In Defense of the Buyback: Why Share Repurchases May Be a Smart Move
Few corporate finance decisions stir the pot quite like the share buyback. Critics cry foul, accusing executives of self-dealing and financial short-termism. Yet a recent blog by an unlikely source (ISS competitor Egan-Jones) offers a contrarian case: maybe buybacks aren’t corporate sin but savvy strategy.
The Cash Conundrum. A company sitting on excess cash has a few choices - each with potential pitfalls. Egan-Jones considers the alternatives:
1. Capital Expenditures: Timing Is Everything. Investing in new facilities or equipment might sound like a no-brainer, but doing so in a high-interest-rate environment or economic downturn could mean overpaying for underwhelming returns.
2. R&D Risk. R&D can unlock future growth but only if the company has a competitive edge to exploit. An oil and gas firm dumping cash into green tech might not outpace companies already ahead in that space. If you’re second to market and spending heavily to get there, is it really a wise use of funds?
3. M&A: The Failure Rate Nobody Talks About. Acquiring a rival is not easy to bring to fruition. The blog cites a study that indicates 70%-90% of acquisitions fail to deliver anticipated results.
4. Employee Compensation: A Fine Line. Yes, profit-sharing sounds noble. But wage inflation beyond market rates doesn’t serve long-term investor interests. The labor market sets the pay levels for talent and overpaying is not judicious.
Surprisingly, for a proxy advisor, Egan-Jones addresses criticisms of buybacks:
They Inflate Executive Pay. Incentive plans are designed specifically so pay aligns with long-term value, often tied to EPS or TSR – and many companies adjust targets or goals to offset buyback effects to avoid a windfall.
They Undermine Growth. Given that executive compensation is mostly equity-based, leaders are not incentivized to chase quick pops.
They Artificially Raise Stock Prices. When companies repurchase, it’s often because they believe their stock is undervalued. It’s a market signal of confidence, not manipulation.
The Bottom Line. It’s interesting that a proxy advisor would take such a progressive view of buybacks as a prudent way to return capital to shareholders. Egan-Jones may be positioning themselves as the “reasonable” proxy advisor in comparison with ISS and Glass Lewis.
Megan Wolf
Director, Practice, HR Policy Association and Center On Executive Compensation
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