Commissioner Jackson, a former Clinton Administration Treasury official and Columbia University law professor. and his SEC staff studied public companies that executed buybacks over the last 15 months and matched buybacks to executive stock sales in 385 such companies. The study concluded: “right after the company tells the market the stock is cheap, executives overwhelmingly decide to sell." In addition:
- Twice as many insiders (8% of all insiders) sold shares in the eight days after a buyback announcement as would sell in an ordinary day (4%).
- In the days before buybacks, on average, executives sold typically less than $100,000 in stock. However, in the eight days following the buyback announcement, executives averaged cumulative stock sales exceeding $500,000.
Mr. Jackson urged the SEC to require compensation committees “to carefully review the degree to which the buyback will be used as a chance for executives to turn long-term performance incentives into cash" and called for a comprehensive review of related SEC rules. However, this ignores the fact that most companies require executives to notify and receive permission from a corporate officer such as the General Counsel prior to executing any stock sale. The proposal would also require disclosure detailing why executive stock sales in the wake of a buyback “are in the company’s long-term interests.”
Jackson’s research ignores common governance mechanisms, like Stock Ownership Requirements and vesting requirements, which require executives to maintain long-term holdings in a company’s stock. Although Mr. Jackson acknowledged that the stock trades are not illegal, the characterization of buybacks being done “at investors expense” ignores a host of articles and other research. This includes a recent Harvard Business Review article by a frequent executive compensation critic, who states “[t]he charge that S&P 500 shareholder payouts are starving the U.S. economy of investment does not stand up to the data.”