Do Stock Buybacks Dilute Return of Capital to Shareholders?

For anyone that has been following the Democratic nomination race in American politics, you’ve probably noticed that a key issue has been the treatment of stock buybacks. Democratic candidates opposing stock buybacks say that they contribute to rising income inequality in the United States. The candidates have therefore proposed plans ranging from outright bans to a mechanism that includes distributions to workers as opposed to just the providers of capital (i.e., shareholders). The main rebuttal to the proposals around regulating buybacks is that they are no different than companies paying dividends to shareholders. However, this op-ed in the Financial Times provides an interesting analysis that posits the return of capital from share buybacks might not actually be accruing to providers of capital. The argument is that stock buybacks are being used to sterilize stock options issued to management at lower than market prices, which ultimately dilutes the supposed return of capital to shareholders. One of the interesting takeaways from the article is the author’s opinion that the agency problem can never be fully eliminated, but better alignment and corporate governance can help tackle the issue.