Director perspectives on the share repurchase revolution
Large American public companies have repurchased their shares at a remarkable rate. 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. This continued a string of broad buyback activity. In each of the last nine quarters, at least 370 S&P 500 companies repurchased shares, and over the last three years, S&P 500 companies spent over $1.5 trillion on buybacks.
Between 2003 and 2013, S&P 500 companies doubled their spending on share repurchases and dividends while cutting their spending on investments in new plants and equipment. According to data from McKinsey, buybacks have accounted for 47% of US companies’ income since 2011, up from 23% in the early 1990s and less than 10% in the early 1980s.
There are reasons to believe that share buybacks will remain popular in the short term. Non-financial S&P 500 companies had $1.77 trillion in cash holdings in the fourth quarter of 2015, more than double what was on hand in 2009. Most people expect the low interest rates to continue for some period of time. In a low-growth and low interest rate environment, where capital is cheap and certain shareholders agitate for capital return, buybacks are an attractive option to many companies.
Critics worry that the growth in buyback activity has come at the expense of productive investments. Larry Fink, the chief executive of BlackRock, the world’s biggest investor with more than $4.5 trillion in assets under management, recently sent a letter to leading CEOs expressing concern: “Many companies continue to engage in practices that may undermine their ability to invest for the future. Dividends paid out by S&P 500 companies in 2015 amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months. We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment.”
Some observers believe buybacks unjustly inflate senior managers’ pay. According to University of Massachusetts economics professor William Lazonick, in 2012, the 500 highest-paid executives in the United States received, on average, $30.3 million each, 42% of which came from stock options and 41% from stock awards. Because share repurchases can raise share prices, at least in the short term, managers often have a personal financial incentive to buy back shares. This incentive may be even stronger at companies that reward executives for earnings per share (EPS). In 2016, 31% of annual incentive plans and 22% of long-term incentive plans were tied to EPS. Buybacks tend to improve EPS and other share-based measures of profitability as they reduce the number of shares outstanding.
Against this backdrop, the Investor Responsibility Research Center Institute asked Tapestry Networks to undertake an extensive inquiry into non-executive directors’ views about share repurchase programs. Between August 2015 and May 2016, Tapestry interviewed 44 directors representing 95 publicly traded US companies with an aggregate market capitalization of $2.7 trillion and aggregate revenue of $1.4 trillion.
Tapestry conducted interviews on a not-for-attribution basis. Unattributed quotations from the interviews are included throughout the report; they appear as italicized text in quotation marks.
This report synthesizes the perspectives of these non-executive directors and other research on a number of important questions related to share repurchase programs:
What is the board’s involvement in capital return decision-making?
Why do companies buy back shares?
Are buybacks jeopardizing growth?
Do repurchase programs unjustly enrich senior executives?
Are buyback disclosures clear and effective?