David Raymond Amos @DavidRayAmos
Methinks the Yankee Robert J. Jackson of the U.S. Securities and Exchange Commission let a cat out of the bag N'esy Pas?
http://davidraymondamos3.blogspot.com/2018/08/methinks-yankee-robert-j-jackson-of-us.html
http://www.cbc.ca/news/business/stock-buybacks-analysis-1.4771344
Why companies flush with tax-cut cash are spending more on share buybacks than wage hikes
Apple, the most expensive company ever, plans to spend billions buying back its own shares
874 Comments
Commenting is now closed for this story.
Commenting is now closed for this story.
Brian Cohen
Trickle Down Economics have never worked anywhere.
Ever
The tax cuts of Donny's, make the corporations and their executives richer, but do little at best for the average worker.
Meanwhile they've added trillions to the US national debt.
Ever
The tax cuts of Donny's, make the corporations and their executives richer, but do little at best for the average worker.
Meanwhile they've added trillions to the US national debt.
David Amos
@Brian Cohen Methinks its not rocket science to see what is on the horizon N'esy Pas?
"In a recent speech, Robert J. Jackson, a commissioner with the U.S. Securities and Exchange Commission, cited the regulator's own research that shows in the days following a buyback announcement, company executives were five times more likely to sell their own shares in the company."
"In a recent speech, Robert J. Jackson, a commissioner with the U.S. Securities and Exchange Commission, cited the regulator's own research that shows in the days following a buyback announcement, company executives were five times more likely to sell their own shares in the company."
Neil Austen
Because share buy backs
benefit the rich. Wages only benefit the working class and that's a big
no no for Conservative style capitalism.
David Amos
@Neil Austen Methinks the
Commissioner with the U.S. Securities and Exchange Commission just let
the cat out if the bag N'esy Pas?
Dwight Williams
It's shocking how many
corporate leaders can't seem to grasp the simple lesson that Henry Ford
understood a century ago. You don't create a buying public without
paying them the wages which give them disposable income and purchasing
power. It's like every board of directors wants someone ELSE to do the
creating while they pinch their pennies. They're starving themselves in
the long run without seeming to be able to wrap their minds around the
inevitable end-game of what they're doing.
David Amos
@Dwight Williams Methinks the
greedy people are merely getting out while the getting is good. Trust
that they don't care about the well being of the "Consumers" they have
been bilking for years They never did. Hell even Henry Ford had battles
with his workers N'esy Pas?
Heath Tierney
Whoever believes in the supply-side "trickle down" economic theory needs their head examined.
It never worked. It was never designed to work.
What started with Reaganomics has led to an ever-increasing wealth gap.
Corporate tax cuts do not create, and have never created, jobs. The only thing that creates jobs is a healthy market for goods.
All the tax cuts in the world won't create jobs in the buggy-whip business.
It never worked. It was never designed to work.
What started with Reaganomics has led to an ever-increasing wealth gap.
Corporate tax cuts do not create, and have never created, jobs. The only thing that creates jobs is a healthy market for goods.
All the tax cuts in the world won't create jobs in the buggy-whip business.
David Amos
@Heath Tierney "All the tax cuts in the world won't create jobs in the buggy-whip business."
Well put
Methinks Ludwig von Mises would be proud of you N'esy Pas?
Well put
Methinks Ludwig von Mises would be proud of you N'esy Pas?
Jennifer McIsaac
Sure would be nice if the
employees were given pay raises rather than give investors the cash. I
say that although I have a stock portfolio.
Then the money would circulate through the economy and help shrink the wealth gap.
Then the money would circulate through the economy and help shrink the wealth gap.
David Amos
@Jennifer McIsaac Methinks
folks should recall why ol R.B. Bennett set up the Bank Of Canada and
why Trudeau the The Elder and everyone after him has ignored its mandate
for the benefit of the Corporate Banksters N'esy Pas?
Dwight Williams
It's brain-dead simple.
No corporation anywhere, ever, has hired someone because they got a tax cut. They hire people when they have demand they can't satisfy with current staff. Period. Ever and always. Look up the talks by Nick Hanauer, a rich venture capitalist. He gives an incredibly cogent discussion of the whole thing.
No corporation anywhere, ever, has hired someone because they got a tax cut. They hire people when they have demand they can't satisfy with current staff. Period. Ever and always. Look up the talks by Nick Hanauer, a rich venture capitalist. He gives an incredibly cogent discussion of the whole thing.
David Amos
@Jennifer McIsaac Methinks most folks should be very concerned about their pension plans N'esy Pas?
mo bennett
real simple, pure greed. and trickle down NEVER works. just ask dubya!
David Amos
@mo bennett YUP
Steph Millar
Only people who are fooled
into voting against their better interests believed that huge companies
would give their employees wage increases.
David Amos
@Steph Millar True
Andrew Hebda (NS)
I suspect that many of those
at the top of the corporate manure pike consider employees as a
necessary evil... just another item on list of expenses that can be
reduced to increase profits. Another example of this was the Bush era
"jobless recovery" when profits soared while employment stagnated... .
Matt Roberts
@Andrew Hebda (NS)
robots: coming soon to a private corporate hell near you!
robots: coming soon to a private corporate hell near you!
