The critical role that treasury plays in shaping a systematic approach to returning excess cash to shareholders as part of a capital allocation plan came into focus during a session featuring an assistant treasurer at a mega-cap corporate who described his company’s framework and playbook for share repurchases at the spring meeting of NeuGroup for Growth-Tech Treasurers sponsored by MUFG. - To fulfill its mission, treasury needs to bring structure, data and discipline to a process that is often influenced by the instincts and beliefs of senior leaders, said the AT, a NeuGroup member. “Buybacks are one of the most emotional decisions you have to juggle in the finance organization,” he told peers.
- “You can try to put as much structure you have around it, but a lot of times it’s ultimately going to come down to your CFO and CEO’s opinion—how you do it, who you use and the timing of it,” he added.
- “But as treasury professionals, our goal is really trying to help the organization understand why you’re doing it, when you’re doing it and how much you’re doing—with guardrails and best practices to return capital in the most efficient way.”
Understand business cycles and investors. The AT started with the need to design a framework for share repurchases within the larger context of a tech firm’s capital allocation priorities, determined in part by its cyclicality and growth trajectory. All finance teams at his company gather each year to review and align strategic action plans to ensure the planned use of capital reflects the likelihood of acquisitions and current investor sentiment, among other factors.
- “These are very critical aspects of how you think about the leveling and timing of the buybacks,” he said. And those are two key elements of creating an appropriate buyback program—before a corporate becomes the target of activist investors. That means treasury needs to carefully monitor metrics tracked by activists.
- The AT recommends tracking cash as a percentage of enterprise value and comparing executive compensation to that of peers, for example. “Understanding where your business cycle is going” is another critical piece of managing share repurchases, he said.
- “Treasury professionals are the voice the CFO needs to hear well in advance of a business cycle.”
- Treasury also must understand—with help from investor relations—how equity investors view the company and who those investors are. In thinking about return of capital, the AT answers questions including:
- “What is our current investor base? Where are we moving towards in the next two to three years? And what does that mean from an investor composition perspective or standpoint?”
Open the playbook. Getting more granular, the AT shared a playbook to guide share repurchases that lists the benefits and potential disadvantages or “considerations” of four different share buyback methods, as well as their governance implications and ability to offer outperformance vs. VWAP. The four methods: - Passive or grid-based 10b5-1 plans.
- Open market repurchases using 10b-18 plans.
- “Performance 10b5-1 plans” employing algorithms, known as eOMRs.
- ASRs, accelerated share repurchases.
The playbook provides a nuanced approach to buybacks based on historical data rather than relying on grids not grounded in analytics, the AT said. Treasury has used it to reduce shares outstanding by more than one-third in the past decade. Initially, repurchases focused on offsetting the dilution caused by equity compensation; today, they include more opportunistic trades, a reflection of the company’s growth rate and perception by investors.
- The playbook gives senior management “a very transparent tool,” the AT said. It helps leaders know, for example: “Are we chasing value here? Are we facing uncertainty? Do we want to take care of the volatility? So do an ASR right now?”
- “Do we want to do a program that’s more programmatic for the year, but we don’t like the fact that a 10B-51 is limiting? So you can use the eOMR structure and really take advantage of the ASR algorithm because we don’t have a great view of how much we should buy back and how.”
Use frameworks with flexibility. A framework—not a policy—sets the parameters of the company’s buyback program. “We have a framework that that dictates what our goals are in each of the programs that we put in place,” the AT said in describing the process of sizing and timing buybacks. It determines when judgment—including the CFO’s—can be used to increase or reduce amounts specified in the framework.
- “Deviations from the framework should only be done at certain points in time,” the AT said. This optionality is a crucial part of a framework designed to take emotion out of decisions about when, for example, to pull back on a share repurchase program.
- The AT also advocates giving flexibility to banks executing a buyback program to demonstrate their value to the treasury team. “Give as much information as you can give to your dealer of why you’re doing it and what latitude they have. It’s really critical for optimizing 10b5-1’s and OMR programs,” he said.
- “Grids that are tight and make sense allow them to actually utilize a skill set—versus just executing trades because you give them volume and no latitude. Then they’re just really just more of a machine than they are actually trying to do something on your behalf.”
- His company allows banks to buy back between 3% and 5% of the daily target and evaluates them on the discount to VWAP they achieve. He rotates banks every 12 to 18 months to boost their engagement.
Other best practices. The AT offered other guidance to peers about share repurchase programs based on his experience:
- Use advisors for ASRs and eOMRs. “I think it’s really critical to make sure that you have advisors helping you maximize the volatility in your stock if you’re going to do a structured product because there’s a lot of leakage that companies just don’t really care about as much that banks really take advantage of.”
- Set up an interest-bearing account. Banks can then direct debit for each buyback settlement without wires. “We also develop a template of how we want them to report data to us on a daily basis. We have a bot setup that will take the e-mailed Excel file and puts it into a nice tablet dashboard for us.”
- Create 10b5-1 and 10b-18 templates. Also, always have two or three banks onboarded and develop onboarding templates.
- Avoid long-term public policy disclosures that limit your flexibility. That said, “messaging is a really big part of a buyback program when you’re still growing,” the AT said. “It’s delivering that message that you believe there is more growth than what equity investors are giving you credit for. It’s really because of your confidence in your earnings growth in the future that you’re going to buy back stock and get the benefit of the valuation.”
