In recent years, as SEC rulemaking has stalled on topics like proxy access and political spending disclosure, “private ordering” has become the catalyst for ESG changes (see Broc’s earlier blog about how that’s faring). This may have been due partly to Department of Labor interpretive bulletins from 2015 and 2016 which assured ERISA fiduciaries – i.e. pension plans – that they could consider ESG factors in making investment decisions.
1. Fiduciaries must avoid too readily treating ESG issues as being economically relevant to any particular investment choice
2. Fiduciaries may not incur significant plan expenses to (i) pay for the costs of shareholder resolutions or special shareholder meetings, or (ii) initiate or actively sponsor proxy fights on environmental or social issues
As noted in a CII alert, the most significant impact of the guidance likely will be on shareholder engagement. Earlier guidance – the bulletin says – didn’t suggest that it’s always appropriate for plans to engage with the board or management of companies in their portfolios. The guidance “was not meant to imply that plan fiduciaries, including appointed investment managers, should routinely incur significant plan expenses” to fund advocacy or campaigns on shareholder resolutions or proxy fights on environmental or social issues at portfolio companies. It appears that this new field assistance bulletin shifts the burden to pension funds to prove there are tangible activism benefits in every case. This creates a negative presumption that most ESG factors are not economically significant.
The change in tone will undoubtedly elicit angst among governance & sustainability advocates. It’s the latest in a long history of back-and-forth: the DOL’s 2015 & 2016 bulletins were issued in response to a 2008 bulletin, which walked back 1994 guidance. Also see this Davis Polk blog entitled “Are the Reports that the DOL Guidance Will Lead to the Demise of ESG-Focused Plans Greatly Exaggerated?”…
Sustainalytics’ ESG Ratings Now on Yahoo! Finance
Here’s the intro from this blog by Davis Polk’s Ning Chiu:
Some companies may not be aware that since February, their Yahoo Finance web page includes a separate tab with the ESG scores from Sustainalytics. The Sustainalytics quote page shows a company’s numerical rating for three categories, environment, social and governance, along with the overall ESG score. Scores range from 1 to 100.
There is also a graphic representation of the score that, according to the Sustainalytics press release, will be tracked against the average in each category and plotted over time. The graph, currently reflecting data from 2014 to now, is intended to display trends of how a company ranks against industry peers.
Our May Eminders is Posted!
We’ve posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Every few years, we survey the practices relating to blackout & window periods (we’ve conducted over a dozen surveys in this area). Here’s the results from our latest one:
1. Does your company ever impose a “blanket blackout period” for all or a large group of employees?
– Regularly before, at, and right after the end of each quarter – 78%
– Only in rare circumstances – 15%
– Never – 7%
2. Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?
– Yes, but they must preclear the gift first – 47%
– Yes, and they don’t need to preclear the gift – 16%
– No – 30%
– Not sure, it hasn’t come up and it’s not addressed in our insider trading policy – 7%
3. Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?
– Yes, but they must preclear the gift first – 37%
– Yes, and they don’t need to preclear the gift – 14%
– No – 38%
– Not sure, it hasn’t come up and it’s not addressed in our insider trading policy – 11%
4. Are your company’s outside directors covered by blackout or window periods and preclearance requirements?
– Yes – 100%
– No – 0%
5. Our company’s insider trading policy defines those employees subject to a blackout period by roughly:
– Stating that all Section 16 officers are subject to blackout – 3%
– Stating that all Section 16 officers “and those employees privy to financial information” are subject to blackout – 4%
– Stating that all Section 16 officers “and others as designated by the company” are subject to blackout – 38%
– Stating that all Section 16 officers “and those employees privy to financial information and others as designated by the company” are subject to blackout – 35%
– All employees – 16%
– Some other definition – 4%
– Our company doesn’t have an insider trading policy- 0%
Please take a moment to participate anonymously in these surveys:
This “Harvard Law” blog claims that companies that use the word “stockholder” hold the sinister view that investors are passive and powerless book-entries:
Today, the term “stockholder” gives off a whiff of a Mad Men-era world where investors were bystanders. Nearly all institutional investors have junked “stockholder” for “shareholder” when referring to themselves. They see their roles not as passive holders of electronic notations but as parties sharing responsibilities for performance when they invest in a company.
That’s why Blackrock CEO Larry Fink recently wrote to corporate boards referring to investors conspicuously as “owners”— the word “stockholder” is nowhere to be found.
So, the blog concludes that the move to “shareholder” was caused by greater attention to investor rights and long-term stewardship. Maybe it’s just me – but I think we’re reading too much into this terminology. I interned for a Delaware Justice – we always used “stockholder” since that’s the word used in the DGCL. But I use “shareholder” for companies incorporated in states that follow the Model Business Corporation Act or otherwise use that terminology in their statute. On this site, we almost always use “shareholder” – but we do that because it’s easier, not as a statement on investor rights. This blog might’ve eliminated my last hope that actions matter more than words.
On the other hand, maybe there’s something to it. Keith Bishop pointed out that even though the blog focuses on the “shareholder v. stockholder” distinction – the nomenclature it’s really trying to argue for is “shareowner.” Here’s his note:
It is my understanding that shareholder activists have adopted the term “shareowner” as a way of signaling that they are more than passive investors (i.e., they are owners, not mere holders). CalPERS, for example, refers to itself as a “shareowner”. I haven’t run across any corporate statutes that have adopted the term, however. As for Delaware, the DGCL uses the term “stockholder”. Incongruously, however, Rule 23.1 of the Delaware Court of Chancery Rules refers to “shareholder”.
Poll: “Shareholder” v. “Stockholder”?
Please take our anonymous poll about your views on investor terminology:
We haven’t heard much about auditor rotation since the PCAOB’s concept release about that topic in 2011. That concept release didn’t go too far due to controversy. But at GE, proxy advisors appear to be taking a closer look at the company’s longstanding relationship with its auditor. Here’s the intro from Cydney Posner’s blog (also see this WSJ article):
It’s certainly a rare event, but both ISS and Glass Lewis have recommended voting against a proposal to ratify the appointment of GE’s auditor, KPMG at the GE annual shareholders meeting. Most often, the issue of auditor ratification is not very controversial—in fact, it’s usually so tame that it’s one of the few matters at annual shareholders meetings considered “routine” (for purposes of allowing brokers to vote without instructions from the beneficial owners of the shares). Are we witnessing the beginning of a new trend?
In its analysis justifying its negative recommendation, ISS observed that the SEC is currently investigating GE’s revenue recognition practices and internal controls related to long-term service agreements, as well as a $9.5 billion increase in future policy benefit reserves for the GE’s insurance operations. ISS also cites commentators who suggested that GE and its auditors “must have or should have been aware of the issues—particularly the increasing insurance liabilities—for years.” These accounting issues, together with KPMG’s issuance of unqualified reports on the financial statements, were the basis of the recommendation by ISS against ratification of the auditors. Not to mention that KPMG has been GE’s auditor for a long time—by a “long time,” I mean 109 years! And notwithstanding major changes in the management team, ISS observed, the board, stressing the benefits of auditor tenure, still reappointed KPMG.
In addition, ISS also saw no discussion in the proxy statement regarding how or whether the board took into account KPMG’s role in GE’s two accounting problems or any other regulatory issues involving KPMG, including auditor independence allegations (which both ISS and GL indicate were alleged to involve GE) that KPMG settled with the SEC in 2014 or the indictments in 2018 of KPMG employees.
Glass Lewis also indicated that it usually supports management’s choice of auditor except when GL believes the auditor’s “independence or audit integrity has been compromised.” In its analysis, GL raised the same concerns as ISS regarding the SEC investigation of GE and problems at KPMG, noting in particular the large increase in fees to KPMG in the prior year, as well as its long tenure as GE’s auditor, which has “thrown KPMG’s effectiveness and relationship with the Company into question.”
Also note this article which highlights how the new changes to the audit report include disclosure of the length of an auditor’s tenure at that company. The article notes: “At the time of writing, 21 of the Dow 30 companies had released their annual reports (those with Dec. 31 year-ends). The average auditor tenure at those companies was 66 years.”
1. Why have audit regulators such as the PCAOB – which has now been in business for 15+ years – been unable to improve the quality of audits to high-quality?
2. Why is the goal to have 71% of audits comply with professional standards? Do investors really have to pay for audits when 29% are found to be defective?
3. Does this system even work? The regulators very rarely fine an auditor for deficient work. And auditors have a conflict of interest since they’re paid by the company being audited.
4. How can the IFIAR manage and inspect for quality – when their report says they’re having a difficult time figuring out how to measure it? Perhaps that’s the reason over one in every four audits is deficient.
The inconsistency among IFIAR member findings is also concerning. Those who conducted fewer inspections were much more likely to find a significant failure to satisfy audit standard requirements. There was a 62% finding rate for members inspecting 20 or fewer audits – a 46% finding rate for members inspecting 21-40 – and a 30% finding rate for members inspecting 41 or more.
The two areas with the highest rate & greatest number of findings were:
– Accounting Estimates: most findings related to failure to assess the reasonableness of assumptions
– Internal Control Testing: most commonly, auditors failed to obtain sufficient persuasive evidence to support reliance on manual controls. The next most common finding was that auditors failed to sufficiently test controls over – or the accuracy & completeness of – data or reports produced by management
“You Get What You Pay For”: Audit Fee Pressure Lowers Audit Quality?
There’s some concern among audit firms that they’re being required to “do more with less.” Rigorous work is required to comply with Sarbanes-Oxley and other regulations – but clients are looking for ways to reduce or maintain fee levels. As a consequence, 80% of firms have seen a reduction in the profitability of audit services.
Studies are starting to show that this fee pressure is negatively impacting audit quality. This latest white paper finds that there’s a higher rate of misstatements among firms that are shifting their focus to more profitable non-audit services. Interestingly, the analysis also shows that the decline in audit quality is more common at large audit offices than small ones.
Some people in our community are wondering whether this information will affect auditor regulations and shareholder ratification votes. I’m not holding my breath – this study just confirms what many people have been observing for decades, and shareholders seem to ignore audit fee info.
Yesterday, Corp Fin issued two new CDIs about non-GAAP financial measures that are used in connection with business combinations. They’re a follow-on to CDI 101.01 – which we blogged about last fall. This Wachtell Lipton memo provides an overview (also see this Cooley blog):
While CDI 101.01 helped address the recent spate of frivolous litigation claiming that projections disclosed to explain the assumptions underlying a financial advisor’s fairness analyses require GAAP reconciliation, plaintiffs’ lawyers subsequently seized on the fact that the CDI did not explicitly clarify whether the GAAP reconciliation requirements apply to projections shared with bidders or the board and opportunistically continued to pursue weak disclosure claims.
The underlying logic of the initial CDI plainly applies to these circumstances too: disclosure of internal forecasts to bidders or the board is not intended to communicate performance expectations to investors, and reconciling them to GAAP is neither useful nor required. Corp Fin has now helpfully confirmed that the same considerations animating the initial CDI extend to these additional factual circumstances.
SEC Impersonators: “This Is What Fraud Sounds Like”
Scammers impersonating the SEC aren’t something new (here’s a blog about one such scam). Yesterday, the SEC issued a warning – along with a one-minute audio recording – about SEC impersonators who are pretending to execute trades in an attempt to dupe people into giving them money or account info. Crazy stuff. Here’s an excerpt:
“The audio recording is what fraud sounds like,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “We included the recording in our Investor Alert so investors can hear the lies and high pressure tactics imposters use to cheat potential victims out of their money.”
Transcript: “Conduct of the Annual Meeting”
We’ve posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
Following up on Broc’s blog about the passing of Julie Yip-Williams, there will be a memorial service for Julie on Saturday, May 5th at 5:30 pm, at St. Ann & Holy Trinity Church (157 Montague St, Brooklyn). In lieu of flowers, her family requests that memorial contributions be made to the “Colorectal Cancer Alliance” in Julie’s name.
This “Prosperity Report” from Allstate looks novel. It’s an 11-page document that is positioned before the proxy statement. The full document is: Prosperity Report, Letter from Independent Directors, Proxy Statement, Financial Report – the whole Allstate story under one hood. The “Prosperity Report” focuses on the company’s long-term goals, purpose & role in society.