David Amos
@Matt Roberts Welcome to the Circus
Abrahm Lincoln
Corporations rank employees
and the wages they earn in the negative column as liabilities, similar
to debts owed, operating expenses or unpaid pension costs. It is not in
the interest of corporations to take on more liability, which is what
taking on employees is considered to be, unless the hiring of an
employee results in a net benefit to the corporation. Nor are they going
to give current employees a wage increase unless required to by some
provision of their original contract or job action on the part of the
employees. The receipt of a tax cut by any government is irrelevant to
any corporation in how they treat their employees.
Jane Doe
@Abrahm Lincoln Sad but true.
I happen to think that having a stable and loyal employee base has some
cost savings of their own, with increased productivity, less time off
and reduced need for training. My view isn't shared wwithin the
majirityvif companues today. That's what happens when companies are run
by people that didn't work their way up but just parachuted in with
their MBAs
David Amos
@Abrahm Lincoln Methinks many folks should agree with the namesake of a long dead Yankee President N'esy Pas?
David Amos
@Jane Doe Methinks it awful sad but true that I am compelled to agree with an nameless soul talking to a ghost N'esy Pas?
Why companies flush with tax-cut cash are spending more on share buybacks than wage hikes
Apple, the most expensive company ever, plans to spend billions buying back its own shares
Corporate earnings are on track for
their best year ever, but at least some of the corresponding rise
in stock prices is because of buybacks — a piece of financial
alchemy that critics say diverts money from more important uses like
expanding business and paying workers more.
A buyback, as the name implies, is when a company buys back some of its shares from investors on the stock market. Investors tend to benefit because it means their remaining slice of the company is more valuable, as there are fewer shares out there.
And from the company's perspective, if a buyback is done right, the company gets to improve its profitability on paper by sharing its profits with fewer shares.
The practice is typically done by large, established companies that earn lots of cash that they don't otherwise have good ways to spend.
But even one of the world's fastest growing and most innovative companies is doing it.
Apple became the world's first trillion-dollar company this week after another impressive quarterly earnings performance pushed its market cap over $1 trillion US. The company previously said it planned to buy back $100 billion of its own shares this year, and has been doing so with aplomb in recent weeks.
Barry Schwartz, chief investment officer at money manager Baskin Wealth Management in Toronto, said the recent surge of buybacks is completely justified based on the underlying profits that companies are earning.
"We're
going to have record profits this year, so it certainly makes sense
that this would be a record year for buybacks," he said.
While he doesn't like it when he sees companies buying back shares using debt, or transparently doing it just to boost their share prices, Schwartz said he's fine when a company like Apple does it.
"Because they don't need to build more factories or widgets to get more sales," he said. "They're just swimming in cash."
New numbers released this week, however, show even companies with much less cash lying around are doing the same thing.
Left-leaning American think-tank the Roosevelt Institute found that from 2015 to 2017, U.S. companies spent 60 per cent of their profits on buying back their own shares, rather than investing that money in new ventures or pay hikes.
The report calculated how some companies could have spent that money differently:
"One of the main responses to Trump's tax policy was to buy back stocks. It's absolutely a trend we are seeing among our clients," she said of a group that includes large S&P 500 companies all the way down to small independently owned businesses.
She cites data from another recent report, from the California-based Drucker Institute, that found corporations plan to spend 30 times more on stock buybacks than on boosting their employees' pay this year.
Even among companies that are passing some of those newfound profits down to workers, most are paying bonuses rather than giving raises.
"It makes the employee feel good, and makes the employer feel good," Bardaro said, "but it's transitory — it's a [one-time] boost in their wallet."
Bank of America, for example, received plenty of kudos after tax reform passed for announcing it would give all 145,000 of its workers a $1,000 bonus. That act of corporate generosity will cost the bank $145 million — or less than three per cent of the $5 billion the bank plans to spend buying back its stock this year.
Beyond employees, there's a potential downside for investors, too.
In a recent speech, Robert J. Jackson, a commissioner with the U.S. Securities and Exchange Commission, cited the regulator's own research that shows in the days following a buyback announcement, company executives were five times more likely to sell their own shares in the company.
In other words, executives were cashing in, even as they were telling investors they think their stock is undervalued. For Benj Gallander, president and founder of Contra the Heard Investment Letter, that's "bad optics," at the very least.
He's not opposed to buybacks in general, but he prefers for companies to reward shareholders with dividends — or better yet, invest in growing their businesses.
"Often it's very, very questionable to me why companies do it," he said.
For William McNally, a professor of finance at the Lazaridis School of Business and Economics in Waterloo, Ont., the reason is simple: buybacks are a great use of excess funds.
"These companies don't necessarily have great projects to invest in [so] it's not like they could just invent a new cure for cancer if they hadn't been giving it to those fat cat shareholders."
Plus, buyback critics might not like the results if companies decided instead to waste money on bad projects and misguided takeovers, he said.
"Better to give it back to shareholders and then they can choose to invest it in a new upstart company."
For a company like Apple, which is currently sitting on a $247-billion pile of cash, earmarking a good chunk of that to buying back its shares makes sense, McNally said.
"My attitude as a shareholder is, give it back to me," he said. "You don't have anything to do with it."
A buyback, as the name implies, is when a company buys back some of its shares from investors on the stock market. Investors tend to benefit because it means their remaining slice of the company is more valuable, as there are fewer shares out there.
And from the company's perspective, if a buyback is done right, the company gets to improve its profitability on paper by sharing its profits with fewer shares.
The practice is typically done by large, established companies that earn lots of cash that they don't otherwise have good ways to spend.
But even one of the world's fastest growing and most innovative companies is doing it.
