In the past Guerdon Associates has established that there is a strong relationship between CEO shareholdings and a company’s total shareholder return (TSR) performance (see article HERE). With various governance and proxy groups supporting director share ownership, we believed it important to verify whether the same relationship applied. We started this quest by first looking at the relationship between non-executive chairman shareholdings and company performance.
The results, especially given the outcomes of our CEO shareholding and company performance research, may surprise some readers.
We extracted remuneration and stock holding information – as reported in the most recent annual report – for all the chairmen on the GuerdonData® database. Companies with a market capitalisation of less then $100 million were excluded, as were chairmen who had only served part of the reporting year.
The chairman data was matched to company data such as share price, market capitalisation and company performance data as at 15 May 2006.
We expressed the value of stock holdings in the following three ways:
- the dollar value of the holding (we multiplied the holding by the current share price);
- the value as a percentage of Total Fixed Remuneration (TFR); and
- the value as a percentage of market capitalisation.
In all we identified 193 chairmen of whom 160 (83%) held stock in the company they oversee.
We analysed the group as a whole and also broke the sample down by industry and company size.
Our analysis relied heavily on correlation statistics to establish whether a relationship exists and its strength. Of course correlation does not necessarily imply causation, but it is difficult to imagine that a large stock holding would not influence the behaviour of a chairman. The questions we wanted to answer were:
- Is the size of the holding a function of company size?
- Is there a relationship between stock holding and performance?
- How strong are these relationships?
- Is the relationship stronger for short or long term performance?
- What other variables influence the relationship?
Findings – Overall
We first established that, overall, there is no meaningful relationship between the value of the stock holding and the market capitalisation of the associated listed company. This held true for the three ways we defined the value of the stock holding. However, there was a weak negative relationship (correlation=-0.09) between the stock holding as a percentage of market capitalisation and market capitalisation. This is not surprising since chairmen are more likely to own a greater proportion of the company if it is small than if it is large.
Overall there is no strong relationship between stock holding and company performance. However, when we broke the holdings down into incremental groups we established that companies with chairmen with large holdings had higher average ten-year TSRs than other groups. The holding had to be worth more than $1 million before the average 10 year TSR exceeded that of companies with chairmen with no stock holding. Thirty seven percent of the chairmen in our sample held more than $1 million in company stock.
By contrast, the companies whose chairmen held no stock outperformed all the other companies based on average one year TSR. Seventeen percent of the chairmen in our sample held no stock in the company.
The following two graphs illustrate the different relationship between the average ten-year TSR and one-year TSR as the dollar value of the stock held increases.
Findings by Industry
When the data was broken down by industry the relationship between stock holdings and company performance changed. The following graph illustrates the relationship between stock holdings and company performance by industry. The second bar in the graph is the average one-year TSR for all companies in the sector. The consumer staple and utilities sectors were excluded because their sample size was too small to provide reliable statistics.
The materials sector had the highest TSR, but it was weakly, negatively correlated to the value of the chairman’s shareholding. The result is clearly related to mineral prices, not shareholding.
The strong correlation between shareholding and performance in the IT&T sector is based on a sample size of 14. Smaller samples will typically correlate more strongly than large samples, however, the result is significant. The correlation is almost as high for shareholding and three-year TSR.
The other interesting result is that the finance sector has a reasonable correlation (0.37) between shareholding and performance. This is based on a sample of 34.
Findings by Market Capitalisation
Although we found little or no correlation between the size of the stock holding and the market capitalisation of the company, we did find that the strength of the relationship between stock holding and TSR varied as market capitalisation changed. Additionally, the average TSR tended to rise as the market capitalisation rose.
The correlation between stock holding and average ten year TSR is negative for the smallest companies. The correlation is –0.34 for the dollar value of stock held. The two groups in the middle have very weak correlations with average ten year TSR. The group with the largest market capitalisation is the only group with a meaningful positive relationship between average ten year TSR and the value of stock held by chairmen.
The following graph illustrates how the relationship between stock holding and TSR performance changes as company size increases. This is true regardless of how we measured the size of the holding.
The correlation between the dollar value of the stock holding and ten year TSR for companies with market capitalisation over five billion is 0.30. This translates to an R squared statistic of 0.09. In other words, 9% of the variability in ten year TSR for very large companies can be explained in terms of the size of the chairman’s stock holding. This is in contrast to CEOs, where the relationship between shareholdings and TSR was very strong (with an R squared statistic of 53%).
Any positive relationship found between chairman shareholdings and total shareholder return is either weak or inconsistent. Large holdings of company stock by the chairman can only be related to increased TSR in very large companies, but not in medium or small companies. There is no discernible relationship between chairman share ownership and company performance in any industry sector apart from the IT&T and finance sectors. Chairmen with no shareholdings have the best one year shareholder returns.
And, of course, where we do find a correlation, we cannot infer that the stock ownership is causing the TSR performance to be higher.
There are many other valid areas of research to conduct before pouring cold water on the intuitively appealing notion that the board chairman should hold the company’s shares. One important area that should not be neglected is to look at the relationship between chairman shareholding and company risk (e.g. earnings and share price volatility). If the board’s role were seen as having a bias to contain risk, whereas the CEO’s is to maximise shareholder return, then it would make sense to examine the impact of shareholdings from this angle. So, when some of our researchers and analysts get their next break from consulting work (fortunately or unfortunately, depending on your perspective, this does not look like any time soon), we have this research high on our priority list.
However, in the interim, the weak and inconsistent results do not affirmatively support the notion that non-executive chairmen should hold shares in the companies that they chair. Yet several governance, investor and proxy groups actively encourage these policies. Given these results and the absence of other research to support these policies, these groups perhaps should consider focussing their energy and attention on other governance matters.© Guerdon Associates 2023 Back to all articles