Corporate share buybacks have been tremendously popular in recent years—in the aggregate, S&P 500 companies repurchased $2.1 trillion of their own shares in the last five years, according to a recent report published by Tapestry Networks. Despite these large cash outlays, U.S. securities laws generally require that companies only disclose relatively limited information regarding share buyback programs. Under current U.S. securities laws, companies are largely only required to disclose the number of shares authorized for repurchase, the shares actually repurchased, the average price per share, and information about when the plan expires, and most companies do not provide any additional disclosure in their SEC filings.
A number of institutional investors have noted that this has resulted in a “disclosure gap”, and claim that they are not provided with the information they need to evaluate share buyback programs. Moreover, in February of this year, SEC chair Mary Jo White remarked that the SEC is closely evaluating when, and how often, public companies should tell their investors about stock repurchases.
Against this background, a coalition of 11 institutional investors representing $500 billion in assets, led by the UAW Retiree Medical Benefits Trust, recently issued a white paper intended to provide a framework for discussion between investors and companies, and provide key questions that boards should be prepared to address when conducting a buyback program. As companies prepare for proxy season and continue to evaluate and approve buyback programs, the white paper highlights some of the questions and discussion topics companies can expect to receive from investors.
Among the questions and discussion topics contained in the white paper are the following:
- What is the goal of the buyback program? How are those goals determined?
- Given that corporate capital is a finite resource, does the company have a hierarchy for capital allocation options? If so, what are the company’s priorities when it comes to allocating capital among them?
- Are there conditions that need to be met in order for buybacks to be approved and ultimately executed?
- Who is responsible for reviewing and approving buyback programs and how frequently are buybacks discussed?
- What information does the Board collect on the historical performance and balance sheet impact of prior share buybacks, and how is this information used to inform future decision-making?
- Does the company conduct any other analysis to inform its decision about whether or not to repurchase shares?
- Does the company seek feedback from investors on its capital allocation program, and if yes, to what extent does investor feedback impact future capital allocation decision-making?
- Some companies structure incentive awards using metrics that can be affected by buybacks, e.g., earnings per share. If your company uses any such metrics, are performance goals set in a way that mitigates the impact of buybacks (anticipated and unanticipated) from the achievement of those metrics?
- What policies, processes, and controls does the Board have in place to manage conflicts of interest and/or insider trading related to share repurchases (for example, 10b5-1 trading plans) and what information about these measures is disclosed to investors?