March 30, 2022

Buybacks: Biden Administration Pushes Legislative Fix

The SEC has issued proposed rules intended to promote increased transparency when it comes to stock buybacks, but according to this NY Times DealBook report, the Biden Administration intends to go much further, and will propose legislation to discourage buybacks by hitting public company executives right in their wallets:

The White House plans to propose new restrictions on buybacks, DealBook has learned. This could have further-reaching implications than its plan for a minimum tax for billionaires that’s also expected to be announced today. The buyback proposal goes beyond the 1 percent tax on share repurchases that was part of the administration’s ill-fated $2.2 trillion climate and social spending bill last year, which was meant to raise around $124 billion in tax revenue.

The proposal will call for a three-year freeze on corporate executives selling their shares after a buyback. To support this move, the administration is likely to cite academic research that found company executives tend to sell far more stock in days following a buyback announcement than at any other time. Other research shows that buybacks have accounted for an increasingly large share of corporate profits (often more than 50 percent of net income) over the years. Apple has spent more than $420 billion buying back its shares over the past decade.

Call me a cynic, but if the objective is to reduce the level of buybacks, I think this approach is likely to be very effective. But people are already raising objections about the potential unintended consequences, including a jump in executive comp. Here’s an excerpt from this Forbes article, which says the proposed legislation is a bad idea:

Third, if the targeting of stock buybacks leaves top executives worse off financially, then you can expect CEOs to demand a hike in their cash pay to make up the difference. That may happen because some business leaders will feel (rightly) unfairly targeted by the government. Or it may be that job offers arrive from other countries with more liberal regulations. Either way, the war for top talent will result in fatter executive paychecks.

Like I said, you can call me a cynic, but I think this is also very likely to happen if the proposal becomes law. Of course, I also think that the sun rising tomorrow will very likely result in increased CEO pay.

John Jenkins