For the first time since 2015, the Securities and Exchange Commission finally has a full compliment of Commissioners. On Dec. 21, Robert Jackson, a Democrat, and Hester Peirce, a Republican, were confirmed by the Senate.
The confirmations come after Sen. Tammy Baldwin (D-Wis.) lifted a hold on a final vote, pending responses to a lengthy questionnaire she crafted to glean their views on hedge funds, activist investors, stock buybacks, and executive pay.
Jackson is nominated for the remainder of a five-year term expiring June 5, 2019. He is a professor at Columbia Law School and director of its program on corporate law and policy. His academic work focuses on corporate governance and improving transparency in securities markets.
Jackson has served as a senior adviser at the Department of the Treasury during the Financial Crisis, assisting Kenneth Feinberg in his work as special master for TARP executive compensation. Prior to that, he worked as a lawyer in private practice.
Peirce would serve for the remainder of a five-year term expiring June 5, 2020. She is a senior research fellow at the Financial Markets Working Group at the Mercatus Center at George Mason University. Previously, she served on the staff of the Senate Banking Committee and as a staff attorney with the SEC from 2000 to 2008.
She is the editor and a contributor to the 2012 book, Dodd-Frank: What It Does and Why It’s Flawed. Peirce was an unconfirmed nominee to fill the same post by President Obama back in October 2015.
The responses submitted to Baldwin provide a final, detailed look at the often-oppositional philosophies espoused by the two candidates. Below, we have excerpted those responses.
Baldwin: I am concerned that the influence of aggressive short-term oriented shareholders, along with the rise of stock-based pay, have made corporate executives focus myopically on share price at the expense of long-term growth and serving other stakeholders, such as workers and taxpayers.
Peirce: While I believe that market prices generally reflect the long-term value of companies, it is important to ensure that the capital markets work for investors in companies with a long-term focus.
I am deeply concerned that corporate executives are too focused on short-term share prices instead of sustainable value creation.
Large blockholders sometimes influence company decision-making. Their influence can be positive (encouraging companies to take steps that will increase their long-term value) or negative (inducing companies to focus on objectives that further the blockholders interests, but undermine the company‘s value).
I look forward to working to ensure that investors have the information they need to understand and assess companies and shareholders’ actions and the implications of those actually for companies’ and shareholders’ actions and the implications of those actions for companies’ long-term value. The SEC can also explore ways to modify market structure and capital formation rules to ensure that companies are able to raise capital in a way that is consistent with long-term value maximization.
Jackson: I am deeply concerned that corporate executives are too focused on short-term share prices instead of sustainable value creation.
There are at least three areas in which the SEC should consider immediate steps to encourage companies to focus on the long term. The first is executive pay. Most public companies require executives to hold stock-based pay for only three years, making it unsurprising that executives so often pursue short-term stock increases.
It is time for corporate executives worried about short-termism to put their money where their mouths are. SEC rules could encourage these executives to hold their stock for far longer periods. That would give executives real incentives to invest for the long term—and truly align their interests with the investors, employees, and communities that these companies serve.
The SEC should also consider allowing companies and investors to choose voting arrangements that reward shareholders who commit to hold shares for the long term. It should consider whether and how to enable public companies to choose these arrangements. That could help ensure that companies favor the interest of their longer-term investors—despite any pressures they may face from short-term speculators.
The SEC should also consider whether the rules governing stock buybacks need to be modernized. Given the importance of this issue to making sure that public companies invest for the long term, these rules now deserve another look.
Baldwin: Do you believe activist hedge funds encourage public companies to cut their investments in favor of buying back their own stock?
Jackson: Yes. The empirical evidence makes clear that, among other strategies, certain activist hedge funds often encourage public companies to engage in stock buybacks. Nearly one-fifth of activist hedge-fund engagements explicitly involve a request to pursue recapitalizations—and that fraction excludes the hedge funds that do so behind the scenes.
Baldwin: The SEC’s mission is to facilitate capital formation. However, in recent decades, through stock repurchases and mergers, public corporations actually send money to the stock market, rather than vice versa.
Are you at all concerned about the rate of buybacks and what, if anything, do you believe the SEC should do to reverse the extraction phenomenon in our public markets?
Peirce: Facilitating capital formation is key part of the SEC’s mission and one that would be important focus of my tenure.
As with other market trends, it is important for the SEC to monitor stock buybacks and stock issuances. Manipulative buyouts, of course, should not occur at all. Buybacks, if properly and legally used, however, can contribute to economic growth.
For example, a company without productive uses of capital might conclude that it should return capital to shareholders through a stock buyback. The shareholders can then invest that money in public or private companies with productive uses for it. Other companies might contribute to corporate growth by choosing to refrain from buybacks in order to invest in new projects.
The SEC should work to ensure that the regulatory framework facilitates the flow of capital to its highest and best use.
Jackson: I absolutely share the concern that the volume and scale of stock buybacks have increased dramatically.
It is not at all clear that the SEC’s rules in this area, which have not been updated for over a decade, are adequate to ensure that investors understand exactly how and when corporate cash will be used for buybacks instead of job creation.
