So I got that goin' for me
July 23, 2019·22 comments·In Brief
The financial industry is winning every argument about stock buybacks on pure mathematics while losing something far more important in the process. Smart people keep proving the same point over and over: buybacks are an efficient way to return capital. But as they do, something else entirely is slipping past their defenses, and the regulatory hammer is coming down anyway.
- The meta-game shifted without anyone noticing. Buybacks became too good an explanation, too easy to defend. That made them useful for something else entirely. What started as a capital-return mechanism has become cover for other moves nobody's paying attention to defend against.
- Winning the math argument has become a liability. Every time the industry thumps its chest about the efficiency and ethics of buybacks, it gives permission for something that looks like buybacks but isn't. The charitable interpretation of the mechanism is being borrowed to legitimize something different underneath.
- The appearance of the thing matters as much as the thing itself. Regulators and politicians don't actually care whether your spreadsheet is right. They care what the practice looks like and what it enables. That gap between mathematical soundness and political perception is closing.
- The people exploiting this aren't the ones arguing about it. While one group defends buybacks on principle, another group in boardrooms is quietly using that defense to immunize forms of compensation that wouldn't survive scrutiny on their own merits.
- Defending flexibility in capital returns may cost you the right to do it at all. If the industry keeps playing this as a single debate to be won instead of recognizing what's actually happening in the background, the mechanism itself gets legislated away. Being right about the math offers no protection against that outcome.
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Comments
Brilliant writing and analysis Rusty. Hard to believe that you are raising your already incredibly high bar. Best explanation of the meta game around buybacks I’ve read - well done.
Plus 1…even I understood Rusty’s explanation and I’m the slowest of the pack members.
Correct me if I’m wrong but buybacks sole purpose seem to be to return capital while avoiding taxes(unlike dividends). Unless I misunderstand (please tell me how, I probably am), this doesn’t seem like just a meta game fail, but just a loosing argument.
Hmmm, I believe the record shows that, on average, corporate management buys back shares at the highs and issues shares at the lows.
Rusty, I get you point and do desire freedom vs regulatory control but help me understand why this isn’t corporate malfeasance?
So the million-dollar question – how do we root out the raccoon boards/management?
Attempting to invest based on governance gets you into ESG territory (which has all of the charm noted in Demonetized’s Kobayashi Maru note).
The voices on either side of the debate are louder and have far more Twitter followers than most of us will ever have, so a publicity push seems hard.
The math does work, and in the case of executive X using buybacks to “beat” estimates and increase share price, other shareholders benefit, making the broad-based shareholder pushback difficult.
How do we fight the raccoons without using the Fatcat Executive, Ban Buybacks narrative?
It certainly doesn’t make the argument more compelling, However, if the buy-backs were at least sourced from productive activities, you could argue that there is some broader societal benefit at play (R&D, better/cheaper stuff, employment, something). When it’s just an empty game…the argument is as you point out awful.
I’ve seen datasets and analyses which, depending on assumptions, horizons, etc. show very different outcomes for buyers-back. But let’s accept your premise as a given. Even so, bad decisions alone aren’t malfeasance. And outside of compensated related maybe-kinda-sorta malfeasance, there isn’t an appreciable monetary difference between buybacks and dividends, so what we’re really talking about here is separate from what they are - it’s how they’re able to be used. They have the appearance of something more sinister, aided by the reality of their use in immunizing non-cash comp, and that’s what’s got regulators’ hackles up.
I’m not 100% sure that I follow you, Michal. What is the losing argument you’re referring to, and on whose part?
Thanks, Mark!
Totally fair question. What do you think?
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