Business Secretary Greg Clark
As researchers were hired to discover whether share buybacks are being used by some companies to inflate the pay of their executives artificially, the government could possibly crack down on share buybacks.
Share buybacks are where a company buys some of its own shares in order to lessen the number of shares that are available in the market and usually increase their price, which can raise the earnings per share of a company. Since most executive pay packages are usually determined in relation to this figure, executives who have performed a share buyback could unlock a higher pay bracket even though the performance of the company has been poor.
The PwC and a professor at the London Business School named Alex Edman have been appointed by the Department for Business, Energy and Industrial Strategy (Beis) to research how common the said practice is.
Greg Clark, the business secretary, stated: “There are concerns that some companies may be trying to artificially inflate executive pay by buying back their own shares,” said.
“This review will examine how share buyback schemes are used and whether any action is required to prevent them from being abused.”
However, the government was also quick to acknowledge that there are also some legitimate reasons for share buybacks. A firm may want to buy shares if it believes that they are undervalued, to make use of cash when business conditions fail to justify spending it in other areas or to meet the demands of investors to return cash.
However, there are fears that “a minority” of companies are making use of the said technique for reasons that are less honourable including to inflate pay and “crowd out investment.”
Sports Direct received criticism from its investors in 2017 who were concerned that a share buyback would hand excessive control to Mike Ashley, the chief executive of the company.
The government is expecting that the research which is scheduled to be published later this year will help in strengthening public and investor trust and confidence in big businesses and corporate standards.
Last summer, Theresa May, the British Prime Minister, announced a wider package of corporate governance reforms which includes the creation of a public register of companies whose shareholders are complaining on executive pay, new legislation demanding companies to justify the pay ratio between chief executives and employees annually, and a group to address corporate governance principles for large private companies.