Apple became the world's first trillion-dollar company this week after another impressive quarterly earnings performance pushed its market cap over $1 trillion US. The company previously said it planned to buy back $100 billion of its own shares this year, and has been doing so with aplomb in recent weeks.
Barry Schwartz, chief investment officer at money manager Baskin Wealth Management in Toronto, said the recent surge of buybacks is completely justified based on the underlying profits that companies are earning.
While he doesn't like it when he sees companies buying back shares using debt, or transparently doing it just to boost their share prices, Schwartz said he's fine when a company like Apple does it.
"Because they don't need to build more factories or widgets to get more sales," he said. "They're just swimming in cash."
Left-leaning American think-tank the Roosevelt Institute found that from 2015 to 2017, U.S. companies spent 60 per cent of their profits on buying back their own shares, rather than investing that money in new ventures or pay hikes.
The report calculated how some companies could have spent that money differently:
- McDonald's could have paid its 1.9 million workers almost $4,000 more a year.
- Starbucks could have given every worker a $7,000 raise.
- Lowes, CVS and Home Depot could have each given their workers raises of at least $18,000 a year.
"One of the main responses to Trump's tax policy was to buy back stocks. It's absolutely a trend we are seeing among our clients," she said of a group that includes large S&P 500 companies all the way down to small independently owned businesses.
She cites data from another recent report, from the California-based Drucker Institute, that found corporations plan to spend 30 times more on stock buybacks than on boosting their employees' pay this year.
Even among companies that are passing some of those newfound profits down to workers, most are paying bonuses rather than giving raises.
"It makes the employee feel good, and makes the employer feel good," Bardaro said, "but it's transitory — it's a [one-time] boost in their wallet."
Bank of America, for example, received plenty of kudos after tax reform passed for announcing it would give all 145,000 of its workers a $1,000 bonus. That act of corporate generosity will cost the bank $145 million — or less than three per cent of the $5 billion the bank plans to spend buying back its stock this year.
In a recent speech, Robert J. Jackson, a commissioner with the U.S. Securities and Exchange Commission, cited the regulator's own research that shows in the days following a buyback announcement, company executives were five times more likely to sell their own shares in the company.
In other words, executives were cashing in, even as they were telling investors they think their stock is undervalued. For Benj Gallander, president and founder of Contra the Heard Investment Letter, that's "bad optics," at the very least.
He's not opposed to buybacks in general, but he prefers for companies to reward shareholders with dividends — or better yet, invest in growing their businesses.
"Often it's very, very questionable to me why companies do it," he said.
'Give it back to me'
For William McNally, a professor of finance at the Lazaridis School of Business and Economics in Waterloo, Ont., the reason is simple: buybacks are a great use of excess funds.
"These companies don't necessarily have great projects to invest in [so] it's not like they could just invent a new cure for cancer if they hadn't been giving it to those fat cat shareholders."
Plus, buyback critics might not like the results if companies decided instead to waste money on bad projects and misguided takeovers, he said.
"Better to give it back to shareholders and then they can choose to invest it in a new upstart company."
For a company like Apple, which is currently sitting on a $247-billion pile of cash, earmarking a good chunk of that to buying back its shares makes sense, McNally said.
"My attitude as a shareholder is, give it back to me," he said. "You don't have anything to do with it."
About the Author
https://www.sec.gov/news/speech/speech-jackson-061118
Stock Buybacks and Corporate Cashouts
Washington D.C.
Thank you so much, Neera, for
that very kind introduction. I’ve long admired all that you and everyone
here at the Center for American Progress do to promote a progressive
economic agenda. And I share your commitment to making sure our markets
are safe and efficient—and fair for all Americans. So it’s a real honor
to be with you here today.[1]
I also want to thank my friend Andy Green, who in addition to being Managing Director of Economic Policy here at CAP, has been a critical source of wisdom for me since my swearing in at the Commission back in January.
Before I begin, let me start with the standard disclaimer that the views I’m about to express are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s Staff. And let me add my own standard caveat, which is that I fully expect someday to convince my colleagues that I am, as usual, completely correct in everything I say and do.
Today, I’d like to share a few thoughts about corporate stock buybacks—and some research produced by my staff that raises significant new questions about this activity. As Neera mentioned, I’m a recovering researcher. Before I was appointed to the SEC, I was a law professor who spent most of my time thinking about how to give corporate managers incentives to create sustainable long-term value. I’d often ask my students: are we making sure that executive pay gives managers reason to invest in the long-term development of their workforce and their communities? Or are we paying executives to pursue short-term stock-price spikes rather than long-term growth?
Little did I know that, so soon into my tenure, I’d have a sobering case study to put these questions to the test. That’s because the Trump tax bill, promising to bring overseas corporate cash home, became law last December.
Now, we all know what happened the last time a Republican-controlled government pushed through a corporate tax holiday in 2004. As that bill’s sponsors hoped, American companies repatriated billions of dollars of overseas cash.[2] But corporations didn’t invest most of that money in innovation. They didn’t invest it in retraining their workforce or raising wages. Instead, executives largely used the influx of fresh funds for massive stock buybacks.[3]
So when I first took this job, I worried that 14 years later history would repeat itself, and the tax bill would cause managers to focus on financial engineering rather than long-term value creation. Sure enough, in the first quarter of 2018 alone American corporations bought back a record $178 billion in stock.[4] On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs.[5] And, because we at the SEC have not reviewed our rules governing stock buybacks in over a decade, I worry whether these rules can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.[6]
Even more disturbing, there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay.[7] We give stock to corporate managers to convince them to create the kind of long-term value that benefits American companies and the workers and communities they serve. Instead, what we are seeing is that executives are using buybacks as a chance to cash out their compensation at investor expense.
