Defying Critics and Curbs, Buybacks
Persist: Should Executives Benefit From Them?
By Alexandra Reed
Buybacks can be a boon for shareholders, but a detriment to employees.
Despite the new 1% tax on share repurchases under the Inflation
Reduction Act of 2022, U.S. public companies today are still using
share buybacks to return cash to shareholders — including executives
with equity-heavy pay — at unprecedented rates. This year has seen
well over half a trillion dollars’ worth of stock repurchased by S&P
500 firms in the first eight months of 2022 alone — including a $500
million plan by Kohl’s, one of more than two dozen public companies so
far to announce buybacks since President Joe Biden signed the new tax
into law on August 16, 2022. While there are signs of buyback
slowdowns ahead, this is the highest reported level since the SEC’s
1982 passage of Rule 10b-18 granting a safe harbor for buybacks,
enabling them to rival (and in some years surpass) dividends as a way
of returning cash to shareholders.
Wall Street loves buybacks, as is demonstrated in the Nasdaq Global
Buyback Achievers Index and the Nasdaq US Buyback Achievers Select
Index, as well as the S&P 500 Buyback Index. But do shareholders
really benefit from them? What about other stakeholders, such as
employees and customers? How do buybacks affect the long-term value of
companies? What difference do buybacks really make, and to whom?
Such questions are important for directors to consider, both generally
and with respect to their own companies.
Buybacks, whether accomplished through a direct purchase of shares
from the open market or (less often) by a premium tender offer, can
happen for a variety of reasons. When companies repurchase some of
their shares, they take cash out of the company (or, if leveraging,
incur debt) and return cash to shareholders who choose to sell —
sometimes giving a short-term boost to the stock price for those who
do not sell, and often increasing earnings per share (because of the
decrease in the ratio’s denominator, typically calculated as total
Through direct market buybacks, a company with undervalued stock can
“buy low” in a repurchase in order to later “sell high” in a new stock
offering. Another reason for a buyout is to reduce dilution that
occurs when companies issue new stock (including new stock that goes
to pay their executives): the more stock, or “float,” there is out in
the marketplace, the less each share is worth, so a buyback reverses
that dilutive effect.
Yet another reason companies may buy back their shares is to minimize
the risk of a hostile takeover, as companies with high cash balances
and lackluster stock price can attract raiders. Finally, a cynical
view is that boards approve buybacks in part to increase the value of
shares held by executives, who typically are awarded the lion’s share
of a firm’s equity compensation.
Legal Context for Buybacks
Whatever the reasons for buybacks, one thing is clear: In the United
States, it is up to directors to approve them. (In some other
countries, shareholder approval is necessary as well.) As stated in
the Key Agreed Principles of the National Association of Corporate
Directors (NACD), directed toward U.S. public companies, directors
must approve all material capital expenditures and transactions “not
in the ordinary course of business,” which would include share
repurchases. The American Bar Association’s Model Business Corporation
Act (MBCA) defines repurchases as a kind of “distribution” to be
approved by directors and establishes liability (under Section 8.32(a)
of the MBCA) for directors who approve distributions improperly. It is
no wonder that the law firm Skadden Arps has stated, in a client
letter on the topic, that “any share repurchase should be authorized
and approved by a company’s board of directors.”
In many cases, this approval process begins at the committee level.
All public companies listed on the major stock exchanges are required
to have independent audit committees, and the charters of these
committees may mention share repurchases as an area of oversight.
Examples include Biogen and Citrix Systems. For boards that have
finance committees (14%, according to the NACD), this oversight duty
often appears in those committee charters, as seen at Philip Morris
Of course, director approval of buybacks does not occur in a vacuum;
share buybacks are not the only extraordinary transaction legally
requiring board approval. That is, under most state corporation laws
and corporation governing documents, directors must also approve
dividends, major acquisitions, mergers and the sale or liquidation of
the company. And these transactional approvals occur in the broader
context of corporate capital allocation.
