Directors Remuneration and Its Impact on Share Repurchases Research Proposal

Introduction

Prior to 1982, share buybacks by public companies in the open market in the U.S. were illegal. That year the Securities and Exchange Commission (SEC) passed Rule 10b-18, which created a legal process for executing share repurchases (Reda, 2018). Since that time, many companies have engaged in share repurchasing. As Egan (2018) notes more than $400 billion were allocated by companies to share buybacks in 2018. The reason this is relevant is that it shows a dangerous trend of allowing considerably vast sums of money to be used in share repurchasing programs: conflicts of interest are inevitable and moral hazard can result (Chan & Hoy, 1991; Choi & Maldoom, 1992). Leaders and directors of companies are often incentivized to perform by being given shares and options in the company. When companies use (or borrow) money to repurchase shares they effectively prop up the stock price, which allows directors and top level executives to sell their shares at a higher price than would be the case if these companies were not piling billions upon billions into market to fund buybacks.

In Ireland, the Companies Act 2014 (CA 2014) and the Taxes Consolidation Act 1997 (TCA 1997) describe the legal procedure for authorizing a repurchase by a company of its own shares and set the parameters under which the funds received on the repurchase or redemption can be treated as a capital receipt rather than as an income distribution (Lee, 2018). But is there a moral consideration that should be made by companies in spite of the legality of share repurchases for the sake of director remuneration? What sort of signal does it send to stakeholders when companies invest in repurchasing their own shares instead of in research and development or infrastructure? As Scheider-Maunoury and Gouin (2016) point out, share buybacks hinder investment in the company and undermine the potential of a company to reinvest in itself and in its future. If directors have a responsibility in terms of corporate governance and transformative leadership to look out for the best interests of all stakeholders, can it be considered morally feasible for companies to engage in the repurchasing of shares for the sake of directors’ remuneration?

General Purpose

The general purpose of this research is to understand whether stakeholders in an Irish company view director remuneration as a result of share repurchases as a case of conflict of interest or as immoral. As the global economic crisis of 2007-2008 showed, when immorality is introduced into the financial system, moral hazard can quickly escalate to the point beyond where effective risk management can any longer be demonstrated (Murray, Manrai & Manrai, 2018). It is unclear, however, whether in Ireland there is sufficient awareness of this fact to mitigate the risk of moral hazard effectively rising out of control. This research aims to conduct a qualitative study of that question to ascertain how Irish stakeholders view the morality of share repurchasing programs in the context of directors’ remuneration.

Research Objectives

The objective of this qualitative case study design is to look at one Irish company that recently engaged in share repurchasing and assessing stakeholders’ views on that program. Stakeholders will include more than shareholders, as they are but one type of stakeholder. Other stakeholders that will be invited to participate in this study will be members of the community in which the company is situated, consumers of the company’s products, employees of the company, and individuals from the legal financial industry. The objective is to obtain the views of stakeholders on share repurchases to see whether this activity is viewed with approval or disapproval in relation to the common good of society. The theoretical framework that will be used for this study is based on Mill’s utilitarian theory—i.e., that from a utilitarian perspective, an action may be considered moral if it contributes to the greatest common good of a community (Mill, 1859).

It is expected that stakeholders who are shareholders will welcome the…

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…share repurchasing program in connection with directors’ remuneration. The view of the stakeholders compared to the character of the company in its business dealings will provide the substance for evaluation in this qualitative case study. The purpose of the comparison will be to unlock and explore the business’s financial and social situation in relation to how stakeholders view the morality of share repurchasing to see if there is a connection or trend that can illuminate the relationship between stakeholders and the company’s financial dealings.

Timeline Requirements

The time needed for this study will be four months and will be divided out according to this schedule:

1. First month: Literature review and write-up of findings.

2. Second month: Development of interview questions and piloting of questions with stakeholders to see if they are effective at producing the desired results. If necessary, adjustments to the questions will be made. Interviews with participants will then be conducted for the rest of the month. The interviews will be recorded and transcribed for analysis using the Moustakas model.

3. Third month: Literature review of the public company’s financial statements and reports describing its share repurchasing programs, labor, etc., and write-up of findings.

4. Fourth month: The data will be synthesized and the final report will be written, allowing for time for revision.

Resource Requirements

Resource requirements will include access to the Internet and a digital lockbox for securing interview recordings and transcripts for the purpose of security. Recording equipment will be required but is available as an app on the smart phone. Literature resources will be required but are obtainable through relevant websites. This is the extent of the resources needed for this study.

Conclusion

This qualitative case study design aims at exploring the moral, social and business implications of directors’ remunerations and share repurchasing programs. The purpose of the study is to see more closely into whether there is a moral hazard related to share buybacks or if the…