Executives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is. That’s why I’m here today to call on my colleagues at the Commission to update our rules to limit executives from using stock buybacks to cash out from America’s companies.
And I am also calling for an open comment period to reexamine our rules in this area to make sure they protect employees, investors, and communities given today’s unprecedented volume of buybacks.
Basic corporate-finance theory tells us that, when a company announces a stock buyback, it is announcing to the world that it thinks the stock is cheap.[8] That announcement, and the firm’s open-market purchasing activity, often causes the company’s stock price to jump, so the SEC has adopted special rules to govern buybacks.
Those rules, first adopted in 1982, provide companies with a safe harbor[9] from securities-fraud liability if the pricing and timing of buyback-related repurchases meet certain conditions.[10] After experience proved that buybacks could be used to take advantage of less-informed investors,[11] the SEC updated its rules in 2003, though researchers noted that several gaps remained.[12]
In the meantime, the use of stock-based pay at American public companies has exploded.[13] Although these pay programs present many challenges, the one that I’ve spent much of my career thinking about is how to make sure that corporate management has skin in the game—that is, how to keep top executives from cashing out stock they receive as compensation.[14]
You see, the theory behind paying executives in stock is to give them incentives to create long-term, sustainable value.[15] Because executives who receive shares rather than cash demand higher levels of pay, the use of stock-based compensation has led to eye-opening pay packages for top executives. In the trade, investors—and the economy as a whole—tie executives’ fortunes to the growth of the company.
But that only works when executives are required to hold the stock over the long term. Researchers have long worried that executives, who always prefer cash to stock, will try to sell rather than hold their shares, eliminating the incentives they were meant to produce.[16] So it’s no surprise that, in the years leading up to the financial crisis, top executives at Bear Stearns and Lehman Brothers personally cashed out $2.4 billion in stock before the firms collapsed.[17] And it’s no wonder that sophisticated investors have for decades strictly limited executives’ freedom to cash out their shares.[18]
In the wake of the financial crisis, Congress realized the importance of keeping executives’ skin in the game, so the Dodd-Frank Act included several provisions designed to give investors more information about whether and how managers cash out.[19] Unfortunately, as you all know too well, those rules have still not yet been completed, keeping investors in the dark about executives’ incentives.
Nearly eight years since that landmark legislation, it is completely unacceptable that the SEC has still not promulgated these and other rules required by law. But it’s not just that the regulations haven’t been finalized. It’s that the problem itself keeps getting worse. You see, the Trump tax bill has unleashed an unprecedented wave of buybacks, and I worry that lax SEC rules and corporate oversight are giving executives yet another chance to cash out at investor expense.
That’s why, when I was sworn in a few weeks after the Trump tax bill took effect, I asked my staff to take a look at how buybacks affect how much skin executives keep in the game. I was worried that lax corporate practices and SEC rules might lead to buybacks that give executives yet another chance to cash out at investor expense.
So we dove into the data, studying 385 buybacks over the last fifteen months.[20] We matched those buybacks by hand to information on executive stock sales available in SEC filings.[21] First, we found that a buyback announcement leads to a big jump in stock price: in the 30 days after the announcements we studied, firms enjoy abnormal returns of more than 2.5%.[22] That’s unsurprising: when a public company in the United States announces that it thinks the stock is cheap, investors bid up its price.
What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement. In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day.[23] So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.[24]
And, in the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement:
Now, let’s be clear: this trading is not necessarily illegal. But it is 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. It’s one thing for a corporate board and top executives to decide that a buyback is the right thing to do with the company’s capital. It’s another for them to use that decision as an opportunity to pocket some cash at the expense of the shareholders they have a duty to protect, the workers they employ, or the communities they serve.
More importantly, policymakers, advocates, investors and corporate boards have spent decades, and billions of dollars of shareholder money, trying to tie executive pay to long-term corporate performance. But the evidence shows that buybacks give executives an opportunity to take significant cash off the table, breaking the pay-performance link. SEC rules do nothing to discourage executives from using buybacks in this way. It’s time for that to change.
There are two steps we can and should take right away to address the practice of executives using buybacks as a chance to sell their shares. First, as I mentioned earlier, the SEC last revised its rules governing buybacks in 2003. Those rules give companies a so-called “safe harbor” from liability when pursuing buybacks. But there are no limits on boards and executives using the buyback—and the safe harbor—as an opportunity to cash out.
I cannot see why a safe harbor to the securities laws should subsidize this behavior. Instead, SEC rules should encourage executives to keep their skin in the game for the long term. That’s why our rules should be updated, at a minimum, to deny the safe harbor to companies that choose to allow executives to cash out during a buyback.[25]
And that’s why today I’m also calling for an open comment period to reexamine our rules in this area to make sure they protect American companies, employees, and investors given today’s unprecedented volume of buybacks.[26]
Second, corporate boards and their counsel should pay closer attention to the implications of a buyback for the link between pay and performance. In particular, the company’s compensation committee should be required 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. If executives will use the buyback to cash out, the committee should be required to approve that decision and disclose to investors the reasons 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.[27]
Executives who can’t sell their holdings in the short term—but instead have to create real value over time—have far fewer incentives to manage to quarterly earnings and pursue the kind of short-term thinking that dominates our economy today. The esteemed experts on our next panel will, I’m sure, offer broader policy proposals that can help us address those problems. But at the SEC, it’s time for our rules to require corporate managers who say they want to manage for the long term to put their money where their mouth is. At the very least, our rules should stop giving executives incentives to use buybacks to cash out.
