Exploring Director Remuneration & Stock Repurchases: Conflict of Interest or Immoral? - Essay Sample

Abstract

The general purpose of this research is to understand whether stakeholders in an American company view director remuneration as a result of share repurchases as a case of conflict of interest or as immoral.

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Project (Research Topic) Details

This research project seeks to evaluate the implications of stock repurchases on director remunerations, where it starts with background information about the issue, followed by the discussion of research questions and objectives, an analysis of the research significance and the research design, and finally the research protocol.

Introductory Background

The board of directors of corporations in the United States and other parts of the world undertakes numerous measures to increase the shareholder value. One of the standard practices in the current global market and specifically the US corporations is the purchase back of the company stock. A stock buyback, also commonly referred to as a share repurchase, is a practice where a publicly-traded company decided to purchase back its own shares from the market place (Koller, Goedhart, Wessels, & Copeland, 2010). Through this practice as well as the dividends, the company can return cash to its shareholders. However, it should be noted that while a dividend is considered as a cash bonus that amounts to a particular agreed percentage of the total stock value of the shareholder, a stock buyback entails the shareholder returning all his stock to the company to receive the cash (Vermaelen, 2005). Recently, many of the companies, especially the best companies, have been striving to reward its best shareholders through the consistent increase of the dividends, and the regular buyback of the shares. Such a practice involving a share repurchase can also be termed as a float shrink, considering that it contracts the company's shares that are trading freely.

Although directors of an organization can decide to repurchase shares from the market place for different reasons, there have been arguments that the decision is based on director remuneration. Director remuneration refers to the process where the directors of an organization are compensated through various means such as salary, fees, or the use of other property owned by the company, with the approval of the shareholders and the organization's board of directors (Solomon, 2007). This process of director remuneration resulted from the concern that directors of organizations were rewarding themselves with large salaries even when the entity was showing weak profits. Therefore, the process allows the shareholder to agree or to reject the fees that are paid to the directors. The board of directors is then left with the task of determining how the payments will be split among the directors. However, the director's remuneration implies that the salaries and the bonuses that are paid to the directors are part of the employment contract (Hendrikse & Hefer, 2004). As such, the directors have control over the agreement of remuneration. Such processes have questioned the issue of share repurchases as the process tends to increase the executive compensation levels despite the success of the company. In this regard, there is a need to investigate the issue in detail to evaluate the overall impact of share repurchases concerning director remunerations.

Research Questions

The use of share repurchases has increased drastically in the United States in recent years. Although the practice is done for various reasons including increasing shareholder value, returning cash to the shareholders, providing consistent shareholder returns, and boosting the capital efficiency measures among others, there has been a massive debate regarding the extent of the repurchases in establishing a long-term growth strategy. The main question regards what motivates the buybacks. Such a discussion has been complicated and mostly political, especially regarding increasing executive compensations. Recent studies have demonstrated that executives are likely to facilitate repurchases to cash out the shares that they receive due to the compensation packages (Susai & Uchida, 2011). In this regard, the executives are expected to capture the short-term increases in the share prices that tend to follow a buyback announcement, thereby questioning the motivation of doing so. In this regard, the study seeks to understand the motivation and impact of stock repurchases guided by the following research questions.

• What is the impact of stock repurchase on directors' remuneration?
• Do the buybacks in an organization unfairly enhance executive pay?
• To what extent do the stakeholders in American corporations' view director remuneration as a result of share repurchases as a case of conflict of interest or as immoral?

Aims/Objectives of the Project

This study aims to evaluate what motivates the buybacks among the American corporations, assess the benefits that the board of directors' gains from the process. There has been a concern regarding whether share repurchases are used to return the cash to the shareholders, which could be an alternative to the dividends. It has also been noted that the buybacks are essentially used in the periods where the investment opportunities do not look appealing. As such, the buybacks can unfairly enhance the remuneration of directors, even when the company is performing dismally. In this regard, there is a need to investigate whether the repurchases of stock are designed for the gain of the directors. Besides, buybacks are observed to boost the earnings per share, which facilitates an increase in the share prices, at least for the short-term. Therefore, there is a tendency where the incentive compensation packages can unfairly enrich the organizational executives. In this regard, the specific objectives for the study are listed below.

• To investigate the impact of stock repurchases on directors' remuneration.
• To determine whether the buybacks in an organization unfairly enhance executive pay.
• To evaluate the extent to which the stakeholders in American corporations' view director remuneration as a result of share repurchases as a case of conflict of interest or as immoral.

Significance/Contribution to the Discipline

Stock repurchases in an organization have numerous advantages. Some of the benefits include increasing the shareholder value, returning the cash to shareholders, increasing the liquidity of the market, and increasing the earnings per share among others. However, buybacks have demonstrated numerous disadvantages and concerns that should be explored to ensure that they achieve their desired task in an organization. One of the main concerns in American corporations regarding buybacks is the issue of director remunerations. It has been noted that the buybacks are likely to increase the executive compensations regardless of the success of the organization (Kershaw, 2012). This is true and concerns after the recent reduction in the rates for corporate income tax. In this regard, there is a possibility of the board of directors using the buybacks in their corporation for their own benefits to boost their remunerations. This research will, therefore, offer valuable insights regarding the role of stock repurchases in organizations regarding remunerations of directors. By evaluating the impact of the buybacks in the executive pay, it will be possible to understand the directors' motivations, hence develop policies that facilitate better managerial decisions depending on the financial status of the company. Also, the research will clear the air regarding the negative perceptions that a lot of people have towards buybacks and executive remunerations.

Theoretical Framework and Methods

This study will use a quantitative research methodology to test the hypothesis and investigate the research question. A quantitative research design entails the collection of numerical data that can be analyzed statistically to evaluate the correlations (Thyer, 2012). In this regard, the approach will facilitate the measurement of objects and assess the relationship between the director remuneration increases and the organizational buybacks. Therefore, the quantitative research method will enable the researcher to evaluate the descriptive data. The research design will be a quasi-experiment based on the subjects. A quasi-experiment is a research design that entails an empirical interventional study that is used to estimate the causal impact of the intervention on the target population (Thyer, 2012). However, this approach does not involve the random selection of the participants and tends to be controlled. In this regard, corporations will be selected having fulfilled the criteria for being publicly traded in the desired region in the United States. Some of the organizations selected will have to undergo the stock repurchases and others will not be required to endure or to have undergone a stock repurchase recently. Data will be collected regarding the funds, remunerations, shareholders, and shareholders' accounts, among other corporate data, to evaluate the relationship between the buyback decisions and the remunerations for the executives. The data collected will be analyzed statistically using SPSS and Microsoft Excel statistical packages to assess the correlations.

References

Hendrikse, J. W., & Hefer, L. (2004). Business governance handbook: Principles and practice. Cape Town: Juta Academic.

Kershaw, D. (2012). Company law in context: Text and materials. Oxford, U.K: Oxford University Press.

Koller, T., Goedhart, M. H., Wessels, D., & Copeland, T. E. (2010). Valuation: Measuring and managing the value of companies. Hoboken, N.J: John Wiley & Sons, Inc.

Solomon, J. (2007). Corporate governance and accountability. Chichester: John Wiley & Sons.

Susai, M., & Uchida, S. (2011). Studies on financial markets in East Asia. Singapore: World Scientific Pub. Co.

Thyer, B. A. (2012). Quasi-experimental research designs. New York: Oxford University Press.

Vermaelen, T. (2005). Share Repurchases. Hanover, MA, USA: Now Publishers.