CONFRONTED with a sluggish global economy, U.S. firms have settled on a controversial tool that rewards shareholders and executives: share buybacks.

    First permitted by the U.S. Securities and Exchange Commission in 1982, the use of share buybacks has spread rapidly over the last five years due in part to pressure from activist investors anxious for a quick payoff.

    When companies buy back shares, the shares remaining on the market rise in value due the tighter supply, an immediate boon to shareholders. Executives also benefit when their compensation is tied to the share price, often through rich stock options.

    But critics point out that companies spending billions of dollars of shareholder funds on buybacks means the funds are not being invested in new plants, higher salaries and other areas that boost the company and the broader economy.

    Over the past two years, at least 20 percent of S&P 500 companies have trimmed their share count by at least 4 percent, said Howard Silverblatt, analyst at S&P Dow Jones Indices.

    The net effect is to increase the companies’ earnings per share by at least 4 percent. But as a study by University of Chicago professors Daniel Bens, Franco Wong and Douglas Skinner, that gain “cannot be attributed to improved firm performance.”

    The surge in spending on buybacks has been huge. In 2009, the 500 biggest publicly traded companies in the United States spent 27.5 percent of their US$500 billion in operating profits on buybacks, according to S&P Indices.

    By 2015, they spent 64.7 percent of US$885.3 billion in earnings on buybacks.

    Apple led the way with last year putting US$37 billion in buybacks, followed by Microsoft with US$17.9 billion and Qualcomm with US$11.6 billion. (SD-Agencies)