Incorporating share buybacks in board-driven strategy

November 2016

We are living through what the Economist has called “the share repurchase revolution.” At least 350 public companies in the S&P 500 Index have repurchased shares in each of the last 10 quarters. Most companies are spending the majority of earnings on buybacks: during the 12 months ending with the second quarter of 2016, the average S&P 500 company spent 71.5% of its net income on buybacks, and 137 firms spent more on buybacks than they generated in earnings.In the aggregate, S&P 500 companies bought back $2.1 trillion of their own shares in the last five years2 – enough to take Apple, Exxon, Facebook, General Electric, and Johnson & Johnson private.

Lead directors said that their companies have felt pressure to increase their buyback activity, a pressure that some see as closely related to the preference for short-term results, which might imperil long-term growth prospects. “As board directors, we’re charged with long-term value creation, but that’s becoming increasingly courageous,” commented a member.

Lead Director Network (LDN) members met on October 25 in Washington, DC, to discuss capital return during this share repurchase revolution. This issue of ViewPoints synthesizes that discussion and conversations leading up to it. It also summarizes a review by King & Spalding partners of the Supreme Court’s business docket.