Do CEO shareholdings matter?
07/06/2019
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In 2006, Guerdon Associates conducted a study using Australian companies in the ASX 300 (see HERE), which concluded that over the long term there is a positive relationship between CEO share ownership and shareholder returns .

Recent research from ISS presents attempts to consider ownership not only to performance, but other governance matters (see HERE) .

Company Size

The relationship between the size of a company and the stake of CEO ownership is that as company size increases, voting power concentration decreases.

In the Russell 3000, excluding the S&P1500, 27% of CEOs have less than 0.5% voting rights. In the S&P 500, this number rises to 74%.

Another trend is that CEO ownership guidelines increase as company size increases.

Sixty-nine percent of S&P 500 companies have a minimum shareholding policy that require shareholdings of at least 6 times their annual salary. Only 15% require a holding of at least 6 times for small companies (i.e. Russell 3000 excluding the S&P1500 companies).

While CEO voting power may decrease with company size, shareholding guidelines dictate that the dollar value of their shares increase.

Given this, it is worth noting that companies with dispersed ownership are more likely to disclose ownership guidelines than where CEOs have significant voting power.

Corporate Governance Practices

Dual class share structure leads to companies sustaining both high CEO voting power and more restrictive governance practices. This enables owners to maintain their voting power, to the annoyance of regular investors.

In the S&P 500, for companies where the CEO voting power is less than 10%, only five percent  have differential voting structures. In contrast, in companies where the CEOs have more than 10% of the voting power, fifty percent of these practice differential voting rights..

High voting powered CEOs are more likely to maintain power by holding the chairman role. They are also 3 times less likely to have an independent lead director on the board.

High CEO voting power also found to correlate with both staggered boards and less gender diversity in the board and C-suite.

For S&P500 companies that have CEOs with voting power of more than 10%, twenty-five percent hold staggered board elections. The average percentage of women on these boards is 21%. The percentage of companies with at least 2 females in the top 5 executive positions is 0%.

Compared to S&P500 companies where CEO voting is below 10%, only 10% hold staggered board elections. The average percentage of women on boards is 26%. The percentage of companies with at least 2 females in the top 5 executive positions is 11%.

Company Performance

There does not appear to be a discernible relationship between the economic performance of a company and CEO voting power.

The study used ISS’s economic value-added (EVA) methodology. It found that over a 3-year timeframe, profitability margins for companies with CEO voting power below 10% were higher. The medians were 0.9% and 0.3% for below and above 10% voting power, respectively.

The opposite was observed when using a 5-year timeframe. The median EVA margin is 0.6% for CEOs with below 10% voting power compared to 0.8% for CEOs with above.

Higher levels of CEO ownership in monetary terms was found to positively correlate with better company performance (i.e. profitability margins and momentum).

Companies where the CEO owns between $50 million to $100 million in shares achieve a median EVA margin of 2% in 3 years and an EVA margin of 1.7% in 5 years. This trend is in line with the previous Guerdon Associates research conducted on the ASX 300 (see HERE) .

© Guerdon Associates 2021
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