Corporate Directors Identify Four Key Reasons For Stock Buyback
Programs
Press Release • August 22,
2016
Buybacks at Highest Level Since Financial Crisis, With S&P 500
Companies Repurchasing $166.3 Billion of Shares in First Quarter of
2016
Webinar on Tuesday, Sept. 13th
at 1 PM ET to Review Findings
NEW YORK, NY, August 22, 2016
– As
large American public corporations repurchase company shares at
historic rates, corporate directors cite four key reasons for
buybacks: to return capital to shareholders; invest in the company’s
shares; offset dilution from using equity as currency; and/or alter
the company’s capital structure. The directors generally disagree with
widespread criticism of corporate stock buybacks, and say that
companies need to better disclose the reasons for undertaking
buybacks.
These findings are contained in a new report, Buybacks and the
Board: Director Perspectives on the Share Repurchase Revolution,
from the
Investor Responsibility Research Center
Institute (IRRCi) and
Tapestry Networks. A webinar
is scheduled for Tuesday, September 13, 2016, at 1 PM ET to review the
findings and respond to questions. Register at no charge
here. Download the research
here.
The
research notes that Standard & Poor’s (S&P) 500 companies acquired
$166.3 billion of their own shares in the first quarter of 2016, more
than in any other quarter since the financial crisis. For the past
nine quarters, more than 370 S&P 500 companies repurchased shares, and
S&P 500 companies spent over $1.5 trillion on buybacks during the past
three years.
Between 2003 and 2013, S&P 500 companies doubled their spending on
share repurchases and dividends. But, at the same time, companies cut
spending on investments in new plants and equipment.
“A
trillion and a half dollars in buybacks over three years certainly
returns capital to shareowners and reduces the number of shares
outstanding. That’s why buybacks are popular,” says
Jon Lukomnik, IRRCi executive
director. “But, some view buybacks as financial engineering to juice
short-term corporate performance at the expense of investments that
would better grow companies and the economy over the long-term.”
Lukomnik added, “Corporate board directors are charged with making
sure buyback programs are well-designed and well-executed. However,
there was little information available about how directors themselves
analyzed buybacks. Not surprisingly, the research finds that directors
believe they do a good job, but they also admit that they could do a
better job disclosing the specific reasons for each buyback program to
investors.”
“Decisions
about capital return and allocation are among board members’ most
important responsibilities,” says
Richard Fields, report author
and Tapestry Networks principal. “The 44 directors we interviewed take
these decisions seriously to ensure share repurchases occur only when
in the company’s best interest. But, we find that few companies
effectively disclose the strategies and thinking behind buybacks. As a
result, few companies get credit for the rigor of their buyback
decision-making.”
The
report’s key findings are as follows:
-
Companies repurchase shares for four main reasons
– to return capital to shareholders; invest in the company’s shares;
offset dilution from using equity as currency; and/or alter the
company’s capital structure. Directors define what constitutes a
successful buyback program differently depending on the reason(s)
the buybacks were initiated.
-
Most directors disagree with criticisms of buyback programs.
The two most common criticisms are that buybacks jeopardize
corporate growth and that they lead to large, unjustified pay
packages for executives. Directors, with few exceptions, say that
their companies can afford both buybacks and adequate investment.
Directors also reported that buybacks do not unjustly enrich senior
executives, as compensation plans are adjusted for buybacks.
-
There is room to improve corporate disclosures about share
repurchase programs.
Few companies publicly disclose details about buyback
decision-making and very few state the reasons for a specific
buyback program. With regard to executive compensation, though a
number of directors mentioned that their companies project how
buyback activity will affect earnings per share and adjust targets
accordingly, only 20 S&P 500 companies disclose that they do so.
-
Macroeconomic factors make share buybacks attractive.
Monetary and fiscal policies and macroeconomic forces have
encouraged repurchase programs. Many directors said that they would
be unlikely to find enough good opportunities to invest all their
companies’ available capital in today’s low- growth,
low-interest-rate environment, and that it was often better to
return capital to shareholders than to hoard capital or invest in
projects with less-than-desired projected returns. Directors also
said they tend to prefer buybacks to dividends because they believe
a buyback program offers greater flexibility over time.
-
S.
tax policies that discourage companies from repatriating foreign
cash have also spurred buyback activity.
The large build-up of capital in non-US affiliates means that
companies have an emergency fund to draw upon should it become
necessary. As a result, creditors offer very attractive loans to
companies, meaning some corporations are able to engage in almost
costless borrowing to fund buyback programs.
To
conduct this study on how companies make decisions about share
repurchases, Tapestry Networks reviewed available literature and
current capital market reports, and interviewed 44 directors serving
on the boards of 95 publicly traded U.S. companies with an aggregate
market capitalization of $2.7 trillion. The interviews were conducted
from August 2015 through May 2016 on a not-for-attribution basis.
Download the full study
here. Register for the webinar
at no charge
here.
The Investor Responsibility Research Center Institute
is a nonprofit research organization that funds academic and
practitioner research enabling investors, policymakers, and other
stakeholders to make data-driven decisions. IRRCi research covers a
wide range of topics of interest to investors, is objective, unbiased,
and disseminated widely. More information is available at
www.irrcinstitute.org
Tapestry Networks
helps corporate leaders become more effective and more confident in
carrying out the challenging task of governing and leading the world’s
largest companies. We do this by bringing together non-executive
directors, regulators and executives from North America and Europe, to
learn from one another and to discuss their role. For well over a
decade our cross-sector networks of audit committee chairs,
compensation committee chairs, lead directors, and our networks of top
leaders in banking, insurance and healthcare, have been advancing the
state of the art of governance and leadership.
Media Contacts:
Kelly Kenneally | +1.202.256.1445 |
kelly@irrcinstitute.org | @IRRCResearch
Richard Fields | +1.781.290.2292 | rfields@tapestrynetworks.com | @leadcomp
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IRRCi. All Rights Reserved. |