No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.

I understand that stock buybacks are controversial.  There have been studies that “prove” the validity (or lack of validity) of the above and other concerns.  And maybe the SEC (or some other regulator or academic – Commissioner Jackson’s old job) should study and consider controls on buybacks.  However, Commissioner Jackson’s proposal seems to me to be ill-informed and ill-advised.

First, to buy shares in open market transactions, a company may not be in possession of material nonpublic information about itself; otherwise, it would be violating SEC antifraud rules. Interestingly, that same condition applies to insiders who want to sell shares – i.e., they can only do so when they have no material nonpublic information about the company.  (That may not be technically accurate for an insider selling under a so-called 10b5-1 sales plan; however, the executive can only enter into such a plan when s/he has no material nonpublic information.)  So what better time for an insider to sell than when the company has effectively confirmed that there’s nothing to disclose?

Second, Commissioner Jackson seems to be saying that insider sales, in and of themselves, are sabotaging long-term growth and job creation by selling shares during buybacks:

“We need our corporations to create the kind of long-term, sustainable value that leads to the stable jobs American families count on to build their futures.  Corporate boards and executives should be working on those investments, not cashing in on short-term financial engineering.”

However, he doesn’t cite any evidence for that.  It’s arguable that buybacks do that, but not insider sales.  And his language suggests that he thinks boards may be approving buybacks for the sole purpose of facilitating insider sales.  I’ve been inside boardrooms long enough to know that directors do not necessarily look favorably upon insider sales; in fact, I’ve known boards to deny insiders the ability to enter into 10b5-1 sales plans because of the anticipated reactions to sales by insiders.

Commissioner Jackson also believes that it is the duty of the compensation committee

“to carefully review the degree to which the buyback will be used as a chance for executives to turn long-term performance incentives into cash. …[T]he committee should be required to approve [the decision to cash out] and to disclose…why it is in the company’s long-term interests.  It is hard to see why a company’s buyback announcement shouldn’t be accompanied by this kind of disclosure.”  (Emphasis added.)

Well, I’m sure I’m dense, but I can think of at least a few reasons why the company’s announcement shouldn’t be accompanied by “this kind of disclosure”.  For one thing, it’s the individual’s choice, not the company’s. Second, is he suggesting that insiders should never be allowed to sell stock?  Aside from the fact that insider trading concerns make it very difficult for insiders to sell shares – ever – many companies have imposed ownership and holding requirements on their insiders; in other words, the shares they are selling are likely to be marginal and in no way reduce their commitment to the company’s long-term growth.

Assigning this responsibility to the compensation committee would add one more piece of substantive federal corporate law to those already put in place by SOX and Dodd-Frank.  And while it might be framed as a disclosure requirement rather than a substantive requirement (i.e., “disclose whether the compensation committee did such-and-such or, if not, why not”), it would have the same effect. And, by the by, the decision to buy back shares is a capital allocation decision that arguably doesn’t belong in the compensation committee in the first place.

It’s been pointed out not only that Commissioner Jackson made the standard disclaimer before these remarks – that the remarks reflect his views and not necessarily those of the SEC – but also that no other Commissioner (or, to my knowledge, any member of the SEC Staff) has made any similar noises.  However, Commissioner Jackson is a very smart man and is surely aware that tying his concerns about buybacks to the ever-inflammatory issue of executive enrichment will generate buzz among investors and the media.  In fact, I have to believe that that was precisely his goal.

Frankly, I share some of the concerns about buybacks noted at the top of this posting, so I think a study of buybacks – and even of the SEC rules governing buybacks – is probably long overdue.  (To be fair, Commissioner Jackson suggests that companies should be required to report on repurchased shares more often than quarterly, and that’s a suggestion worth considering.)  However, the approach taken by Commissioner Jackson – in effect, blaming insider sales during buyback period for the ills possibly caused by buybacks themselves – strikes me as unfair and unwise.