The increasingly rapid cycling of capital at American public companies has had real costs for American workers and families. 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.
Each day when I arrive at work, I’m reminded that the SEC’s mission is to protect investors, ensure a level playing field in our financial markets, and encourage capital formation. Updating our rules to reflect the effects of buybacks on executives’ incentives to create long-term value would serve all three of those goals.
Investors deserve to know when corporate insiders who are claiming to be creating value with a buyback are, in fact, cashing in.[28] A level playing field requires that shareholders selling into a buyback know what managers are doing with their own money. And investors who feel assured that buybacks won’t be used as a chance for insiders to cash in will be more willing to fund the kinds of long-term investments our economy needs.
All of you here at CAP have provided essential leadership in developing policies that produce growth for all Americans—and favor long-term value creation over financial engineering. That’s why I’m so proud to be here today. I’m very much looking forward to your questions. And I so look forward to working with you to ensure that the SEC’s policies create the kinds of markets that American families need—and deserve.
I also want to thank my friend Andy Green, who in addition to being Managing Director of Economic Policy here at CAP, has been a critical source of wisdom for me since my swearing in at the Commission back in January.
Before I begin, let me start with the standard disclaimer that the views I’m about to express are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s Staff. And let me add my own standard caveat, which is that I fully expect someday to convince my colleagues that I am, as usual, completely correct in everything I say and do.
Today, I’d like to share a few thoughts about corporate stock buybacks—and some research produced by my staff that raises significant new questions about this activity. As Neera mentioned, I’m a recovering researcher. Before I was appointed to the SEC, I was a law professor who spent most of my time thinking about how to give corporate managers incentives to create sustainable long-term value. I’d often ask my students: are we making sure that executive pay gives managers reason to invest in the long-term development of their workforce and their communities? Or are we paying executives to pursue short-term stock-price spikes rather than long-term growth?
Little did I know that, so soon into my tenure, I’d have a sobering case study to put these questions to the test. That’s because the Trump tax bill, promising to bring overseas corporate cash home, became law last December.
Now, we all know what happened the last time a Republican-controlled government pushed through a corporate tax holiday in 2004. As that bill’s sponsors hoped, American companies repatriated billions of dollars of overseas cash.[2] But corporations didn’t invest most of that money in innovation. They didn’t invest it in retraining their workforce or raising wages. Instead, executives largely used the influx of fresh funds for massive stock buybacks.[3]
So when I first took this job, I worried that 14 years later history would repeat itself, and the tax bill would cause managers to focus on financial engineering rather than long-term value creation. Sure enough, in the first quarter of 2018 alone American corporations bought back a record $178 billion in stock.[4] On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs.[5] And, because we at the SEC have not reviewed our rules governing stock buybacks in over a decade, I worry whether these rules can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.[6]
Even more disturbing, there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay.[7] We give stock to corporate managers to convince them to create the kind of long-term value that benefits American companies and the workers and communities they serve. Instead, what we are seeing is that executives are using buybacks as a chance to cash out their compensation at investor expense.
Executives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is. That’s why I’m here today to call on my colleagues at the Commission to update our rules to limit executives from using stock buybacks to cash out from America’s companies.
And I am also calling for an open comment period to reexamine our rules in this area to make sure they protect employees, investors, and communities given today’s unprecedented volume of buybacks.
Stock Buybacks and Executive Pay
Basic corporate-finance theory tells us that, when a company announces a stock buyback, it is announcing to the world that it thinks the stock is cheap.[8] That announcement, and the firm’s open-market purchasing activity, often causes the company’s stock price to jump, so the SEC has adopted special rules to govern buybacks.
Those rules, first adopted in 1982, provide companies with a safe harbor[9] from securities-fraud liability if the pricing and timing of buyback-related repurchases meet certain conditions.[10] After experience proved that buybacks could be used to take advantage of less-informed investors,[11] the SEC updated its rules in 2003, though researchers noted that several gaps remained.[12]
In the meantime, the use of stock-based pay at American public companies has exploded.[13] Although these pay programs present many challenges, the one that I’ve spent much of my career thinking about is how to make sure that corporate management has skin in the game—that is, how to keep top executives from cashing out stock they receive as compensation.[14]
You see, the theory behind paying executives in stock is to give them incentives to create long-term, sustainable value.[15] Because executives who receive shares rather than cash demand higher levels of pay, the use of stock-based compensation has led to eye-opening pay packages for top executives. In the trade, investors—and the economy as a whole—tie executives’ fortunes to the growth of the company.
But that only works when executives are required to hold the stock over the long term. Researchers have long worried that executives, who always prefer cash to stock, will try to sell rather than hold their shares, eliminating the incentives they were meant to produce.[16] So it’s no surprise that, in the years leading up to the financial crisis, top executives at Bear Stearns and Lehman Brothers personally cashed out $2.4 billion in stock before the firms collapsed.[17] And it’s no wonder that sophisticated investors have for decades strictly limited executives’ freedom to cash out their shares.[18]
In the wake of the financial crisis, Congress realized the importance of keeping executives’ skin in the game, so the Dodd-Frank Act included several provisions designed to give investors more information about whether and how managers cash out.[19] Unfortunately, as you all know too well, those rules have still not yet been completed, keeping investors in the dark about executives’ incentives.
