December 12, 2019
Buybacks & Equity Compensation: Match Made in Heaven?
– Liz Dunshee
Our friend Bruce Dravis recently sent us a note about his research on the complementary relationship between stock buybacks & equity compensation – and a related panel that the ABA’s Corporate Governance Committee held at the Business Law Section meeting in September:
Given some of the leaders in the Democratic presidential polls, the political critique of buybacks could be a hot topic in 2020. The ABA panel looked at ways the political and academic critiques of buybacks miss the boat – particularly with respect to the assumption that dollars spent on buybacks just leak out of the capital markets and evaporate.
In the Fortune 100 companies sampled – $1.23 trillion of transactions — about 37% of buybacks reversed share dilution created by equity compensation, with 61% of the dollar cost of such repurchases offset by option exercise proceeds and tax benefits. While the other two-thirds of buybacks are “pure play” repurchases that affirmatively reduce share counts, a sizable chunk of buyback activity supports the employee compensation benefit.
In the panel, Prof. Jesse Fried also spoke to his research on “short-termism” – including how investors recycle buyback dollars in the capital and investment markets.
Given the huge amount of money spent on buybacks in recent years, Bruce is probably right that they’ll continue to draw scrutiny – whether fairly or unfairly, and even if the true issue is less about buybacks themselves and more about some perception of market manipulation to benefit insiders. This recent WaPo article takes issue specifically with insider sales after a buyback announcement. It picks up on the thread of SEC Commissioner’s Rob Jackson’s critiques – even if the post-announcement sales are made under a 10b5-1 plan or during an open window.