• Charles Heighton

Manipulated share buybacks should be outlawed


By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets


Share buybacks are either loved or hated by investors across the world. They inevitably increase the price of an individual stock, and companies are often rewarded with a larger market caps alongside a higher share price. A recent example of this is Softbank, who at the start of the year initiated a widespread program of buybacks to increase the stock price. This was arguably done to keep Masayoshi Son from breaking covenants on his personal debt. Investors rewarded this strategy by increasing the market cap of the company. This increase should not technically occur as a result of buybacks, because they do not positively affect the value of the company. In practice, this increase in market cap often occurs.


Share buybacks are now seen as a superior option to dividends by management in the US because of the tax benefits. However, a recent study has documented the timing of share buybacks and found that they are generally timed to bump up the price when C-Suite options vest. They then sell their newly vested shares at this higher price. This is an example of managers using the company to personally enrich themselves.


While a complete banning of share buybacks would be an overreaction, this data shows that something needs to be done to prevent this form of manipulation. Executives should not be allowed to time company decisions to profit themselves. Managers are obviously manipulating business operations specifically to enrich themselves. While this also benefits other shareholders, the timing does not matter to any other stakeholder.


Former SEC Commissioner Robert Jackson raised this issue in 2018 and claimed that the current rules do not discourage or prevent this strategy. He noted that this breaks the link between pay and performance. This also hurts shareholders in the long term according to further research. The positive effects of the price bump are offset by dilution via executive packages over the long run, making executives the only beneficiaries of the current system.


There are also further issues with buybacks, as evidence has shown that they harm profitability in the long term. However, the above evidence should be enough. Buybacks should be banned from coinciding with the vesting of executive shares. This is not a complex topic; the data is clear. The current system harms shareholders and the business itself. The US government needs to step in and prevent this obvious abuse of power to benefit all stakeholders and realign management priorities of building a great business not a cash cow for execs.


Sources:

https://ritholtz.com/2020/10/corporations-scamming-shareholders/

https://www.nber.org/papers/w20476

https://www.japantimes.co.jp/news/2020/04/27/business/corporate-business/softbanks-buyback-investors/

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