Directors Remuneration and Its Impact on Share Repurchases

Introduction
Prior to 1982, share buybacks by public companies in the open market in the U.S. were illegal. That year the Securities and Exchange Commission (SEC) passed Rule 10b-18, which created a legal process for executing share repurchases (Reda, 2018). Since that time, many companies have engaged in share repurchasing. As Egan (2018) notes more than $400 billion were allocated by companies to share buybacks in 2018. The reason this is relevant is that it shows a dangerous trend of allowing considerably vast sums of money to be used in share repurchasing programs: conflicts of interest are inevitable and moral hazard can result (Chan & Hoy, 1991; Choi & Maldoom, 1992). Leaders and directors of companies are often incentivized to perform by being given shares and options in the company. When companies use (or borrow) money to repurchase shares they effectively prop up the stock price, which allows directors and top level executives to sell their shares at a higher price than would be the case if these companies were not piling billions upon billions into market to fund buybacks.
In Ireland, the Companies Act 2014 (CA 2014) and the Taxes Consolidation Act 1997 (TCA 1997) describe the legal procedure for authorizing a repurchase by a company of its own shares and set the parameters under which the funds received on the repurchase or redemption can be treated as a capital receipt rather than as an income distribution (Lee, 2018). But is there a moral consideration that should be made by companies in spite of the legality of share repurchases for the sake of director remuneration? What sort of signal does it send to stakeholders when companies invest in repurchasing their own shares instead of in research and development or infrastructure? As Scheider-Maunoury and Gouin (2016) point out, share buybacks hinder investment in the company and undermine the potential of a company to reinvest in itself and in its future. If directors have a responsibility in terms of corporate governance and transformative leadership to look out for the best interests of all stakeholders, can it be considered morally feasible for companies to engage in the repurchasing of shares for the sake of directors’ remuneration?
General Purpose
The general purpose of this research is to understand whether stakeholders in an Irish company view director remuneration as a result of share repurchases as a case of conflict of interest or as immoral. As the global economic crisis of 2007-2008 showed, when immorality is introduced into the financial system, moral hazard can quickly escalate to the point beyond where effective risk management can any longer be demonstrated (Murray, Manrai & Manrai, 2018). It is unclear, however, whether in Ireland there is sufficient awareness of this fact to mitigate the risk of moral hazard effectively rising out of control. This research aims to conduct a qualitative study of that question to ascertain how Irish stakeholders view the morality of share repurchasing programs in the context of directors’ remuneration.
Research Objectives
The objective of this qualitative case study design is to look at one Irish company that recently engaged in share repurchasing and assessing stakeholders’ views on that program. Stakeholders will include more than shareholders, as they are but one type of stakeholder. Other stakeholders that will be invited to participate in this study will be members of the community in which the company is situated, consumers of the company’s products, employees of the company, and individuals from the legal financial industry. The objective is to obtain the views of stakeholders on share repurchases to see whether this activity is viewed with approval or disapproval in relation to the common good of society. The theoretical framework that will be used for this study is based on Mill’s utilitarian theory—i.e., that from a utilitarian perspective, an action may be considered moral if it contributes to the greatest common good of a community (Mill, 1859).
It is expected that stakeholders who are shareholders will welcome the share repurchasing program while stakeholders who are not shareholders will view it as morally questionable. If this does in fact prove true, it will raise a problematic issue in terms of Mill’s theory and present tension among stakeholders over an action that is viewed as beneficial to a few but not to the majority of stakeholders.
Justification of Objectives
These objectives are important from both a social and a business perspective because ultimately business is based on sociality. As Sir James Goldmsith (1994) noted, when business directors turn away from the common interests and needs of the community, they undermine their own advantage and position in the marketplace. The organization is there to serve the needs of the community and to profit from the service or sale of goods that it provides. The ability to pay for the services and goods provided by the organization is obtained by the community in exchange for its labor under the organization. This is the basic idea of Weber’s theory of capital. If that labor is offshored the stability of the community is undermined and it can no longer afford to pay for the services and goods of the organization, which now depends upon sellilng to other markets. Eventually, unless labor is returned to the community, the position of the organization becomes untenable.
Weber believed that as a capitalistic society expanded, the white collar or middle class should expand as well. Weber also believed that the expansion of capitalistic free enterprise system would not lead to polarization between the classes, yet polarization has occurred, as is evident by the growing wealth divide. By understanding what role the moral compass plays in the interplay between stakeholders (the community) and a business (the directors), it may be possible to explain why polarization has occurred and what can be done to address the issue. In Weber’s model of society, the classes are integrated in a functioning whole that benefits all (Bendix, 1974). This is consistent with Durkheim’s view.
Durkheim (1997) points out in The Division of Labor in Society that solidarity in society has two distinct elements: mechanical and organic. Organic solidarity is a result of complementary process on the part of the different individuals in society. Of the two elements, Durkheim argues that organic solidarity is the more lasting and more important. Durkheim (1997) states that “not only does mechanical solidarity generally bind men together less strongly than does organic solidarity, but, as we mount the scale of social evolution, it becomes increasingly looser” (p. 105). In other words, unless there is solidarity among stakeholders, society will not grow together—and, as Goldsmith argues—business will collapse.
