In a June 2018 speech, SEC Commissioner Robert Jackson, Jr. took aim at insiders’ sales of stock during corporate stock buyback programs and called for an open comment period on SEC rules governing “safe harbors” for stock buybacks. Jackson’s speech suggested he believed that executives who authorize stock buybacks and then sell their personal shares during such repurchase programs may act to undermine the incentive structure that is theoretically inherent to stock-based compensation – the creation of long-term, sustainable value. His concern is that stock buybacks, which generally boost the current stock price, reflect a short-term focus at the expense of innovation and the generation of long-term shareholder value.
Jackson’s statement may have been in response to the latest proliferation of share repurchase programs in the U.S. In the first quarter of 2018 alone, American corporations bought back $178 billion in stock. As reported by Forbes, publicly-traded U.S. companies are currently on track to repurchase $1 trillion worth of their own shares in 2018.
The following results were reported from research conducted by Mr. Jackson’s staff, which studied 385 buybacks over a fifteen-month period prior to January 2018:
- In about half of those buybacks, at least one executive, committee member or director of a public company sold shares in the month following the buyback announcement.
- Twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day.
- On average, in the days before a buyback announcement, insiders trade in relatively small amounts (less than $100,000 worth).
- During the eight days following a buyback announcement, insiders on average sell more than $500,000 worth of stock each day.
Though Jackson’s study leaves many unanswered questions, his speech indicates that stock buyback rules may become a focus for the SEC.
Jackson proposed a dual approach to revising the SEC’s current buyback rules – expanded committee disclosure and limiting the application of existing stock buyback safe harbors.
Jackson recommended new procedures and requirements for compensation committees, essentially requiring them to review and approve the extent that insiders will be permitted to participate in a buyback. Jackson’s proposal would also require disclose of the committee’s decision to investors, along with an explanation of why the decision is in the company’s long-term interests. Following the committee’s decision and its disclosure, Jackson suggested that it may be appropriate to restrict the availability of the Rule 10b-18 safe harbor to any company that permits executives to sell stock following a stock buyback announcement. Rule 10b-18 of the Securities Exchange Act of 1934 provides certainty from charges of illegal market manipulation for companies and their affiliated purchasers when the company or its affiliates repurchase the company’s shares of common stock in compliance with the Rule. A board would be forced to choose between the certainty afforded stock repurchases made in compliance with Rule 10b-18 and denying insiders the right to sell shares earned as compensation.
Other data points highlight the growing focus on stock buybacks. For example, in June 2018, 21 Democratic U.S. Senators asked the SEC to examine its current rules around stock buybacks and to revisit Rule 10b-18. There has also been a trend for certain shareholder activists in recent years to submit shareholder proposals calling to exclude the impact of stock buybacks from performance metrics used in determining executive compensation.
Future debate may attempt to analyze other important avenues of inquiry, such as the impact of corporate stock ownership guidelines and the different roles of board members and executive officers in making decisions about stock buybacks. While we wait, in light of the current attention being paid to the issue of share buyback programs by regulators and legislators alike, it may be prudent for directors to evaluate their companies’ current policies and practices, if any, with respect to stock repurchase programs and executive participation specifically.