Share buybacks have been controversial in recent times. But there now seems to be some good news. Independent directors appear to head off stock repurchases driven by the wrong reasons.

A statistical study by a team from Bocconi University in Milan and Loughborough University in the UK, have found that the presence of independent directors seems to ameliorate flawed buyback decisions.

Anna Grosman and Mario Daniele Amore looked at events at 236 UK companies from 2000 to 2007 to find what happened to buybacks after significant change in corporate governance. In this case it was a report, known as the Higgs Report, which recommended a majority of board directors should be independent non-executive directors.

The study reveals that the moment companies begin increasing the “fraction of independent directors” there are implications for buybacks: they increase but the directors perform an essential role.

“Our analysis,” says Grosman and Amore, “indicated that while accretive share repurchases (i.e., those done for earnings management purposes) harm firm employment, this effect is attenuated by having a greater share of independent members on the board of directors.

“These findings suggest that independent directors were efficient at monitoring and advising against share repurchases that would destroy long-term shareholder value.”

The study appears to suggest that the relationship between independent directors and buybacks is more sophisticated that previously thought. Until now, the presence of independent directors would cause companies to undertake fewer buybacks. The new analysis suggests independent board members do not dismiss buybacks out of hand but distinguish between those driven by different reasons.

Share buybacks bounce back

Buybacks have in recent years faced much public scrutiny as well as criticism. They were shut down during the pandemic as a condition of receiving government aid, but they have come back in force. In recent weeks DIY retailer Kingfisher said it would buyback £300m in shares, while in July miner Anglo American revealed plans for £1.46bn of repurchasing. Sage, the software company, has announced plans for repurchases of £600m this year.

Critics have claimed buybacks are a waste of capital and used for boosting executive bonuses instead of being used for investment. Some have called for more disclosure when companies decided to make buybacks. Others sought changes to the UK’s governance code to include statements on buybacks.

So much rancour grew up around the subject that the UK government commissioned PwC and Alex Edmans, a professor at London Business School, to probe exactly what was driving a wave of huge buybacks. Edmans concluded buybacks “neither inflate executive pay nor crowd out investment”.

However, Edmans did conclude that firms with earnings per share targets in their executive pay contracts invest less than those without, a finding his report said “warrants further research”.

There may be still be much to learn about buybacks. But it seems independent directors do good work when considering whether to green-light repurchases. What may be a concern is recent research which appears to show that many boards have begun to prefer “insiders” over independent directors in their boardroom ranks. That may have implications for buyback decision-making but that remains unclear for now.