Buybacks: disclose and describe
Tom Brown, Senior Consultant at Bladonmore, explores the upcoming changes to buyback disclosure rules in the US, and what they mean for investor relations.
Changes to disclosure regulations are on the way as the US Securities and Exchange Commission (SEC) has taken steps to make buybacks a little more transparent.
The SEC voted to force companies to report daily repurchase activity in their quarterly reports. Companies will also need to give the average price paid and shares bought on any given day, compared with aggregate monthly information previously.
Importantly, any company repurchasing its own stock will have to provide a narrative explaining its reasoning for doing so. And it must indicate whether senior execs and directors traded on or around the time of the buyback announcement.
Growing popularity of buybacks
Buybacks have long been considered a murky practice. They’ve been widely criticised as giving executives free rein to quickly boost stock price by reducing the number of shares outstanding.
Because share price is often linked to executive compensation, a buyback can become a quick, practically foolproof way for a company’s executives to enrich themselves.
According to US consultant Pay Governance, detractors of buybacks argue that they ‘inflate per share performance metrics used in incentive compensation plans through a reduction in shares that drives incentive compensation higher.’
Pay Governance found that the majority (76%) of companies doing buybacks either don’t adjust compensation for the buyback or are silent about the buyback when it comes to their incentive plans.
Last year, US public companies paid $1.25 trillion to repurchase their own stock. SEC Chairperson Gary Gensler points out that the astronomic buyback figure from 2022 is far higher than the $950 billion in stock buybacks in 2021.
What’s more, there are signs that buyback fever is far from abating. In early May, for instance, Apple announced a $90 billion share buyback program.
Narrative now a necessity
For investor relations officers, the biggest challenges may not arise from the quantitative disclosures but from the expanded repurchase narrative.
The SEC says that a company’s repurchase narrative should include the following:
- “The objectives or rationales for its share repurchases and the process or criteria used to determine the amount of repurchases,” and
- “Any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.”
For US companies, these new rules will go into effect later this year, in the quarter beginning on October 1st.
Foreign private issuers will face the same buyback disclosures, with no accommodations beyond a slightly longer time to prepare. These companies will need to begin disclosing quantitative buyback data in the first full quarter after April 1, 2024.
New rules face opposition
These new disclosure requirements are coming into play, but they still face some stiff opposition.
The changes are, for instance, extremely unpopular with the US Chamber of Commerce. On March 12, the US Chamber of Commerce, the Texas Association of Business, and the Longview Chamber of Commerce sued the SEC under the Administrative Procedure Act and the Constitution.
‘The SEC’s stock buyback rule doesn’t protect investors,’ said US Chamber Executive Vice President and Chief Policy Officer, Neil Bradley, in a press release. ‘Instead, it puts the thumb on the scale to discourage buybacks despite the fact that the repurchasing of shares improves returns for savers and investors across the economy.’
Own your story
These changes create a challenge – how to gather and present information on your buybacks to investors – but also an opportunity. Rather than purely forcing companies to provide more metrics, the new rules also require that you explain them.
Explaining major decisions, like a buyback scheme, helps investors to understand your motives and see the value in your actions. By owning your story and creating a compelling narrative around your decision, you prevent others from creating their own story to fill the void.
If you’re looking for help to build a narrative for your investors, get in touch.