The thing feels like “BlackRock Catnip.” It’s basically a human capital sustainability report (which is a priority for BlackRock, as noted in this blog) – and yes, BlackRock is the company’s largest holder. Another way to look at it perhaps is as an innovative expansion of the CEO’s “Letter to Shareholders” that typically kicks off the glossy annual report. Whatever your view, you have to admit that Allstate doesn’t slack on its proxy materials. You might recall Broc’s blog from last year, claiming that their proxy statement was one of the best…
Transcript: “The SEC’s New Cybersecurity Guidance”
We’ve posted the transcript for our recent popular webcast: “The SEC’s New Cybersecurity Guidance.”
Last Call for Early Bird Registration! Our “Pay Ratio & Proxy Disclosure Conference”
Early Bird Rates – Act by April 13th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 13th to take advantage of the 20% discount.
Over the years, Broc has blogged about mistakes made in filings (here is one such blog). Members are kind enough to send us good stories about mistakes they’ve seen in SEC filings. Here are a few new ones (please send your own stories – we’ll keep them confidential unless you tell us otherwise):
I live in fear of internal notes making it into filings – always do a “ctrl+F” search for brackets, all team member names and NSFW words before giving the go-ahead!
Best Pay Ratio Disclosure to Date!
Hilarious item on the NASPP blog yesterday from McLagan’s Ryan Gildner – here’s an excerpt:
The newly formed Data on Ratio Comparison Society (D.O.R.C.S) is pleased to announce preliminary results from a groundbreaking ongoing study of CEO pay ratio disclosures. According to Ryan Gildner, president of the Society, “This is the first study of its kind and uses an unprecedented innovative approach to evaluate the content of CEO pay ratio disclosures. We hope our data will provide a new perspective on this controversial disclosure and lead to a more complete understanding of its value.”
Using a proprietary 16-point qualitative analysis, the Society has identified the following disclosure to be the best disclosure to date:
As required by Item 402(fu) of Regulation S-K, we are providing the following information:
For fiscal 2017, our last completed fiscal year:
– The number of words comprising the CEO Pay Ratio Regulation (Item 402(u) of Regulation S-K) is 2,933.
– The number of words comprising the Compensation Discussion and Analysis Regulation (Item 402(b) of Regulation S-K) is 1,282.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Here’s the intro from this blog by Cooley’s Cydney Posner:
Is it just me? Am I the only one that finds having to decipher a load of graphics in a proxy statement to be somewhat daunting on occasion? Inclusion of graphics in lieu of copious text has been almost de rigueur in proxy statements for several seasons now as a way to facilitate comprehension of sometimes complex data. And most often, those graphics are relatively effective for that purpose. As we head into the 2018 proxy season, however, this piece on CFO.com suggests that some forms of visual presentation may be, well, a lot more useful than others.
According to the article, featuring some graphics does make sense because research has shown that people “process visual information faster than verbal information. And we do it with a part of the brain that requires less energy.” That’s especially true with line and bar charts. Where things get trickier, the article suggests, is with pie charts: “a pie chart often makes it hard to figure out the exact magnitude of a data point (a slice) and uses a lot of text to display very little data. It also forces readers to rapidly move their eyes back and forth between the legend and the graphic to interpret the data. A simple table can be a lot more elegant, experts say.”
And more sophisticated tools, such as “exploding 3-D pie charts” can compound the problem, according to one academic. He also took issue with “stacked bar charts,” according to the article, “’because they make estimating the values of the variables on the top of the bars difficult.’”
Tomorrow’s Webcast: “Handling the Proxy Season – The In-House Perspective”
Tune in tomorrow for the webcast – “Handling the Proxy Season: The In-House Perspective” – to hear Intuit’s Betsy McBride, Juniper Networks’ Shahzia Rahman and Oracle’s Renee Strandness discuss how to prepare for the proxy season from the in-house perspective…
Here’s the results from our recent survey on Regulation FD policies & practices (here’s other Reg FD surveys conducted over the years):
1. Our company has a written policy addressing Regulation FD practices:
– Yes, and it is publicly available on our website – 5%
– Yes, but it is not publicly available on our website – 64%
– No, but we are in the process of drafting such a policy – 7%
– No, and we do not intend to adopt such a policy in the near future – 24%
2. For Regulation FD purposes, our company believes:
– Our website is a “recognized channel of distribution” – 29%
– We are still studying whether our website is a “recognized channel of distribution” – 17%
– Our website is not a “recognized channel of distribution” – 52%
– I don’t even know what this question means – 2%
3. Compared to our insider trading policy, our Regulation FD policy:
– Has the exact same parameters – 34%
– Our Regulation FD policy imposes a quiet period that starts earlier than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that starts later than our insider trading policy – 25%
– Our Regulation FD policy imposes a quiet period that lasts longer than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that lasts shorter than our insider trading policy – 28%
– We don’t have a Regulation FD policy – 26%
I found it interesting that Japan just introduced its own version of Reg FD. Better late than never…
Equifax: Special Committee Finds Insiders Properly Pre-Cleared Trades
Back when I blogged about the Equifax cybersecurity breach – and the question arose whether senior executives had pre-cleared trades in the company’s stock – I wrote: “At this point – as the LA Times article notes – we don’t know if these officers were aware of the breach before they made the sales and/or whether the company’s pre-clearance procedures were adequately followed.”
