Further to our recent post: "Counterpoint: Proposed Stock Buyback Reforms," which summarized Gunster Securities and Corporate Governance Practice Group co-chair and Society member Bob Lamm's well-considered rebuttal to SEC Commissioner Jackson's recent call for Rule 10b-18 stock buyback rule reforms, another Society public company member, who agrees with Bob Lamm’s observations, shares his thoughts with the Society community at large:
When I first read Sen. Tammy Baldwin’s letter to Mary Jo White in 2015, several things struck me. First, other than in the quote from Larry Fink’s 2015 CEO letter, there is no reference to dividend increases. Dividends and stock buybacks are part of a company’s capital allocation strategy and together represent how much capital is returned to shareholders. If some persons believe that buybacks need to be curtailed or are harmful to a company’s long-term sustainability, then dividends are equally suspect. After all, a board could suspend a stock buyback program entirely and triple the dividend, boosting total shareholder return, which is often a metric used to determine executive compensation, as is earnings per share.
Second, in the third paragraph of the Senator’s letter, she implies that executives make the decisions about the level of buybacks when boards of directors approve and regularly review buyback plans and the size of quarterly buybacks. I have seen this repeated in media articles picking up on this issue, with the clear implication that executives are manipulating the level of buybacks in order to boost stock prices before they “dump” (the preferred verb) their stock, admittedly at the same price that all other shareholders could sell their shares if they wanted to.
Third, the request that “…the SEC should require annual disclosures of the performance metrics used by a firm to compensate its executives- including specific information on stock-based metrics, such as earnings per share” must surely have the Corp Fin staff shaking their heads.
Earlier this year, Senators Schumer and Baldwin introduced an amendment to the banking deregulation bill that would give the SEC the authority to block a stock buyback if the SEC deemed it would harm the company. To my earlier point, the SEC’s authority would also have to extend to the rejection of dividend increases. Presumably, the SEC would create a new Division of Capital Allocation that would decide whether public company boards of directors were making prudent decisions on how much of the shareholders’ capital to return to them.
In any event, for those seeking a thoughtful examination of this issue, I highly recommend an article titled Are Buybacks Really Shortchanging Investment? by Professor Jesse Fried of Harvard Law School and Professor Charles C.Y. Wang, also of Harvard. Originally published in the Harvard Business Review, the article was posted in March on the Harvard Law School Forum on Corporate Governance and Financial Regulation at corpgov.law.harvard.edu. It’s well worth reading.
Access additional information and resources on our Capital Structure page, and watch for a report in next week's Society Alert on Executive Compensation and Stock Buybacks: Pros & Cons.