WBA Stock Buyback Proposal is my latest submission in an attempt to address CEO pay and long-term performance. As mentioned previously (Stock Buyback: Shareholder Initiative) this is a new type of proposal for me. I welcomed feedback from readers and certainly got it. The wording of this proposal is substantially better, thanks to your many suggestions!
WBA Stock Buyback Proposal: Background
Among papers cited by readers, I found Stock Buybacks: What corporations are not telling you to be the most helpful. That report came from Arne Alsin, the Founder of Worm Capital. Below are some bullet points from the Executive Summary (modified and abbreviated).
- Buybacks are a wash when executed. No tangible value is conveyed to shareholders as a result of buybacks. Cash is withdrawn (reducing the value of the corporation), which is offset by a stock buyback (the purchase and subsequent retirement of shares).
- Buybacks increase leveraged risk for both corporations and shareholders. Of the nonoperational choices available to corporate executives for excess cash—pay dividends, pile up cash (do nothing), and buybacks—the most aggressive, riskiest choice is a buyback.
- Buybacks are a nonproductive use of capital. For almost any other use of capital—mergers, acquisitions, expansion, new products, innovation, etc.—there is at least the possibility of a payback for the corporation but not with buybacks.
- Buybacks constrain innovation and reinvestment. Prior to Rule 10b-18 in 1982, corporations reinvested about 50% of their income back into the business to maintain their competitiveness. The Dow 30 companies spent, on average, 126% of their income on buybacks and dividends during 2014-2016, with no income left over for reinvestment. Reinvestment was funded by increases in debt, asset sales, and other balance sheet maneuvers.
- Shareholders are completely shut out of the decision-making process. Executives can send material amounts of cash to the market for buybacks, without consulting or advising shareholders about the risks involved.
- Conflicts of interests: Decision-makers – corporate executives, including boards of directors – are subject to substantial, undisclosed conflicts of interests when engaged in buybacks.
- Misinformation and misrepresentations: Claims of “reward,” “value creation,” and “returning cash” or “capital” to shareholders are unfounded.
- Corporate boards risk a shareholder backlash as shareholders about increased risk, how information is not fully explained and disclosed, how executives are subject to substantial, undisclosed conflicts of interest, without sharing the same risks.
WBA Stock Buyback Proposal: Submitted Text
Resolved: Shareholders of Walgreens Boots Alliance Inc (“WBA”) request that any open market share repurchase programs or stock buybacks (“buybacks”) adopted by the Board after approval of this shareholder proposal shall not become effective until such new programs are approved by shareholders.
Supporting Statement: WBA announced a $10 billion buyback in June 2018 http://www.walgreensbootsalliance.com/newsroom/news/walgreens-boots-alliance-authorizes-10-billion-share-repurchase-program-and-increases-quarterly-dividend.htm. According to last year’s proxy statement, a substantial proportion of compensation to executives was based on performance targets tied to stock price, including earnings per share (EPS) https://www.sec.gov/Archives/edgar/data/1618921/000119312517354603/d452082ddef14a.htm.
- Buybacks are a wash. Cash is withdrawn (reducing the value of the corporation), which is offset by the purchase and subsequent retirement of shares. For mergers, acquisitions, expansion, new products, innovation, etc. — there is at least the possibility of a payback. Not for buybacks.
- Prior to Rule 10b-18 in 1982, allowing buybacks, corporations reinvested about 50% of income back into the business. Dow 30 companies spent, on average, 126% of their income on buybacks and dividends during 2014-2016.
- Executives aggressively pursue buybacks because of personal incentives tied to short-term metrics, such as earnings per share (EPS), at the cost of long-term value creation.
Performance metrics that align senior executive pay with long-term sustainable growth are a plus. However, this alignment may not exist if a company uses earnings per share or certain financial return ratios to calculate incentive pay awards when the company is aggressively repurchasing its shares or if senior executives use the jump in stock price resulting from a buyback announcement as a chance to sell stock intended to incentivize performance.
Research by Robert Ayres and Michael Olenick of INSEAD found “the more capital a business invests in buying its own stock, expressed as a ratio of capital invested in buybacks to current market capitalization, the less likely that company is to experience long-term growth in overall market value [Secular Stagnation (Or Corporate Suicide?).
Another recent study found “twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day” (Stock Buyouts and Corporate Cashouts). SEC Commissioner Jackson stated that rules should be amended, “at a minimum, to deny the safe harbor to companies that choose to allow executives to cash out during a buyback.”
For more information, read Stock Buybacks: What Corporations Are Not Telling You by Arne Alsin, The Curse of Stock Buybacks, and Q&A: Economist William Lazonick On Stock Buyback Mania That Threatens The American Economy.
Legacy pharmacies could face an existential threat in the near future from online competition (Amazon buys online pharmacy PillPack). Why not gear up for that battle or provide a one-time dividend?
WBA Stock Buyback Proposal: Feedback Solicited
Since my WBA Stock Buyback Proposal submission, another report was released by the Roosevelt Institute, Curbing Stock Buybacks: A Crucial Step to Raising Worker Pay and Reducing Inequality.
Further ideas on how the template can be improved for other companies? Other supporting studies? What have I missed? If you disagree, why are my concerns unwarranted? Use the comment section below the post or email me.