Nearly eight years since that landmark legislation, it is completely unacceptable that the SEC has still not promulgated these and other rules required by law. But it’s not just that the regulations haven’t been finalized. It’s that the problem itself keeps getting worse. You see, the Trump tax bill has unleashed an unprecedented wave of buybacks, and I worry that lax SEC rules and corporate oversight are giving executives yet another chance to cash out at investor expense.
How Executives Use Buybacks to Cash out
That’s why, when I was sworn in a few weeks after the Trump tax bill took effect, I asked my staff to take a look at how buybacks affect how much skin executives keep in the game. I was worried that lax corporate practices and SEC rules might lead to buybacks that give executives yet another chance to cash out at investor expense.
So we dove into the data, studying 385 buybacks over the last fifteen months.[20] We matched those buybacks by hand to information on executive stock sales available in SEC filings.[21] First, we found that a buyback announcement leads to a big jump in stock price: in the 30 days after the announcements we studied, firms enjoy abnormal returns of more than 2.5%.[22] That’s unsurprising: when a public company in the United States announces that it thinks the stock is cheap, investors bid up its price.
What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement. In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day.[23] So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.[24]
And, in the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement:
Now, let’s be clear: this trading is not necessarily illegal. But it is 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. It’s one thing for a corporate board and top executives to decide that a buyback is the right thing to do with the company’s capital. It’s another for them to use that decision as an opportunity to pocket some cash at the expense of the shareholders they have a duty to protect, the workers they employ, or the communities they serve.
More importantly, policymakers, advocates, investors and corporate boards have spent decades, and billions of dollars of shareholder money, trying to tie executive pay to long-term corporate performance. But the evidence shows that buybacks give executives an opportunity to take significant cash off the table, breaking the pay-performance link. SEC rules do nothing to discourage executives from using buybacks in this way. It’s time for that to change.
The Path Forward
There are two steps we can and should take right away to address the practice of executives using buybacks as a chance to sell their shares. First, as I mentioned earlier, the SEC last revised its rules governing buybacks in 2003. Those rules give companies a so-called “safe harbor” from liability when pursuing buybacks. But there are no limits on boards and executives using the buyback—and the safe harbor—as an opportunity to cash out.
I cannot see why a safe harbor to the securities laws should subsidize this behavior. Instead, SEC rules should encourage executives to keep their skin in the game for the long term. That’s why our rules should be updated, at a minimum, to deny the safe harbor to companies that choose to allow executives to cash out during a buyback.[25]
And that’s why today I’m also calling for an open comment period to reexamine our rules in this area to make sure they protect American companies, employees, and investors given today’s unprecedented volume of buybacks.[26]
Second, corporate boards and their counsel should pay closer attention to the implications of a buyback for the link between pay and performance. In particular, the company’s compensation committee should be required 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. If executives will use the buyback to cash out, the committee should be required to approve that decision and disclose to investors the reasons 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.[27]
Executives who can’t sell their holdings in the short term—but instead have to create real value over time—have far fewer incentives to manage to quarterly earnings and pursue the kind of short-term thinking that dominates our economy today. The esteemed experts on our next panel will, I’m sure, offer broader policy proposals that can help us address those problems. But at the SEC, it’s time for our rules to require corporate managers who say they want to manage for the long term to put their money where their mouth is. At the very least, our rules should stop giving executives incentives to use buybacks to cash out.
* * * *
The increasingly rapid cycling of capital at American public companies has had real costs for American workers and families. 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.
Each day when I arrive at work, I’m reminded that the SEC’s mission is to protect investors, ensure a level playing field in our financial markets, and encourage capital formation. Updating our rules to reflect the effects of buybacks on executives’ incentives to create long-term value would serve all three of those goals.
Investors deserve to know when corporate insiders who are claiming to be creating value with a buyback are, in fact, cashing in.[28] A level playing field requires that shareholders selling into a buyback know what managers are doing with their own money. And investors who feel assured that buybacks won’t be used as a chance for insiders to cash in will be more willing to fund the kinds of long-term investments our economy needs.
All of you here at CAP have provided essential leadership in developing policies that produce growth for all Americans—and favor long-term value creation over financial engineering. That’s why I’m so proud to be here today. I’m very much looking forward to your questions. And I so look forward to working with you to ensure that the SEC’s policies create the kinds of markets that American families need—and deserve.
[1] Commissioner,
United States Securities and Exchange Commission. I am, as always,
grateful to my SEC colleagues Bobby Bishop, Caroline Crenshaw, Marc
Francis, Satyam Khanna, Prashant Yerramalli, and Jon Zytnick for their
invaluable counsel. Professor Jesse Fried of the Harvard Law School also
provided insights that significantly deepened my thinking about these
matters. The views expressed here are solely my own, and do not
necessarily reflect those of the Staff or my colleagues on the
Commission, though I hope someday they will.
[3] Although the degree to which corporations used the proceeds of the 2004 holiday for buybacks is debatable, whether they did so—even though the statute prohibited such uses—is not. Compare Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes, Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, 66 J. Fin. 753 (2011) with Thomas J. Brennan, Where the Money Really Went: A New Understanding of the AJCA Tax Holiday (Northwestern
Law and Economics Working Paper) (2014). What’s worse, “the temporary
holiday conditioned firms to anticipate future holidays and to change
their behavior by placing more earnings overseas than ever before.”
