Share Buybacks and Executive Compensation: Assessing Key Criticisms

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Michael Seigne
Posted Tuesday, July 18, 2023 at 1:01 pm | Permalink
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A very well argued and researched paper so thank you.
I think the more current controversial governance topic is how companies choose to implement their buy-backs.
For example if a share buy-back is being viewed by management as “a dividend with another name” then the efficiency of the implementation process needs to be designed to ensure as much of that capital actually gets transferred to the selling shareholders. The frictional loss in this process is what needs to be managed and measured.
On the other hand if management is trying to “time” a share buy-back for current share price vs “intrinsic value” reasons, then the process needs to be designed to try to maximise the quantity of shares purchased. The risk of the stock price moving higher, and so buying less shares for the allocated capital, is what needs to be managed.
These two processes are very different, and currently a large portion of “execution products” that are used to implement share buy-backs are not designed for either of these two objectives mentioned above.
As an example a UK company recently split a capital return program into two parts. 50% using a special dividend, and 50% by using a share buy-back. The frictional costs of the share buy-back was over 8%. In the UK a well managed process designed for this outcome should have a “friction” of about 55 to 60bps.
There are a number of key issues here that start with most boards are not being aware of the nuances of the conflicts on interest hidden within some of these execution processes. This means they are unable to carry out their governance responsibilities of protecting the shareholders interests. The recent SEC improvements to disclosure laws should help to some degree, but the UK already has more stringent disclosure laws in place. I think a more effective way to solve for this is for boards to ask management to ensure that the execution strategy used to implement the buy-back aligns with the managements objective for the buy-back. Management will then need to find a way to answer that question. Asking their banking advisor is only going to help if that advisor understands how trading floors extract value out of equity execution transactions. Advisors typically have great corporate finance and m&a competence but most have very limited trading floor experience. It is also clear that this “friction” mentioned above is mostly the brokers lunch, so they are a conflicted and part of the problem, so management would be better severed elsewhere.
Finally to put some numbers on this issue. Accelerated Share Repurchases (ASR’s) are a product used to implement 10% (by value) of all US shares. ASR’s underlying execution strategy does not align with either of the two objectives mentioned above. Just over 20% of all Apple Inc’s buy-backs from 2012/13 to the end of 2022 were implemented via ASRs. In Apple’s case we estimate this friction exceed $550mil. Had this been understood by their board/management the majority of this money would have been used to buy more shares, as was intended. Apple shareholders would have gained an extra $6 billion in capital gains alone. This isn’t just an Apple issue; it’s been happening across the market for at least 25 years.