Equifax now has released this special committee report dealing specifically with this pre-clearance of insider trades. And after reviewing 55,000 documents & 62 interviews with the parties involved, it found that the insiders involved did indeed properly pre-clear the trades according to the company’s policy. That certainly is good news.
One of the things that I’ve blogged about more than I would like is how the Reg Flex Agenda is merely aspirational – and people should pay little mind to it (here’s one of my more recent entries). History certainly has borne out the truth – I imagine the SEC has missed it’s predicted timetables for rulemakings listed in the Reg Flex Agenda many more times than not. And not that there’s anything wrong with that, it’s always been viewed as a meaningless regulatory exercise for those “in the know.”
But now – probably due to all the Congressional & media attention being paid to it – SEC Chair Clayton recently told the Senate Banking Committee that he intends to make the Reg Flex Agenda more realistic, including streamlining it (see this Cooley blog).
Kudos if the SEC can pull it off. But I worry that by promising to make deadlines, the SEC is placing a bullseye upon itself. In recent years, the Staff has smartly avoided mentioning any “hard” time frames for conducting rulemaking. That’s because it’s nearly impossible to predict when a rulemaking will come out, even when you’re the one actually writing the rules! It’s difficult to even predict which season of the year it will happen.
There’s a myriad of review layers within the SEC, including:
1. Your superiors within your Division (and there might be quite a few of those)
2. The folks within the SEC’s Office of General Counsel
3. That ever-growing newish Division of Economic & Risk Analysis (DERA)
4. Each Commissioner (and their counsels)
5. Possibly other Divisions or Offices within the SEC, depending on the nature of the rulemaking
6. Possibly members of Congress (or their staff) if it’s a politically-sensitive topic
You think its tough getting your proxy through an internal review? That’s nothing. A proposing/adopting release can easily go through 20 drafts. Anyway, I draw your attention to the transcript of one of my favorite webcasts if you want to learn more: “How the SEC Really Works“…
Some of you might know that I’m rolling into “Week 38” of my second pregnancy…the “home stretch.” For all the parents out there – especially moms – you know that balancing your pregnancy & profession can present some unique issues. Here are 4 things I’ve experienced:
1. To-Do Lists: At this point, these are growing faster than the baby. There’s the work list, the mom/baby healthcare & benefits lists, the nursery list, etc. It can be overwhelming, especially since all the tasks have the same imminent – but unknowable – deadline.
With our firstborn, I managed to wrap up my work projects (and report for jury duty!) just before the baby’s early arrival. But, we were “those people” who didn’t have a name picked out & installed the car seat in the hospital parking lot. This time, I’d love to have 10 minutes of downtime to mentally prepare for the new person who’s joining our family. I’m not there yet – but there’s still hope.
2. Transition Mechanics: I’ve benefitted from good parental leave policies, but there’s an art to making this work. Good colleagues & relationships are key, since it’s scary to entrust your work and clients to someone else. You want to know they’ll do a great job but also that your position is secure and your clients will still want to work with you when you return. You’re also well-aware that you’re asking big favors. Co-workers are taking on extra work – with limited background and without an obvious long-term incentive. Clients are dealing with someone they don’t know, who might not have the entire backstory for on-the-fly questions.
It’s best for everyone if you’re extremely organized going into leave (more to-do lists, plus contact lists). Discuss expectations with clients & colleagues – separately & during intro calls. I also continued to monitor e-mail and was available for questions during leave. People are pretty respectful, but they like knowing you won’t hang them out to dry. Small thank-you gifts also never hurt.
