April 26, 2019

How Big are Buybacks? Scary Big!

Broc recently blogged about SEC Commissioner Robert Jackson’s concerns that insiders were using buybacks as an opportunity to cash out. Well, it turns out that they aren’t alone – buybacks are providing a frightening amount of the overall demand for corporate equities. This excerpt from a recent Bloomberg article on the effects of a ban on corporate buybacks just blew me away:

With political scrutiny of stock buybacks growing, Goldman Sachs started assessing an extreme scenario: “a world without buybacks.” The picture doesn’t look pretty. That’s because corporate demand has far exceeded that from all other investors combined, according to strategists led by David Kostin. Since 2010, net buybacks averaged $420 billion annually, while buying from households, mutual funds, pension funds and foreign investors was less than $10 billion for each, Federal Reserve data compiled by Goldman showed.

The article says that corporate repurchases represent the “largest source of U.S. equity demand,” and says that because other potential buyers are pretty saturated with equity investments, they’re unlikely to step in if companies pull back. According to Goldman, “aggregate equity allocation totals 44% across households, mutual funds, pension funds and foreign investors — and that ranks in the 86th percentile relative to the past 30 years.”

So, on the one hand, if buybacks stop, the market will lose its largest source of demand for equities, which is really bad news. But on the other hand, the market’s dependence on buybacks to provide demand cannot possibly be healthy – or sustainable – over the long term.  And that may be even worse news.

By the way, tune into our upcoming webcast – “Company Buybacks: Best Practices” – to learn the latest…

ESG: Shareholder Proposals Getting Traction?

According to this recent WSJ article, shareholders continue to gain clout in public companies, and the latest sign of that is increasing support for ESG shareholder proposals.  Here’s an excerpt:

The median level of support for environmental and social shareholder proposals as a percentage of votes cast rose from the middle single digits from 2000 until 2008 to 24% in 2018, representing record levels of support, according to proxy-advisory firm Institutional Shareholder Services Inc.

But the real measure of success is the record 48% of proposals characterized as social or environmental that were filed and then withdrawn in 2018, according to ISS. That’s up from an average of 38% over the prior seven years. Such proposals are often withdrawn after a company accedes to at least some of the shareholder demands.

That’s all interesting, but to me, the best example of how much things have changed when it comes to shareholder clout is another WSJ piece from an earlier time that’s referenced in the article.  That 1996 piece describes the  response of ever-combative former Cypress Semiconductor CEO T.J. Rodgers to a letter from Sister Doris Gormley pressing for women to be represented on the company’s board.

While Rodgers’ letter was praised by some at the time as a strike against “political correctness,” today it reads as both condescending & more than a little misogynistic.  For instance, can you imagine a CEO today responding to a shareholder seeking board gender diversity by saying that only a person with an advanced technical degree or CEO experience was qualified – and that few women or minorities “fit the bill?”

Fast Act Rules: Informal Staff Guidance on Expanded Hyperlinking Requirement

As part of the new Fast Act disclosure simplification rules, companies will be required to hyperlink to information incorporated by reference into a registration statement or report if the information is publicly available on EDGAR “at the time the registration statement or form is filed.”

This recent blog from Bass Berry’s Jay Knight discusses some informal Staff guidance on how this new requirement applies to information incorporated by reference from one item to another within the same filing. Here’s an excerpt:

The SEC staff has provided informal interpretive guidance that they believe it is reasonable for registrants to interpret the phrase “at the time the registration statement or form is filed” to mean that such information would need to be on EDGAR prior to the time the registration statement or form is filed.

In other words, an active hyperlink would not be required by the new rules if such hyperlink would be to information within the same filing. The SEC Staff noted that companies are permitted, if technically feasible, to include such hyperlinks to information within the same filing, but that they do not view the rule as requiring this.

John Jenkins