A U.S. Securities and Exchange commissioner said insider sales surrounding corporate buybacks may hurt the long-term interest of shareholders, prompting a U.S. senator to call for tighter restrictions on executive stock sales.
“The market verdict is that when executives sell into a buyback, that’s bad for the company and its long-term prospects,” said Robert J. Jackson Jr., one of four SEC commissioners. “I don’t know why anybody would want to be for that.”
Jackson’s findings are contained in a five-page letter to Sen. Chris Van Hollen (D-Md.) that the senator released Wednesday during a telephone conference with the media.
“The evidence points to a troubling trend,” Jackson said in his letter. “When insiders sell upon announcing a buyback, long-term performance is worse.”
Van Hollen called the conclusions “startling” and said he will press to reopen discussions about regulations governing when corporate insiders can sell their shares.
“The bottom line is that this is very troubling that corporate insiders are getting paydays for themselves at the expense of stockholders,” Van Hollen said.
Corporations buying back their shares on the open market, while legal, has exploded in the past year as companies have become flush with cash because of the Republican corporate tax cut passed in December 2017.
There is potential for abuse because corporate executive compensation is often tied to a manager’s ability to increase his or her company’s share price. Buybacks can raise the share price without the company doing anything more than spending its cash buying its own stock.
“Something like two-thirds of executive compensation tends to be stock-based,” said economist William Lazonick, a critic of buybacks who has written extensively on the subject. “Executives benefit directly by boosting the share price that stock buybacks give and selling their shares. The information they may be trading on is not transparent and is not available to the public and even to the SEC.”
Van Hollen called for immediately convening a round table and invite public comment on changes to the rules. He suggested solutions that might include lengthening the period in which an insider is prohibited from selling shares.
Former SEC chairman Arthur Levitt Jr. said revisiting the regulations is a good idea.
“I agree with reopening the commission’s view on this entire area,” Levitt said during a phone interview Wednesday. “Today’s markets have cast a new light on this whole subject. It’s never too late to revisit commission opinions.”
U.S. public companies repurchased a record $800 billion of their own shares last year, according to Howard Silverblatt of S&P Dow Jones Indices. Companies also distributed a record amount of dividends and spent more in capital expenditures than in any previous year, Silverblatt said.
Buybacks reduce the number of shares on the market, which tends to drive up the price of a company’s shares. Democrats have criticized the practice as benefiting the wealthy and say the money would be better spent on workers.
Proponents, including many Republicans, favor buybacks as an effective tool of returning value to shareholders and as a way to circulate money into the economy for productive use.
Pension funds, institutions, foundations and individual retirees can benefit from an increase in a corporation’s share price.
Legislators across the political spectrum, including Sen. Marco Rubio (R-Fla.) and Senate Minority Leader Charles E. Schumer (D-N.Y.), have called for measures to curtail buybacks.
Doug Holtz-Eakin of the American Action Forum, who favors buybacks, said an examination of SEC rules is fine, given the message management sends when insiders sell their shares.
“There is no reason not to look at the rules,” Holtz-Eakin said. “What does it mean when an insider sells? It sounds like this commissioner believes there is long-term bad news about the company when an executive sells under certain circumstances. If this is true, then it may be useful to separate the sale from the buybacks.”