Research Methodology
The methodology for this study will be literature and interview based. It will include multiple data sources so as to achieve triangulation of data and thereby establish greater credibility and trustworthiness for the study. A literature review will be conducted that examines the reasons for and against share buyback programs from both a business and social perspective. The purpose of the literature review will be to establish a perspective for analyzing and interpreting the data obtained from interviews with stakeholders.
Interviews will be conducted with stakeholders in order to obtain their perspective on the matter of director remuneration and share repurchasing programs. Participants will be located by using social media sites such as LinkedIn, Facebook and Twitter. The participants will be asked to be interviewed and if they know of anyone else who would like to participate in the study, which will allow for snowball sampling to be conducted as well. The interviews will be semi-structured and be conducted with participants in either face-to-face settings or on virtual networks such as Facetime or Skype, whichever is more convenient for both participants and the researcher. The interviews will be with participants who are stakeholders of the Irish company and will include shareholders, employees, members of the community, consumers and individuals in the legal financial industry. The interviews will focus on obtaining data about what the stakeholders view as the moral value of share repurchasing programs is.
The company that will be chosen will be an Irish company that is well known in Ireland and that has recently engaged in a share repurchasing program in connection with directors’ remuneration. The study will show how much was spent on share repurchasing, how long the program lasted and what the outcome of the program was for the business—i.e., where the business’ worth was when the program started and where it was when it finished; whether any other kind of investment in the company was conducted at the same time; and whether it is conceivable that the money spent on share repurchasing could have been spent in any other way. This information will come from publicly available documents published by the company in accordance with public company finance laws.
The situation of the business will then be examined in the larger context of its overall performance history over the past years and the extent to which other share repurchasing programs have been implemented. The situation of the business corporate social responsibility outlook will also be examined and evaluated in terms of number of employees that work for the company, where they are employed, and the nature of that employment.
This information will be used to describe the character of the company and that character will be compared to the character of the company as described by the stakeholders during the interviews that are conducted. The participants will give their view of the company based on their perception of the morality of the share repurchasing program in connection with directors’ remuneration. The view of the stakeholders compared to the character of the company in its business dealings will provide the substance for evaluation in this qualitative case study. The purpose of the comparison will be to unlock and explore the business’s financial and social situation in relation to how stakeholders view the morality of share repurchasing to see if there is a connection or trend that can illuminate the relationship between stakeholders and the company’s financial dealings.
Timeline Requirements
The time needed for this study will be four months and will be divided out according to this schedule:
1. First month: Literature review and write-up of findings.
2. Second month: Development of interview questions and piloting of questions with stakeholders to see if they are effective at producing the desired results. If necessary, adjustments to the questions will be made. Interviews with participants will then be conducted for the rest of the month. The interviews will be recorded and transcribed for analysis using the Moustakas model.
3. Third month: Literature review of the public company’s financial statements and reports describing its share repurchasing programs, labor, etc., and write-up of findings.
4. Fourth month: The data will be synthesized and the final report will be written, allowing for time for revision.
Resource Requirements
Resource requirements will include access to the Internet and a digital lockbox for securing interview recordings and transcripts for the purpose of security. Recording equipment will be required but is available as an app on the smart phone. Literature resources will be required but are obtainable through relevant websites. This is the extent of the resources needed for this study.
Conclusion
This qualitative case study design aims at exploring the moral, social and business implications of directors’ remunerations and share repurchasing programs. The purpose of the study is to see more closely into whether there is a moral hazard related to share buybacks or if the issue presents no apparent issues either for the business and its health or for stakeholders and the community.
References
Bendix, R. (1974). Inequality and social structure: a comparison of Marx and Weber.  American Sociological Review, 149-161.
Chan, R., & Hoy, M. (1991). East—West joint ventures and buyback contracts. Journal of International Economics, 30(3-4), 331-343.
Choi, C. J., & Maldoom, D. (1992). A simple model of buybacks. Economics Letters, 40(1), 77-82.
Durkheim, E. (1997). The Division of Labor in Society. NY: The Free Press.
Egan, M. (2018). Tax cut triggers $437 billion explosion of stock buybacks. Retrieved from https://money.cnn.com/2018/07/10/investing/stock-buybacks-record-tax-cuts/index.html
Goldsmith, J. M. (1994). The case against GATT. Multinational Monitor, 15(10), 20-24.
Lee, P. (2018). Share Buybacks and Redemptions: Legal Update - Companies Act 2014. Retrieved from https://www.lexology.com/library/detail.aspx?g=30c07ac8-c29c-4f99-b17d-7844d09888ea
Mill, J. S. (1859). On Liberty. London: John W. Parker and Son, West Strand.
Murray, N., Manrai, A. K., & Manrai, L. A. (2018). The role of incentives/punishments, moral hazard, and conflicts of interests in the 2008 financial crisis. The bi-annual academic publication of Universidad ESAN, 22(43).
Reda, J. (2018). How Stock Buybacks Can Affect Executive Compensation. Retrieved from http://clsbluesky.law.columbia.edu/2018/08/03/how-stock-buybacks-can-affect-executive-compensation/
Schneider-Maunoury, G., & Gouin, A. (2016). Socially Responsible Investment as a Process for Assessing CSR Strategies: Theoretical Implications for CSR. In Finance and Economy for Society: Integrating Sustainability (pp. 139-160). Emerald Group Publishing Limited.