEC hasn't acted," said Ms.
O'Brien. "I am glad the conversation is starting."
taking a broad-brush approach, Calvert Research and Management prefers
to take it case by case. Calvert is part of a share buybacks
disclosure initiative launched in 2016 by a coalition of 11
institutional investors representing $500 billion in assets seeking
more disclosure and transparency about companies' buyback decisions.
real information to understand the motivation for the buyback," said
John Streur, president and CEO of Calvert, in Washington. While
comfortable with buybacks, and opposed to restrictions on executives
selling after buyback announcement periods, "if there is a pattern of
abuse by executives, we support proposals to impose a holding period,"
Mr. Streur said.
commissioner Paul Atkins, CEO of Patomak Global Partners LLC, a
Washington financial consulting firm, said that post-tax reform,
companies are supporting economic growth in several ways, such as
distributing cash through buybacks to shareholders, including those in
and saving for retirement. "Buybacks are a basic function of capital
markets that drive reinvestment. Share buybacks benefit those very
shareholders, seniors and the broader economy," Mr. Atkins said.
Democrats, including Sen. Charles Schumer of New York, are also
watching closely, particularly when it comes to how the corporate tax
cuts are paying off for workers and the economy overall, as
Republicans promised it would. "We don't hear a peep now that they've
been announcing an avalanche of corporate stock buybacks," Mr. Schumer
said on the Senate floor in March.
Mr. Clayton, the
SEC chairman, declined to respond directly to Mr. Jackson's call for
the SEC to study, and do, more. But in several congressional hearings
he has expressed concern about potential abuses. While buybacks can be
an efficient and appropriate way to return capital, the potential for
short-term motivations could be troubling, Mr. Clayton told the Senate
Banking Committee in September.
Crain Communications Inc.