Analysis: Academics advise JSE to tighten buyback reporting rules

have made it virtually impossible to establish with certainty the extent of repurchasing. A recent study has indicated that more than 50 percent of the total number of shares repurchased on the JSE are not disclosed on Stock Exchange News Service announcements.

It also appears that the majority of JSE-listed companies overstate their market capitalisation, because they base their calculation on the number of company shares in issue and do not exclude the shares repurchased by subsidiaries and associates.

More significantly, the inadequate disclosure adds to the dangers inherent in a situation that is fraught with potential conflicts of interest. US academic Martin Gumport has warned that share buybacks could be the “next great corporate scandal”. Gumport contended that the most credible explanation for the increase in buybacks was that “corporate stock option strike prices are usually not adjusted for dividends under any circumstances”. He argued that dividend payments hurt corporate share options, while share buybacks assist them.

While some consultants note that the payment of dividends can be dealt with in executive remuneration schemes, it remains a fact that the decision to buy back shares is influenced by the assumption that the buyback will enhance the share price, and the value of share options. This gives rise to a potentially conflicted situation, given that the decision to buy back is taken by executives who hold the options.

The pioneers in this little-researched field in South Africa are two academics based at the University of Stellenbosch Business School. Nicolene Wesson and Willie Hamman, whose research indicates that the cumulative value of buybacks could run to hundreds of billions of rands, have spent untold hours trawling through every available piece of information on share buybacks in South Africa.

Given the potential conflict of interest and the values involved, it is troublesome that their major concern relates to the accuracy of information. They note that there is no database of share-repurchase information, so all data had to be collected from their initial source. Also, share-repurchase announcements understate actual repurchases and, therefore, annual reports needed to be consulted.

The academics recommended that companies be required to announce actual share repurchases on a daily basis.

At present a company must report to the market as soon as it has bought back 3 percent of its shares. However, there appears to be some uncertainty about this rule, with some companies interpreting it as an annual limit and assuming they don’t have to report if they keep repurchases at less than 3 percent a year.

While Hamman and Bester argue that the daily reporting required by the LSE makes it far easier to track just how much repurchasing a company is doing, Burke counters that this would signal the company’s intentions to the market. “The market will take positions against the company and drive up the price.”

However, this appreciation of a supposedly undervalued share price would achieve one of the stated reasons for share buybacks.