Institutional investor Legal & General has criticised companies for rewarding chief executives for hitting earnings per share targets when share buybacks are involved. Instead the firm said it wanted companies to invest in the real economy.
Using excess capital to purchase the company’s own shares was described as “unfair” by the investor because it generates illusory value rather than real economic value. As a result, Legal & General doesn’t believe top staff should be rewarded when this process, or other similar financial engineering methods, has been used.
Speaking to The Times, Nigel Wilson, chief executive of Legal & General, said, “We don’t think chief executives should be remunerated for hitting an earnings per share target that’s been enhanced by buying back shares. There is this asymmetrical relation between doing nothing and getting big rewards for it, which just isn’t fair.
“We want to see capital invested in both intellectual property and physical infrastructure. Our message is that we will support good investment, just buying back shares will not make us happy.”
Remuneration packages at companies have recently come under fire, with some shareholders criticising the tie between short-term targets and rewards. They argue that this leads to businesses focusing on the immediate future rather than long-term and sustainable value creation.
Wilson added, “The share buyback does not generate real economic value, although of course it does generate personal financial wealth for anyone remunerated on a per-share metric.
“This seems fundamentally wrong, and as a big institutional shareholder – around 4% of everything in the FTSE – was are advising investee companies that our clear preferences is to invest in real growth and value.”
Photo: Gastonmag via Freeimages