Irreconcilable Views of Stock Buybacks on Full Display at House Hearing

October 18, 2019

During a discussion of four different legislative proposals at a House Financial Services Capital Markets Subcommittee hearing this week, Democrats and Republicans presented mutually exclusive views on stock buybacks, with Democrats insisting on tying buybacks to income inequality and Republicans questioning the presence of a problem in the first place.

Democratic attempts to link buybacks to income inequality were rejected by panelists, including an investor as well as notable professors from Harvard and Vanderbilt law schools, who each offered several strong justifications for the needs for buybacks and warned against prohibiting them.  Only witnesses from the progressive think tank Roosevelt Institute and “United for Respect at Walmart” argued that buybacks are a problem needing to be addressed.

Wide range of solutions:  The four bills discussed in the hearing provided a range of proposals to address buybacks.  The bills included:

  • Stock Buyback Disclosure Improvement Act:  Under this draft bill, which received the most discussion in the hearing, when a buyback is announced, a company would need to disclose whether executives will participate and how the buyback plan will impact compensation, or elements that impact executive compensation.

  • The Reward Hard Work Act (H.R. 3355):  Introduced by Rep. Jesús Garcia (D-IL), this bill would repeal the SEC rule which allows companies to conduct open-market stock buybacks.  Implemented by the SEC in “consultation with the National Labor Relations Board,” the bill would require one third of corporate board members to be chosen by employees.

  • Stock Buyback Reform and Worker Dividend Act:  This draft bill changes the SEC buyback rules by lowering the permissible buyback amount and creating disclosure requirements for buybacks.  The bill also requires a “worker dividend” amounting to $1 to every worker for every $1 million spent on buybacks, dividends, and special dividends.

  • SEC Approval of Buyback Bill:  This draft bill would require companies to get approval from the SEC to conduct a buyback.  Among the information the SEC would be required to evaluate in approving a buyback would be worker wages, layoffs, pension plans, how buybacks serve long-term interest of stakeholders and whether the issuer has alternatively considered investing in research and development, and training and workforce expansion, among other things.

Campaign issue:  With three of the witnesses dismissing outright the idea of prohibiting buybacks, only the disclosure bill received serious consideration as part of the panel discussion.  The outlook for the bill, given the murkiness of the House schedule due to the impeachment inquiry, is not clear.  However, Democrats are clearly focusing on making buybacks a core of their economic messaging as the 2020 election season approaches.