Statement by Chair Gensler on Share Repurchase Disclosure Modernization

Harvard Law School Forum on Corporate Governance - "Read More" for Seigne's comments

Michael Seigne
Posted Wednesday, July 19, 2023 at 12:50 am | Permalink
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Chair Gensler’s support is very well founded. Enabling greater transparency to investors on this topic is badly needed.
I state this, not because of any of the more commonly mentioned, and often ill founded concerns that have been widely commented on, but because of some of the execution products used to implement share buy-backs.
The combination of having both, clearly stated objectives or rationales for a buy-back, and the daily trading details of how that buy-back was executed will be very powerful for enhancing investor protection. This is because a sizeable portion (greater than 20% by value) of all share buy-backs in the US are executed by using products that are not fit for purpose.
Company managements have different reasons for deciding that the best use of a companies cash is to buy-back shares. Those reasons can include ones that relate to the current share price versus what they perceive to be “intrinsic value”, or they could be that management think a share buy-back is a more efficient, or more positive signalling mechanism to return excess cash to shareholders than a dividend. The point is that different decisions have very different objectives in terms of the implementation of that buy-back.
A “value” based decision is all about the current price of shares, whereas a “dividend like” decision is all about the efficient transfer of that cash back to the selling shareholder. The value to the shareholder of the daily repurchase activity being made transparent, is that someone can then analyse if that activity, the execution process, was actually designed and executed in their best interest.
These details are currently available in the UK and EU, and we can show you from these details that a significant portion of share buy-back implementation is not in the best interest of shareholders. A UK company recently split a capital return process into two equal parts, 50% returned via a special dividend and 50% via a share buy-back. The share buy-back execution process cost shareholders over 8% in lost value. This is very relevant to shareholder return. Apple Inc have executed over 20% of their share repurchase via execution products that are not in their shareholders best interests. This is no reflection Apple Inc, it is the process, that is the the problem. The SEC, by improving transparency to this process, will also bring fairness to our investors.
I would also encourage the SEC and/or other relevant regulators to take a long cold look at ASR’s (accelerated share repurchases). These products are used to implement approximately 10% by value of all share buy-backs in US securities (including the above mentioned 20% for Apple Inc). The reason I single these products out is that it is unlikely, judging by current market commentary, that any of the daily hedging activity carried out by the selling broker will be captured in any of these recent disclosure law enhancements. However ASR’s use the same underlying trading strategy as some OMR (Open Market Repurchase) products that, as I have stated above, are not aligned to either of the specific objectives most commonly stated by corporates.
By using independently sourced estimates of broker profitability, it is reasonable to assume that trading profit from Apple Inc’s ASR’s have directly cost investors over $550mil. Had this money been used to buy the additional shares that Apple Inc intended then their shareholders would have accrued over $6bn in additional shareholder return (not including lost dividends).
As I have also mentioned in comments submitted to other articles on this Forum, I believe that the execution process used to implement share buy-backs should be a topic that boards examine as part of their governance process.