Nicolene Wesson has spent a large part of the past five years trying to get a precise indication of how much money the individual JSE-listed companies are spending on the repurchase of their own shares.
As a result of work she and her colleague at the Stellenbosch University Business School, Professor Willie Hamman, have done, Wesson realises that the total figure runs to hundreds of billions of rand. She is now working on determining how large the buyback bill is for individual companies.
Wesson and Hamman are pioneers in this critically important field of research in South Africa. Their work will reveal the extent to which companies use their listing to distribute money to investors through dividends and share buybacks.
This is in contrast to the traditional role of an exchange, which is to receive money from investors. In the absence of Wesson’s work, it is impossible to know the extent to which the JSE is actually playing its traditional capital-raising role or whether this role is overshadowed by its capital distribution role.
It has been an enormously painstaking exercise, which anyone less resolute would probably have abandoned four-and-a-half years ago. But Wesson, who is an academic accountant, has all the characteristics that companies and the users of company accounts are so enormously dependent upon – an encyclopedic knowledge of accountancy, a commitment to understanding what is going on in a critical area of corporate finance, and a keen investigative mind that seems never daunted by the volumes of information she has to wade through in order to find the details she needs, to identify the important patterns.
The new regulation that has been introduced by the JSE comes too late to help Wesson with her current research project, which relates to buyback activity in the 10 years since the Companies Act was amended to allow it.
The current dismal state of disclosure has forced Wesson and Hamman to trawl through the minute detail contained in hundreds of annual reports in an attempt to identify what changes there have been to a company’s equity.
Wesson and Hamman’s heroic activities are reminiscent of a comment made some years back by Christopher Cox, then chairman of the US Securities and Exchange Commission that “no shareholder should need a machete and pith helmet to go hunting for what the chief executive makes.”
In South Africa the search for share repurchases is even more challenging than that for executive pay. This opaque situation is extremely troubling given the potential conflict of interest as corporate executives are essentially using company funds to secretly buy shares from their shareholders.
And while share buybacks are interpreted as a sign that management is more confident than the market about prospects for the share price, the strength of this “signal” is diluted by the fact that management is not using its own funds to do the repurchasing.
There is the additional concern that to the extent that repurchasing activity lifts the share price and hence the value of share options, the executives have indirectly enriched themselves.
As Wesson points out, even the new disclosure requirements are too opaque for shareholders to detect any “signals” from management and it will also continue to be impossible to determine with any precision what impact repurchasing had on the share price.