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Should capital be returned to investors as an alternative to improving management of the business? If the board has determined that the company’s executive managers cannot be relied upon to use the capital for the competitive production of goods and services, the logical next step in most cases would be to replace those managers with new ones who can be relied upon to implement production efficiencies, improve product quality, expand markets, develop new products, or make some other use of capital to develop the business. Alternatively, if the board determines that replacing managers is not a practical strategy, directors would presumably want to sell the business – whether the whole corporation or its undermanaged unit – to someone who can pay a price based on the ability to improve management, and thus return all of the business unit’s capital to investors rather than just some of it. There can of course be some kind of sound reason for returning some of a company’s capital to investors, but whatever it is needs to be considered by the board in this practical context of why the company is continuing to employ managers if they are unable to make use of the capital to develop a competitive business.

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Will the corporation benefit from requiring shareholder approval of a buyback plan? Noting that shareholder approval requirements are common in jurisdictions outside the U.S.,[4] establishing a provision for shareholder voting approval of stock buybacks might be considered by a company’s board as either a case-specific condition or as a permanent governance policy to insulate the company from pressures to accommodate investor constituencies interested in short term pricing of the company’s shares.

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Should a company’s officers be made responsible for trading in the company’s stock? There has been a great deal of research, analysis and debate about whether a company’s managers can be expected to conduct buybacks efficiently at prices below intrinsic value, and it should also be noted that “perfect market” theory suggests that efforts to buy the stock at bargain prices will always be futile. Concerns are also raised about whether a company’s managers may be biased by subjective evaluations, compromised by insider information, or influenced by self-interest.

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Are stock buybacks a legitimate use of corporate capital? Both economic principles and legal theory[5] view corporate capital as having been contributed for use in a business enterprise. Buybacks that are justified as investments in “undervalued” company stock, or as support for market pricing to benefit some of the current holders of previously issued stock, may not be consistent with those understandings of purpose.

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Does an investor concerned with short term pricing need to consider the long term effects of a proposed buyback? Long term effects of a buyback on a company’s access to capital can influence current valuations of a company, and in that context an investor interested in short term pricing must consider the relative influences on trading markets of the apparent long term intrinsic value implications and immediate “financial engineering” benefits.

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How will a long term holder of the company’s stock benefit from a buyback? The continuing holder of stock does not receive any of the theoretical benefit of money being “returned” to investors, since that is given only to investors who sell into the buyback. The intrinsic value of the company is likely to be reduced by its diminished access to capital and resulting limited adaptability, but the buyback’s reduction in shares outstanding will increase the continuing holder’s proportional interest in that diminished intrinsic value. The long term investor therefore must analyze the relative effects of both the increased business risk and increased allocation of equity to determine the net benefit, or to determine whether to sell or continue holding.

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Can an indexed investor benefit from buybacks? Recent discussions of this question have not developed any theories of benefit. Since indexed investors cannot decide to sell any of their shares into a buyback, they will not be receiving any of the funds being “returned” to investors. It must also be assumed that substantially all of the “returned” money received by other investors will be committed to secondary market purchases of previously issued equity securities, rather than contributed to increased capital of the companies in the index to improve their production of goods and services. Finally, that use of “returned” investment to purchase previously issued equity securities will add to buy-side demand that increases the prices the indexed investor must pay for the equity it is currently buying for realization of long term values that will not be enhanced by the buybacks.

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Should a shareholder present or vote in support of a proxy proposal to require shareholder approval of corporate stock buybacks? As indicated in the section on corporate questions above, the requirement of shareholder approval is common outside the U.S. and may support responsible management as well as the interests of long term investors.