3. Awkward Networking: I don’t like being pregnant in a professional setting. Pretty much everyone stares at and/or comments on your body. This doesn’t bother me much if the other person is relating to me as a fellow parent – maybe it’s even a good icebreaker – but you still need a tactic for redirecting the conversation to any professional topics you wanted to cover. And always have a stock response ready for people who aren’t as smooth. Because the cruel irony is that you can’t just smile and take a big drink of wine…
4. Mixed Feelings: Don’t get me wrong, I love our two-year-old more than life and I’m grateful and excited for the opportunity to care for another little person. But parenthood isn’t always easy or fun, the world isn’t always kind, and experiencing all that love also requires a lot of vulnerability.
On top of that, there’s the postpartum identity crisis – during which you try to reconcile your ambitious, always-available, pre-baby self with the realities of limited time & sleep, as well as whatever you & society think a mother/parent should look like. There’s a tension between proving yourself all over again and setting boundaries that allow you to actually enjoy your family. Both are necessary and evolve over time. As a woman in an historically male-dominated profession, I’m also constantly thinking about how my attitude, day-to-day actions & career decisions might impact my kids’ ambitions and worldview.
But there’s upside: the transition is a chance to examine your goals – and decide how to maximize your potential. Plus, you might be more creative & efficient.
I know I’m not alone on this journey of balancing pregnancy, parenthood & lawyering – email me with any experiences & “lessons learned” that you want to share!
Corp Fin’s “Partial” Global Rule 13e-4 Relief
Here’s something that Broc blogged yesterday on the “DealLawyers.com Blog“: Whenever Corp Fin’s Office of Mergers & Acquisitions posts a new no-action response, I take a gander to see if it’s new or unusual. Typically, they aren’t – and this new response to CBS falls within that category. It’s basically one of the formula pricing variety (albeit in the Reverse Morris Trust exchange offer context).
The Staff’s relief allows for the bidder/issuer to offer a number of shares in exchange based on the dollar amount of securities tendered – and relies on “formula pricing” mechanisms going back to the old Lazard Frères no-action letter from the 1980’s while utilizing the “pricing goes hard at least two days prior to expiration.”
So nothing surprising here, except the last paragraph in the no-action letter which states the Staff will no longer be issuing no-action letters for parts of this area. The global relief is somewhat narrow – it covers only Day 18 VWAP pricing in a RMT. So issuers can go on their own if they fit within the letter’s facts. Be careful – the request doesn’t expressly give global relief for Day 20 VWAP pricing, which has a few more conditions under Staff precedents.
This is clearly a sign that Corp Fin is looking to get out of the business of issuing timing-consuming no-action letters in situations where there is a well-trodden path of letters…
Speaking of the Staff, don’t forget to tune in next Wednesday, October 11th for the DealLawyers.com webcast – “Evolution of the SEC’s OMA” – to hear current & former Chiefs of the SEC’s “Office of Mergers & Acquisitions” discuss what that job is all about. Join Corp Fin’s Michele Anderson and Ted Yu, as well as Skadden’s Brian Breheny, Weil Gotshal’s Cathy Dixon, Alston & Bird’s Dennis Garris and Morgan Lewis’ David Sirignano. This is a unique event!
Do EPS Incentives Discourage CapEx?
This Goldman Sachs video suggests we’re in a period of declining capex – for the first time since the early 90s. Some think that’s because shareholders prefer dividends and buybacks over long-term investments. This Dealbreaker article suggests there’s also a connection to incentive pay structures:
How executives are rewarded has a real impact on capital allocation. When a CEO’s bonus is tied to earnings per share – a metric that can be juiced by gobbling up shares – that company will likely to do more and bigger buybacks. And when companies appear to buy back shares in order to avoid a negative earnings surprise, capex spending tends to be diminished in the following year. Executives whose personal wealth moves in tandem with their company’s stock price show a particular preference for repurchases over capital expenditures. Larry Fink has a term for this.
If this criticism sounds familiar, it’s because the potential use of buybacks to support stock prices became a “hot topic” a couple years ago. Here’s one of Broc’s blogs discussing it.
