Companies use loopholes to buy $1.5b in shares for executives
The loopholes are documented in a report by proxy adviser, Ownership Matters, called "While You Were Sleeping: invisible buybacks for employee share plans and how to fix them".
More than a third of the Top 100 acquired shares "on-market" for use in their incentive schemes, mostly for executives. The total cash cost was $1.5 billion.
BHP and Macquarie were the most prolific - the former has outlaid $1.34 billion over the past four years ($424 million last year) and the latter spent $403 million last year. Yet Macquarie also provided the best disclosure of any company, explaining the practice in detail in its presentations on capital management.
Most companies only disclosed the practice in their financing cash flow and the share buybacks had the effect of overstating operational cash flow, wrote the author of the report, Martin Lawrence.
"Simple changes to the Listing Rules would address the regulatory and disclosure gaps," he said.
Qantas too has made substantial buybacks - $16 million in 2012 and $65 million the year before - wading into the market to buy shares for its executives at a time when it had been conserving capital and suspending dividends.
In relative terms, UGL was the most prolific. In line with its reputation for aggressive remuneration, the engineering group spent $18 million buying shares for executives out of operational cash flow of just $111 million.
The disclosure in the area is so poor, said the report, that 22 of the Top 100 bought shares for their incentive schemes but did not disclose how many shares.
"This included companies such as Computershare, which in 2012 spent $US22.8million or nearly 7 per cent of operating cash flow, on acquiring its own shares for use in incentive schemes but did not disclose how many shares it acquired."
Purchases fell into two categories: where companies bought shares on-market to satisfy equity incentives as they vested and where companies established trusts, managed by third parties, to acquire shares to ensure the trust always had sufficient shares available when vesting occurred.
"This situation has arisen because of a regulatory gap, whereby purchases of shares on-market by a company for incentive schemes are not treated as buybacks under the Corporations Act or the ASX Listing Rules," said Ownership Matters.
Last year BusinessDay exposed the practice of top companies paying their executives dividends on unvested stock.
As a result this practice had largely been phased out this year, Mr Lawrence said.
Buying incentive shares on-market without proper disclosure was more acceptable than the paying of dividends from unvested stock, he said, but the two were linked. And the disclosure regime needed to be tweaked.
"This is how dividends on unvested shares arise. If you buy and hold them in trust you have to do something with the dividends," Mr Lawrence said. "If you leave dividends inside a trust they are subject to punitive taxes."
Frequently Asked Questions about this Article…
Invisible buybacks are when companies buy shares on the open market specifically to satisfy employee or executive incentive plans (for example when restricted stock vests) or when third‑party‑managed trusts hold shares for those plans. The purchases can be effectively invisible to investors because they are often disclosed only in financing cash flow or not quantified, rather than clearly labelled as buybacks for incentive schemes.
According to a report by proxy adviser Ownership Matters, Australia’s top companies spent about $1.5 billion last year buying shares for executives and incentive plans. More than a third of the ASX Top 100 made on‑market purchases for incentive schemes, and 22 of those Top 100 did not disclose how many shares they acquired.
The report names BHP and Macquarie as the most prolific buyers: BHP spent about $1.34 billion over the past four years (about $424 million last year) and Macquarie spent about $403 million last year (while providing comparatively detailed disclosure). Other examples cited include Qantas (about $16 million in 2012 and $65 million the year before), UGL (about $18 million in purchases versus $111 million of operating cash flow), and Computershare (US$22.8 million in 2012, nearly 7% of operating cash flow, without disclosing the number of shares).
Ownership Matters says a regulatory gap means purchases of shares on‑market for incentive schemes are not treated as buybacks under the Corporations Act or the ASX Listing Rules. Many companies only report these purchases in financing cash flow (or not in detail), which can mask the true effect on company cash metrics and shareholder dilution, leaving everyday investors without clear, comparable information.
The report notes that because many companies disclose these incentive purchases only in financing cash flow, the accounting and disclosure practice has had the effect of overstating operating cash flow. In other words, investor perception of cash generated by operations can be distorted if cash used for executive share purchases isn’t clearly explained in reporting.
The report divides purchases into two categories: (1) companies buying shares on‑market as equity incentives vest, and (2) companies establishing trusts (managed by third parties) that acquire and hold shares so the trust always has stock available when vesting occurs. Both approaches supply shares for incentive plans but are disclosed differently.
The author, Martin Lawrence of Ownership Matters, recommends simple changes to the ASX Listing Rules to address regulatory and disclosure gaps. The report suggests tweaking the disclosure regime so on‑market purchases for incentive schemes are treated and disclosed more like buybacks, improving transparency for investors.
BusinessDay exposed the practice of top companies paying dividends on unvested stock, which raised concerns. The report says that practice had largely been phased out this year. It also notes a link between holding shares in trust and having to deal with dividends inside trusts (which can attract punitive taxes), a factor influencing company behaviour.
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