Thomas J. Brennan, What Happens After a Holiday? Long-Term Effects of the Repatriation Provisions of the AJCA, 5 Nw. J. L. & Soc. Pol’y 1 (2010).
[4] Talib Visram, Tax Cut Fuels Record $200 Billion Stock Buyback Bonanza, CNN.com (June 5, 2018); see also William Lazonick, Stock Buybacks: From Retain-and-Reinvest to Downsize-and-Distribute,
Brookings Initiative on 21st Century Capitalism (April 2015), at 2
(“Over the decade 2004-2013, 454 companies in the S&P 500 Index in
March 2014 that were publicly listed over the ten years did $3.4
trillion in stock buybacks, representing 51 percent of net income.”).
[5]
Savvy market observers also worry that the magnitude of this year’s
buyback spree reflects a troubling trend in corporate investment. See, e.g., Matt Egan, Goldman Sachs Warns Against Falling in Love with Stock Buybacks,
CNNMoney.com (April 26, 2018) (noting a recent equity research report
describing the perhaps-unsurprising result that, since the 2016
presidential election, “Goldman Sachs’s collection of stocks that are
focused on capital spending and research and development soared 42% . . .
besting the S&P 500’s 24% gain”).
[6] For an exceptionally clear demonstration as to how buybacks can harm investors while benefiting insiders, see Jesse M. Fried, Insider Trading Via the Corporation,
162 U. Pa. L. Rev. 801, 805 (2014) (referring to stock buybacks as
“indirect insider trading” and noting that such “trading likely imposes
considerable costs on public investors in two ways. First, just like
‘ordinary’ direct insider trading, indirect insider trading secretly
redistributes value from public investors to insiders. . . . Second, the
use of the corporation as a vehicle for insider trading can lead
insiders to waste economic resources.”).
[7]
In these remarks, I focus on executives’ use of buybacks to cash out
shares granted as part of compensation packages otherwise designed to
link executive pay with long-term performance. There are, of course,
circumstances where managers who founded the firm or are otherwise large
shareholders seek liquidity for those holdings using buybacks. Those
cases, too, should be addressed if the SEC chooses to reevaluate its
rules in this area. But here I focus on cases where executives use
buybacks to cash out shares granted as stock-based pay.
[8] See, e.g., George Constantinides & Bruce Grundy, Optimal Investment with Stock Repurchase and Financing as Signals, 2 Rev. Fin. Stud. 445 (1989) (providing a theoretical model on the role of repurchases when a firm is undervalued).
[9]
Among other reasons, a safe harbor is necessary because firms often
pursue buybacks under informational circumstances that might lead to
securities-law liability in other contexts. See Fried, supra note 5, at 813-814 (“The SEC takes the position that Rule 10b-5 . . . applies to a firm buying its own shares.”).
[10]
Securities and Exchange Commission, Final Rule: Purchases of Certain
Equity Securities by the Issuer and Others, Release Nos. 33-8335,
34-48766, 17 C.F.R. Pt. 228 et seq.
[11]
For example, because these rules permitted firms to announce a
buyback—generating a stock-price spike—and then choose not to buy back
any stock at all without disclosing that fact to investors, commentators
and the SEC worried that managers opportunistically used buyback
announcements to manipulate share prices. See, e.g., Jesse Fried, Informed Trading and False Signaling with Open Market Repurchases, 93 Cal. L. Rev. 1323, 1336-40 (2005); see also Final Rule, supra note
8 (“Studies have . . . shown that some issuers publicly announce
repurchase programs, but do not purchase any shares or purchase only a
small portion of the publicly disclosed amount.”).
[12] See Final Rule, supra note
8. Among other things, commentators have pointed out that the SEC’s
still-lax disclosure rules regarding buybacks give corporate insiders “a
strong incentive to exploit [those] rules in order to engage in
indirect insider trading: having the firm buy and sell its own shares at
favorable prices to increase the value of the insiders’ equity.” Fried,
supra note 8, at 804. Indeed, there is important evidence that
the limited tightening of disclosure rules in this area have had some
benefits in addressing opportunistic buyback activity. See Michael Simkovic, The Effect of Mandatory Disclosure on Open-Market Stock Repurchases,
6 Berkeley Bus. L. J. 98 (2009). That evidence makes the case for
revisiting these rules now all the more compelling. Indeed, the
Commission issued a proposal to update these rules in 2010, see Proposed
Rule, Purchases of Certain Equity Securities by the Issuer and Others,
Release No. 34-61414 (2010), but to date has taken no action on the
proposal.
[13] See, e.g., Kevin J. Murphy, Executive Compensation: Where We Are and How We Got There, in George Constantinides, Milton Harris, and Rene Stulz, Eds., Handbook on Economics and Finance 211 (2013).
[14] See, e.g., Robert J. Jackson, Jr., Stock Unloading and Banker Incentives, 112 Colum. L. Rev. 951 (2012); Robert J. Jackson, Jr. & Colleen Honigsberg, The Hidden Nature of Executive Retirement Pay, 100 Va. L. Rev. 479 (2014); Robert J. Jackson, Jr. & Jonathon Zytnick, The Effects of a Tax Notch on CEO Golden Parachute Contracts and Option Exercises (working paper 2018).
[15] See, e.g., Kevin Murphy, Executive Compensation, in Orley C. Ashenfelter & David Card, Eds., 3B Handbook of Labor Economics 2485 (1999).
