Office Managing Partner, Senior Client Partner, Co-Leader Global Financial Officers Practice
Stock Buybacks Take Off. So Does Scrutiny of Them
One of the hottest moves at companies these days is one that rarely got attention some years ago. As more and more companies buy back their own stock to boost shareholder value, they are drawing attention from many quarters—from workers to employees to the White House.
So far this year, S&P 500 firms are buying back stock at double the pace of last year, setting up 2023 to be the first year ever with at least $1 trillion in completed buybacks. Proponents say the buybacks reflect a smart attempt by firms to distribute excess capital in a balanced way among employees, the business, and shareholders. But critics say the practice can create a backlash when firms are also laying off employees or cutting back services to consumers. “There is a public-relations risk to companies doing buybacks at a time when they are also contracting expenses,” says Jeff Constable, co-leader of the Global Financial Officers practice at Korn Ferry.
Buybacks are now attracting surprisingly intense scrutiny in Washington. On January 1, a new 1% tax on stock buybacks took effect. Its intent was to slow buybacks—but companies went the other way. By the end of that month, they had announced $131 billion worth of buybacks, more than triple the amount announced in 2022 and a record to start the year. In his State of the Union address, President Biden suggested that the current 1% tax didn’t go far enough. Lawmakers are now considering quadrupling the tax to 4%.
Buybacks are an important part of corporate capital-allocation strategies, helping not just CEOs and executives, but all shareholders. Supporters argue that curtailing buybacks could hurt the retirement and pension savings of ordinary Americans by lowering stock prices. They note further that over the last few years companies have increased wages, invested more in long-term strategic initiatives, and enhanced and implemented new wellness and social impact programs, benefiting both employees and the communities they serve—all this in addition to, rather than instead of, buybacks.
CEOs typically use buybacks to reduce the number of shares available for purchase, thus increasing both demand for stock and earnings per share. This allows them to balance their firms’ use of excess capital. Companies are buying back shares at a record clip today, experts say, because last year’s decline in stock prices has made them more attractive.
Along with increasing shareholder value, buybacks can also affect executive compensation: they raise stock prices, which in turn boosts earnings per share—a key metric for awarding bonuses, options, and other rewards to CEOs. “The impact of buybacks on the earnings-per-share outcome for pay purposes can be a big deal,” says David Wise, vice chairman in the Rewards practice at Korn Ferry. The concern, says Wise, is that companies will use buybacks to “make their numbers” instead of investing in the long-term needs of the business. “The pay discussion only puts more pressure on the backlash against buybacks,” he says.
For his part, Constable says companies should continue buying back stock “where it makes economic sense” and until “taxation on buybacks makes them less economically rational.” But he cautions CFOs and boards to ensure that buybacks “are not out of alignment in other ways with things the company stands for.”
For more information, contact Korn Ferry’s Financial Officers practice.