The Board’s Capital Allocation Responsibility
While capital allocation may sound theoretical, it is as real a
responsibility as it gets. “Capital allocation is the most fundamental
responsibility of a senior management team of a public corporation,”
opines Michael Mauboussin on his webpage for ValueEdge Advisors. This
responsibility falls on the company’s directors, as companies are
managed under the direction of boards. In the wake of Business
Roundtable’s 2019 declaration on stakeholder value, Al Rappaport,
pioneer of the shareholder value theory, published a Bloomberg op-ed
challenging CEOs and boards to walk the talk of stakeholder value by
making tough capital allocation decisions.
Capital allocation is indeed at the heart of the fiduciary duty of
directors, who oversee how the company spends its cash — not only via
the extraordinary transactions that they must approve, but also
expenditures that arise as a part of ordinary business (such as
meeting payroll, paying vendor bills, reducing debt and so forth).
Although these ordinary business matters do not typically require
board approval, directors should be aware of all these uses of cash
whenever they approve a stock buyback, since an imprudent buyback
approval could cause financial distress. In fact, Section 160 under
Title 8 of Delaware corporation law says that a corporation may not
“purchase or redeem its own shares of capital stock for cash or other
property when the capital of the corporation is impaired or when such
purchase or redemption would cause any impairment of the capital of
To avoid capital impairment, and more generally to make wise
determinations, directors need to understand buybacks in a financial
context — both generally and with respect to their companies.
Financial Context for Buybacks
As of July 26, 2022, reports The Wall Street Journal, companies
have spent $514 billion this year buying their own stock.
SeekingAlpha.com shows strong buyback activity for August 2022,
listing over 80 transactions for the month, including several worth
But overall, the buyback rage seems to be calming. Quarterly analysis
trends are telling. In the first quarter of 2022, reports S&P Dow
Jones, companies listed in the S&P 500 bought back $281 billion worth
of their own stock, up 4% over the previous quarter’s record of $270.1
billion. And looking back the previous 12 months (from Q2 2021 through
Q1 2022), the $985 billion in buyback dollars set an all-time record,
nearly doubling the previous 12-month period ending Q1 2021 — which
was a mere $499 billion.
In the second quarter of 2022, the trend slowed, with an 8% drop in
buybacks over Q2 2021. In July 2022, while some banks such as M&T
Bank, announced major buybacks, others held back. Jamie Dimon, CEO of
JP Morgan, announced a freeze on buybacks in anticipation of a
recession, and other banks have made similar announcements.
A study of 75% of the S&P 500 showed that although buybacks still
dominate corporate allocation at $175.5 billion, compared with $165.5
billion in capital expenditures and $140.6 billion in dividends, the
rate of quarter-to-quarter growth for capital expenditures, at 21%, is
higher than the other two categories, both at 14%. Add to that the 1%
tax to be levied on some buybacks under the aforementioned Inflation
Reduction Act of 2022, and a slowdown seems likely.
But whatever the megatrends may be, buybacks will never disappear as
an alternative, so directors need to consider their effects
—detrimental, positive or neutral.
Detrimental Impact of Buybacks
When buybacks are funded by debt, they can have a detrimental effect
on key financial ratios, such as debt-to-equity, considered an
indicator of financial risk. (It is nicknamed the “risk ratio.”) A
2019 Bloomberg study on debt-financed buybacks accused the
practice of “benefiting shareholders at the expense of creditors” and
declared that companies were rightly abandoning it. In a September 1,
2022, article in Strategic Finance, Andrew Bargerstock and
Naveed Abbasi warned that, although buybacks can increase earnings per
share, they can also reduce shareholders’ equity — sometimes into
The larger concern in recent years has been the association of
buybacks with executive pay increases and employee layoffs. Critics
say that all stakeholders (including shareholders) would do better if
companies put their cash to work rather than distributing it. They
accuse executives of doing these deals to get a short-term boost in
the value of their stockholdings to the detriment of companies and
Buybacks began to gain notoriety for their harmful effects when they
increased sharply following the Tax Cuts and Jobs Act of 2017, which
gave companies large amounts of unplanned extra cash. Absent any
strategies to invest this windfall, many boards voted to approve
buybacks. In 2018, buybacks increased by 64%, in some cases triggering
layoffs. That was the finding of a 2019 study by AFL-CIO and other
labor groups petitioning the SEC to ban buybacks. That labor group
study identified four major companies that combined buybacks and
massive layoffs in 2018: AT&T, Sears, Walmart and Wells Fargo. The
pairing of buybacks and layoffs also occurred in subsequent years. An
April 2022 Brookings study of how 22 major employers weathered the
2020 peak of the COVID pandemic found that 16 of them had buybacks,
and, of those, three (Best Buy, Gap and Macy’s) also engineered major
layoffs. These findings do not prove that buybacks cause layoffs, but
they do establish a covalence.
Buybacks have also been associated with the lowering of employee pay.
A June 2022 study by the Institute for Policy Studies identified 106
companies at which worker pay did not keep pace with inflation. The
study found that of those, 67 (including most notably Best Buy, Lowe’s
and Target) had not only lowered employee pay but also spent billions
buying back their own stock, which the study calls “a maneuver that
inflates executive stock-based pay.”
These negative social results have attracted the attention of
Washington — and not just in the new tax bill mentioned earlier.
Others in Congress have been concerned. “Instead of spending billions
driving up their own stock prices to line executives’ pockets, Wall
Street should be reinvesting in workers,” tweeted Sen. Sherrod Brown
(D-Ohio) when he reintroduced a “Stock Buyback Accountability Act”
(also proposed in the previous Congress), which would impose a 2%
excise tax on the value of repurchased stock. In the previous
Congress, Brown was joined by five other Senators who had
buyback-busting bills. Sen. Cory Booker (D-N.J.) and Sen. Bob Casey
(D-Pa.) proposed a law in which buybacks would trigger worker
dividends (as did Sen. Brown); Sen. Bernie Sanders (I-Vt.) and Rep. Ro
Khanna (D-Calif.) wanted to ban them when CEO pay is more than 150
times median worker pay; and Sen. Tammy Baldwin (D-Wis.) proposed
banning them outright. Depending on the outcome of the 2022 midterm
elections, such anti-buyback measures could resurface.
Meanwhile, SEC rulemaking could slow the pace of buybacks. In December
2021, the SEC proposed a share repurchase disclosure modernization
rule, which, among other requirements, would mandate daily reporting
of buyback data, currently required on a quarterly basis under Item
703 of Regulation S-K. The announcement acknowledged some benefits of
buybacks but also cited some commenters who alleged “opportunistic and
harmful use of issuer share repurchases by issuer insiders.” As of
mid-September 2022, the proposal is still pending.
Benefits of Buybacks
Buyback defenders allege that, under the right conditions, stock
buybacks can contribute to long-term company value for the benefit of
all stakeholders. After learning of the latest proposed tax on
buybacks, academics Jeffrey Hoopes and Allison Koester wrote a July
2022 op-ed (in The Hill) arguing that “Buybacks help the
company eliminate its least productive capital and make the company
more efficient (smaller and with more productive assets, on average).”
A 2021 paper in Journal of Corporate Finance by Viet Dang et
al. finds that, in states with laws that prevent the firing of
unproductive workers, higher firing costs enhance “employee
entrenchment” so companies “have an incentive to increase share
buybacks to mitigate a wealth transfer from shareholders to
employees.” This is so because buybacks by definition increase the
relative percentage of company funds paid out to shareholders vs.
other constituencies for the period studied. A 2019 study by Alberto
Manconi et al. of more than 9,000 buybacks around the world concluded
that they increased long-term share value as long as shares were
undervalued at the time of the buyback.
The proposed SEC rule on buyback disclosure elicited a number of
defenses. Veteran compensation consultant Ira Kay refuted the notion
that buybacks prevent capital expenditures, finding that companies
with large buybacks make greater capital expenditures than companies
with small buybacks. Also writing in response to the proposed SEC rule
on buyback disclosure, Darla Stuckey, head of Society for Corporate
Governance, called it unduly burdensome. She noted that share buybacks
“increase investor returns, improve market liquidity, return funds to
shareholders that they can deploy to invest in smaller companies and
allow issuers to obtain shares that can be used for employee incentive
compensation without diluting the interests of existing shareholders.”
Shareholders are not the only potential beneficiaries of buybacks.
Business Roundtable and Council of Institutional Investors have
reasoned that “money returned to shareholders through buybacks and
dividends does not disappear from the economy. Individual investors
can use it to purchase something they’ve been saving for. The money
can be lent to other companies that are hiring and growing. It can be
invested in new businesses as seed money for start-ups or financing
for emerging technologies.”
