No. of Recommendations: 3
I don’t know if this is exactly what you are advocating, but Fairfax Financial buys all award shares on the open market.
That certainly sounds like an improvement over simply printing shares as as needed as a "free" source of money.
But the accounting is problematical...probably not one shareholder in 1000 has an intuitive yet accurate grasp of the true economic meaning of non-cancelled treasury shares. I sure don't : )
If they are ultimately cancelled, it's just a normal buyback-and-cancel, the exact reverse of a fresh stock offering. If not, the firm eventually parts with them, it's just a stock investment like the purchase of shares in any other firm. Until you know which it turns out to be, you don't know the economic meaning of the treasury share balance.
At a guess, I think this is still a tax wheeze or a bit of a misdirection. I'm guessing that the accounting treatment is that the stock buyback at the beginning of the period is not counted as a corporate expense, merely a reverse share issuance like any other stock buyback. That amount is likely expensed when some of those shares vest years later at the original buyback cost, not the current market value. But the taxable income to the recipient is the fair market value on the day of vesting. It's not exactly straight forward when a company pays something to someone but the accounting/tax cost of one party is perhaps wildly different from the accounting/tax cost for the other. The time value of that money (or the market value change of the shares) appears nowhere. The books say that the company spent $1 to get an employee $2 in income, likely without employer-side payroll taxes due.
So, sure, getting stock into the hands of executives so they care more about the fortunes of the firm is a good idea. But it's kind of like buying Playboy to read the articles. Sure, it might be true, but it might not be the whole story.
Jim
