RI Interview: SEC Commissioner Robert Jackson: We need to overhaul stock-based pay (Part 2)

This is the second part of a detailed interview. The first is available here.

Jackson has focused on share buybacks, which have exploded since the Trump tax bill, highlighting executives cashing out of stock during a buyback. He has also called for the SEC to open a comment period on share buybacks.

“I’m glad to say that the speech and the coverage [on buybacks] that followed has shone some light on this practice that I was astonished to discover, which is that executives are using stock buybacks as an opportunity to cash out their own shares.

“What was so surprising about it is that, at the same time the managers are telling the market that the stock is cheap, because they are using shareholder money to buy back shares, they are selling their own personal stakes.

My experience with CEOs is that they are not in the business of selling expensive things cheaply. Several senators and others have called upon the chairman of the SEC to open a comment period. His response was that this is not a priority for him, which is very disappointing. We haven’t looked at our rules in this area for more than a decade, the last time we looked at those rules was before the last major buyback wave, before high-speed trading.”

Jackson had also asked for safe harbour during share buybacks to be denied to executives who cashed out their stock during them. I asked if this was only possible through SEC regulation.

“Yes, we give a safe harbour from market manipulation during share buybacks as long as companies abide by certain rules. I think we should add a requirement to those rules requiring that the insiders of the company agree to lock up their shares for a meaningful period of time so as not to take advantage of the price spikes during the buyback. One of the disappointments for me has been the unwillingness of my colleagues to get feedback on the desirability of those changes.”Since the subject of executive compensation had arisen, I asked Commissioner Jackson about his views on the recent questioning that stock-based compensation was the best way to get executives to have ‘skin in the game’, for example, by Deborah Hargreaves in her new Are Chief Executives Overpaid? that calls for a return to cash-based pay as stock-based pay seems to be making executives misbehave as there are no restrictions on them selling company stock.

“Two things,” answered Jackson, “first of all, I think stock-based pay has led to a series of problems and abuses that deserve immediate attention.

“Second, I don’t think we should throw the baby out with the bathwater: returning to a world of cash bonuses is a world in which executives get to extract excessive levels of pay at shareholder expense. And I believe that properly structured stock-based pay can serve a powerful role in getting managers to do the right thing for investors.

“Rather than get rid of stock-based pay and return to cash bonuses, I think we need to overhaul the design of stock-based pay. We need to require executives to hold shares for the long term, we need to prohibit selling into buybacks, we need to more fully address scandals like option backdating or timing.

“My guess is that if someone in the United States proposed a return to cash-based bonuses, the ones who would cheer that first and foremost would be the corporate executives of America. They’d be delighted to be paid in cash rather than shares. The fact that they would be most enthusiastic to return to that form of pay is reason enough not to do it.”

Finally, Jackson’s first speech as commissioner was very critical of dual class shares and the use of power without economic exposure by founders and other CEOs. I asked if there had been any further developments on this issue. “I am very proud and excited by the fact that the Council of Institutional Investors has petitioned the major stock exchanges along the lines of the proposal that I set out,” he replied.