Furthermore, as mentioned earlier when explaining motivations for
buybacks, buybacks can be used as protection against hostile
takeovers. This is ironic, since shareholders — parties presumed to
benefit from buybacks — tend to welcome hostile takeovers, while
employees — the supposed victims of buybacks — are often harmed by
them. In this sense, the role of buybacks as anti-takeover devices can
advance rather than harm the interests of employees.
Buybacks as Financially Neutral
So far, we have reviewed the negative and positive effects of
buybacks, but time-honored financial theory offers a third
perspective, namely that buybacks are neither bad nor good for company
value (and therefore stakeholders): They are neutral. In a 1958
article in The American Economist, Franco Modigliani and Merton
Miller famously concluded that a company’s capital structure does not
affect its value. They said, “as long as management is presumed to be
acting in the best interests of the stockholders, retained earnings
can be regarded as equivalent to a fully subscribed, preemptive issue
of common stock.”
The argument of buyback neutrality is supported by both logic and
evidence. As a matter of reason, buybacks per se should not
automatically boost per-share price. While it is true that the
company’s value is spread out over fewer shares (with each remaining
shareholder holding a larger percentage of the company), it is also
true that the company’s value is proportionately reduced by the fact
that cash has left the company (or, if the buyback is financed by
debt, leverage has increased). Furthermore, any positive anti-dilution
effects may be temporary. Any reduction of the number of shareholders
outstanding can be offset if the company then issues new shares, for
example, in a new pay plan for executives.
That is why, although the buyback-focused indexes do well enough, they
perform no better than the many other indexes attempting to achieve
the elusive alpha (higher than average returns). For example, the June
2022 Index Dashboard: S&P 500 Factor Indices show the buyback index
ranking 11th for year-to-date return and 14th for June total return,
out of 17 S&P indices.
Sample Questions For Directors to Ask
Whether buybacks have a negative, positive or neutral impact on
shareholders and other stakeholders, the fact remains that directors
need to make a reasonable and informed decision when approving them.
Here are some sample questions for directors to ask.
What will this buyback cost? What are its basic characteristics
(total number of shares, average price per share)?
Is the price per share of this buyback set at market price or is it
a premium? If we are paying a premium, how was this calculated?
Is there a need to return cash to our shareholders at this time?
If one of the reasons for the buyback is to increase the value of
compensation paid to executives, is this the only way to achieve
this goal — and is the goal appropriate at this time?
What capital expenditures does this company need to make, and by
when, and how would this buyback affect those needs? (For example,
do we need to invest more in technology or in securing patents for
our intellectual property?)
How much time do we have to make the decision to approve or reject
this proposed buyback?
Will this proposed buyback be made in part to support a stock plan?
If the repurchase is to be made to support a plan, is this the final
bloc, or will there be more repurchase? What is the expiration date
of the plan, if any? Who is covered by the plan?
If the buyback leads to share price appreciation, who will benefit?
Does the company plan any layoffs in the near future? If so, why?
Would the funds used for this buyback be better spent to retain
When we announce this buyback, what rationale will we give?
Buybacks as a Governance Litmus Test
Buybacks, in the end, are an ultimate litmus test for a company’s
decision-making, as well as its values.
The buyback decision, like any board decision, can be scrutinized
under various standards arising from the duties of care and loyalty.
If buybacks are challenged, courts will want evidence of informed,
When it comes to company values, buybacks can be associated with
socially negative conditions, such as excessive senior executive pay,
low employee pay or major layoffs. In companies where human capital is
a stated value, it is particularly important to avoid giving the
impression — or creating the reality — that the company puts people
Buybacks per se are neither good nor bad in and of themselves. Each
buyback decision is company-specific. It is up to directors to ask
questions that look beneath and beyond buyback proposals to see how
they will affect their companies. In this sense, buyback proposals can
serve as the ultimate governance litmus test.
Alexandra “Alex” Reed Lajoux retired from the National Association of
Corporate Directors as chief knowledge officer emeritus in 2016 after
30 years there. From 1978 to 1981, she served as editor of Directors
& Boards, which was founded by her father, Stanley Foster Reed, in