Baldwin: Stock buybacks have famously increased in frequency since the 1982 10b-18 rule that provides safe harbor from insider trading charges to executives buying back their company’s stock. Do you believe that 10b-18 should be reconsidered in light of the explosion of stock buybacks?
Jackson: If stock buybacks are occurring because corporate executives are failing to make important and productive investments, this is an issue that concerns me—and should concern all SEC Commissioners.
If corporate management is declining to make productive investments in research and development in order to satisfy short-term demands for stock buybacks, that is a concern that goes directly to the heart of the SEC’s mission.
Baldwin: What impact do you believe increased stock buybacks have had on wages and jobs?
Peirce: American global competitiveness is closely linked to whether capital is applied to its most productive use.
When a company can use its capital most productively, it should retain the capital rather than conducting buyouts or paying dividends. At other times, however, buybacks can be an appropriate way of moving capital to more productive uses outside of the company conducting the buyback.
Whether a particular buyback benefits economy is a fact-specific question, but it is useful to monitor trends about how and why buybacks are occurring.
Baldwin: Do you support requiring public companies to disclose their repurchases and issuances more frequently, and include more granular data about the transactions?
Jackson: The SEC should consider requiring better disclosure of stock buybacks for companies that wish to take advantage of the “safe harbor” that Rule 10b-18 provides from securities-fraud liability.
That rule—and the conditions for the safe harbor—has not been substantially revised for over a decade, and it is critical that the SEC’s rules be updated to reflect the increasing scale and importance of buyback activity.
In particular, modernized disclosure in this area should require managers to explain the basis for the buyback decision to their investors and to the public. This improved transparency would allow markets more accurately to price the value of the buyback into the company’s shares—and put investors on notice as to when, and how, the buyback will occur.
In light of the increasing importance of buybacks to American companies and investors, a close look at rules that would improve the transparency of these transactions is warranted. That is especially true if changes to our tax laws are likely to make these transactions even more important in the years to come.
Baldwin: As a Commissioner, will you commit to supporting proposing and finalizing the mandatory Dodd-Frank rules required by Sections 956 and 954?
Jackson: It is long past time that the SEC and public companies give legal effect to the investor protections that Congress chose to enact.
It is especially troubling that the rules under Section 956, which requires the SEC to work together with other agencies to develop rules prohibiting the kinds of banker bonuses that helped fuel the devastating 2008 financial crisis, have not yet been finalized.
It is hard to understand why rules under Section 954, which requires public companies to adopt policies addressing the clawback of erroneously awarded executive pay, have not been adopted. Proposed rules have been awaiting Commission action for years—which is unacceptable if the SEC wants its commitment to the rule of law to be taken seriously.
Peirce: I support the completion of rulemakings required by Congress, including the rules required by Dodd-Frank that have not yet been completed.
Baldwin: Do you believe that stock-based pay has distorted priorities for public-company executives?
Jackson: Yes. While stock-based pay can have the beneficial effect of aligning managers’ incentives with those of shareholders, in my view the structure of much stock-based compensation—especially top executives’ freedom to unload shares in the short term—has led corporate managers to pursue short-term profits rather than long-term value creation.
Public-company directors have failed to bargain hard enough with top managers to restrict whether, and when, executives can sell company stock they receive as compensation.
Another issue is that the SEC’s rules do not emphasize executives’ stock holdings as the critical determinant of their incentives. As a result, most public company executives are free at any time to sell the overwhelming majority of stock they hold in the firm, leading many to focus on short-term stock prices rather than long-term value.
Some executives yielded to the temptation to pursue short-term share-price spikes rather than investments in employees.
Peirce: Many factors affect corporate priority setting. The manner in which executives are paid is one such factor. Indeed, one of the reasons many companies use stock based pay is to align executives’ interests with those of shareholders and encourage them to set priorities in a way that contributes to the company’s long-term value.
Baldwin: Do you believe stock-based pay has encouraged executives to buy back their company’s stock?
Jackson: Executives’ freedom to sell shares earned from stock-based pay gives them strong incentives to increase short-term stock prices.
Research supports the common-sense conclusion that, when executives are paid on the basis of increases in share prices, they are more likely to favor tactics that increase share prices—such as buybacks. What this research does not reveal, however, is the effects of these incentives on the companies and communities affected by stock buybacks: the employees and factories that could no longer be supported, research that was never conducted, opportunities lost. For me, those are the truly troubling implications of stock-based pay that rewards short-term stock increases.
Baldwin: Do you believe reducing the ratio of CEO to median worker pay is a worthy goal?
Peirce: Companies should pay people for the contributions they make to the corporation. Decisions about relative and absolute pay for CEOs and others workers are important, but they are best made by the companies and employees who were able to conduct a fact-specific assessment of the contributions an employee is making to the enterprise.
In making individual salary and wage decisions, companies typically take into account a wide range of factors, including the nature of the job responsibilities, the qualifications and experience of the employee, and the local labor market.
I expect to work with my fellow commissioners and the SEC staff to consider ways in which the pay ratio disclosure rule and its implementation can be improved.
Among the issues to be considered is the suggestion that the SEC build into the rule an “actual realized gains” rather than an “estimated fair value” calculation for CEO compensation.