Question

Share buybacks are not ethically wrong.

Because if the company has sufficient retained earnings and cash, but no adequate opportunities to invest, share buybacks are a good way to reward shareholder. Also, the information contained in share buybacks will be processed by the market, and the shares will be priced correctly after taking into consideration all the information, including the share buybacks.

Companies don't have any obligations to use the money to grow the company, pay employees more etc instead of doing buybacks. The performance of the company is majorly dependent on the vision of the owners and the management and if the company is creating huge cash inflows and they lack proper vision on what to do with the money, they spend it on buy back and paying dividend in an expectation that investors will be satisfied.

Some would argue that the capitalist system rewards shareholders only at the expense of others, like employees. The same people might say that in doing so, the company contributes to the growing gap between rich and poor.

Does this contribute to the growing gap between rich and poor, and, by extension, is it the obligation of a public company to assist in narrowing this gap?

Answer 1

Yes, this does essentially contribute to the growing gap between the rich and poor. Let me first explain why buyback happens. A company usually buys back its shares when it thinks that the market has discounted its shares too steeply. The company also buys back in order to invest in itself and with an objective of improving its financial ratios.

The objectives may be varied but it always ends up with maximizing value for shareholders. For instance many companies do buybacks to just improve their financial ratios, to get tax benefit as buybacks are taxed at lower tax rate than dividends. Many companies use buybacks as a tool to get out from under excessive dilution.

In all of the above instances even though the company may be having a different motive the end result or the eventual outcome will be that wealth of the existing shareholders will increase. This is because in case of buybacks corporate profitability is not translated into widespread economic prosperity and all gains are just concentrated on one of the stakeholders i.e. the shareholders. Other stakeholders like employees, etc. are ignored.

While a public company does not have a legal obligation to assist in narrowing this gap from an ethical perspective and an ethical point of view a public company should assist in narrowing this gap. A public company has got several stakeholders like employees, investors, shareholders, creditors, vendors, suppliers etc. A public company should take into consideration the overall interest of all these stakeholders in a collective manner. Moreover a company will do well if it takes into consideration the interest of all stakeholders in a systematic and tangible manner.