[16] See Lucian A. Bebchuk, Jesse Fried, and David Walker, Managerial Power and Rent Extraction in the Design of Executive Compensation, 69 U. Chi. L. Rev. 751 (2002); see also Lucian A. Bebchuk & Jesse Fried, Paying for Long-Term Performance,
158 U. Pa. L. Rev. 1915, 1921 (2010) (describing concerns related to
“ensuring that, whatever equity incentives are used [in executive pay,
executives’] payoffs are primarily based on long-term stock values
rather than on short-term gains that may be reversed.”).
[17] Lucian A. Bebchuk, Alma Cohen, and Holger Spamann, The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, 27 Yale. J. Reg. 257 (2012).
[18] Robert J. Jackson, Jr., Private Equity and Executive Compensation,
60 U.C.L.A. L. Rev. 638, 640 (2013) (“[T]he pay-performance link is
much weaker in public companies than in companies owned by private
equity investors. Borrowing from their private equity counterparts,
public company boards seeking to strengthen the link between pay and
performance should restrict CEOs’ freedom to unload.”).
[19] See, e.g.,
Dodd-Frank Wall Street Reform and Consumer Protection Act §§ 953(a),
954, 955, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (requiring the SEC
to adopt rules requiring disclosure of the pay-performance link, public
companies’ policies related to the clawback of erroneously awarded
compensation, and policies related to insider hedging of public
companies’ stocks, none of which has been finalized).
[20]
We drew information on buybacks from the Securities Data Company (SDC)
database, using transactions identified by SDC as buybacks with
announcements in the year 2017 and the first three months of 2018. For
consistency in treatment across the sample, we identify an initial
sample of 708 repurchases and retain only the first repurchase
announcement by each company—and only those repurchases not followed by a
subsequent repurchase announcement within 60 days. We merged those data
with information from the Center for Research on Securities Prices
(CRSP) database, leaving a sample of 385 public company buybacks.
[21] We used data from Form 4 filed pursuant to Section 16. See Securities
and Exchange Commission, Ownership Reports and Trading By Officers,
Directors and Principal Securities Holders, 56 Fed. Reg. 7,242 (Feb. 21,
1991); see also Securities and Exchange Commission, Mandated
Electronic Filing and Web Site Posting for Forms 3, 4 and 5, 68 Fed.
Reg. 25,788 (May 13, 2003).
[22] That finding is consistent with the longstanding finance literature on the effects of these announcements on stock prices. See, e.g., David Ikenberry, Josef Lakonishok, and Theo Vermalen, Market Underreaction to Open Market Share Repurchases, 39 J. Fin. Econ. 181 (1995); Jesse M. Fried, Insider Signaling and Insider Trading with Repurchase Tender Offers, 67 U. Chi. L. Rev. 421 (2000).
[23]
On an average day, between 3 and 4 percent of corporate insiders trade
in the company’s stock, but we found that, during the eight days
following a buyback announcement, more than 8 percent do. We direct the
interested reader to the data appendix to this speech, where you can
learn more about our methodology and analysis.
[24]
Investors receive a mixed signal from a buyback announcement that is
accompanied by insider selling. Indeed, as we explain in our data
appendix, we observe statistically significantly lower returns during
the ten- and thirty-day window following buyback announcements with
executive selling than we do in buybacks where executives hold their
shares for the long term.
[25]
The precise way in which the safe-harbor could be restructured to
disfavor the use of buybacks for insider sales is beyond the scope of my
remarks—and, in all events, well within the expertise of our
exceptional Staff. Suffice it to say that, if the Commission were so
inclined, our Staff would have little difficulty making sure that our
rules are not used in a way that encourages corporate executives to use
buybacks to sell their shares.
[26]
We should also use this opportunity to review other problems with Rule
10b-18 and related rules—including the fact that they require only
quarterly disclosure of the amount of shares a company has actually
repurchased, leaving investors largely in the dark about corporate
trading in their own shares. For an exceptionally thoughtful proposal in
this respect, see Fried, supra note 5.
[27] Except, of course, the fact that our rules let them. See Final Rule, supra note 8; but see Schnell
v. Chris-Craft Industries, Inc., 285 A.2d 437, 444 & n.15 (Del.
1971) (“Inequitable action does not become permissible simply because it
is legally possible.”).
[28] It’s true, of course, that investors eventually receive
disclosure of executives’ selling on Form 4, which is how we were able
to conduct this study. But those disclosures come after the
executive has already sold—too late for shareholders to price the
executive’s decision into their own determination whether to sell their
shares. See Fried, supra note 5.
I'm Dr Ogudugu, a real and genuine spell caster/Spiritual healer with years of experience in spell casting and an expert in all spells, i specialize exclusively in LOVE SPELL/GET REUNITE WITH EX LOVER, MONEY SPELL, POWERFUL MAGIC RING, ANY COURT CASES, FRUIT OF THE WOMB, HIV CURE, CURE FOR CANCER, HERPES, DIABETE, HERPERTITIS B, PARKINSON’S HERBAL CURE, BECOMING A MERMAID, BECOMING A VAMPIRE, SAVE CHILD BIRTH. They are all %100 Guaranteed QUICK Results, it most work. If you have any problem and you need a real and genuine spell caster to solve your problems, contact me now through my personal Email Address with problem case...Note-you can also Text/Call on WhatsApp.
ReplyDeleteContact me -
Email: greatogudugu@gmail.com
WhatsApp No: +27663492930