Buybacks get lots of bad press. Driven by low interest rates and a perceived lack of investment opportunities, American public companies spent $1.5 trillion buying back their own stock between 2013 and 2015. Critics claim that buybacks are the worst type of financial engineering, designed to prop up a company’s stock in the short term. They say the money could be better used to invest in future growth to fund research and development, capital expenditures, and marketing. Proponents claim that buybacks are efficient ways to return capital to shareholders, who can make their own capital allocation decisions, rather than allow capital to build at corporations faced with limited investment options.
A soon-to-be issued report from the Investor Responsibility Research Center Institute and Tapestry Networks takes a different approach. Rather than look at the net effect of buybacks and opine “good” or “bad,” Tapestry interviewed scores of directors to understand what was on their minds as they made the decision to institute, continue, stop, or change their companies’ buyback programs. At the time of this writing, the report has not yet been issued, but a sneak preview at July’s Stanford/International Corporate Governance Network academic day suggested some interesting findings. Directors said they supported buybacks for four overlapping reasons:
