Democratic presidential candidate Hillary Clinton, and her progressive surrogates are making political hay out of the billions of dollars in share buybacks they say are made only to please “activist” hedge funds.
In several speeches and in a bill introduced in the Senate in March, progressive Democrats are supporting Clinton’s message by repeating the theme of activist hedge funds focused on their own wealth instead of on paying employees more and investing for long-term growth, they say.
That criticism may be a bit too late for this cycle. The enormous share buybacks and generous dividends that politicians, and some large investors, say strips companies of funds to invest in employees and future growth is already slowing. A recent Goldman Sachs
research report said high share prices have made it unattractive for companies to buy their own stock even if they take advantage of super-low interest rates to borrow to do it.
Share buyback announcements by companies during the second-quarter earnings season hit their lowest level since mid-2012. MarketWatch reported TrimTabs, an independent institutional research firm, said buyback totaled $376.5 billion for the first seven months of 2016, down 21% from the same period last year.
Clinton could be tempted to take credit for the reversal. She announced her economic plan on July 24 of last year and it included a recommendation for heightened scrutiny of “excessive buybacks that could take resources away from long-term investment.” She blamed so-called “activist” investors, who Clinton says are too often “focused on short-term profits at the expense of future growth.”
This past March Sens. Tammy Baldwin., a Democrat from Wisconsin, and Jeff Merkley, a Democrat from Oregon, introduced legislation called the Brokaw Act they say will make it harder for activist hedge funds to “exploit healthy companies rather than invest in their future.” The bill has the support of Massachusetts Democratic Sen. Elizabeth Warren and former Democratic Presidential candidate Sen. Bernie Sanders of Vermont.
The press release introducing the bill blames “activist” hedge funds for “leading the short-termism charge in our economy.” Activists make demands of the companies that benefit themselves rather than the long-term growth of the company. Share buybacks and higher dividends are tow of the most common demands they make that shortchange investments in workers and assets that will promote the company’s long-term interests.
The Brokaw Act is less aggressive in clamping down on than some, like Mike Konczal, a senior fellow at the progressive Roosevelt Institute, would have liked. Konczal who co-authored a paper in November 2015 proposing more significant actions such as limiting stock buybacks and executive pay, is quoted on Merkley’s site saying the bill is a “really important first step.”
The legislation, however, may not achieve the goals of those who criticize activist investors according to a client note from law firm Jenner and Block. Rather than curbing buybacks, dividends, and high debt, the proposals instead simply make it more difficult for an investor to accumulate enough shares to have any influence on how companies are run, says the Jenner and Block note.
The business of the Senate may slow down during the summer, but candidate Clinton is not letting the issue go. She repeated the anti-buyback theme recently during a campaign stop in Raleigh, North Carolina this past June. Instead of raising wages or investing in research and development executives, Clinton told the crowd, companies use share buybacks or dividends to send cash to top shareholders.
A recent survey of corporate executives, she said in the speech, revealed “more than half would hold off on making a successful long-term investment — maybe in their workers, or plant equipment, or research — if it meant missing a target in the next earnings report.”
Sen. Mark Warner is also keeping the issue warm until legislators can get back to pushing the bill through to passage. In an interview with the editorial board of the Roanoke Times published Sunday, the Virginia Democrat bemoaned the fact that instead of 50% of corporate profits going back into the business, now “95% of corporate profits are going into stock buybacks or dividends.”
Activist investors are taking the potential threat to their business model seriously. In May some of the biggest ones formed The Council for Investor Rights and Corporate Accountability, or CIRCA. Typically ultra-competitive investors William Ackman of Pershing Square Capital, Daniel Loeb of Third Point Capital, Paul Singer of Elliott Associations, Barry Rosenstein of Jana Partners, and Carl Icahn have joined together to lobby politicians, and the public,because they believe that “a well-functioning system of checks and balances between boards of directors and shareholders is fundamental to long term economic growth and U.S. prosperity.” They’ve hired lobbyists including the former chief of staff of ex-House Majority Whip Eric Cantor.
In a flurry of press since forming, CIRCA has argued short-term shareholders are “entitled to the same voice in a company’s governance as obviously more virtuous and deserving long-term holders.” They have also cite academic studies that show, on average, activist investors maintain their position for a matter of years, not months. The issue, says Charles Nathan in Harvard Law School’s Forum on Corporate Governance and Financial Regulation, “is not the duration of time required for implementation, but rather the value creation potential of the program.”