Several well known ASX listed companies have formal policies of delivering a set proportion of director fees as company shares through a shareholder approved director share plan. Others augment this plan with a feature allowing directors to sacrifice additional cash fees for shares on a tax-deferred basis. Various governance and proxy groups actively support such policies. As a result, more companies are considering introducing these plans.
Very few ASX listed companies have a policy requiring non-executive directors to hold shares. However, there is more active support for companies to adopt these policies from some governance groups. Given this, Guerdon Associates thought it might be appropriate to look at the extent to which non-executive directors hold shares. If the extent of shareholding is already high, such policies may not need to be formalised. To begin, we looked at non-executive board chairmen.
We extracted remuneration and stock holding information – as reported in the most recent annual report – for all the chairmen on the Guerdon Data database. Companies with a market capitalisation of less than $100 million were excluded, as were chairmen who had only served part of the reporting year.
The chairmen 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 manage. We analysed the group as a whole and also broke the sample down by industry and company size.
Findings – Overall
The following table summarises the value of the shareholding of chairmen in our sample group. The data relates to the 160 chairmen with a current share holding and excludes those who own no shares.
It is clear from the average statistic that the sample is skewed. There are five chairmen with share holdings worth in excess of $100m, whose data increases the average significantly. These individuals are usually company founders, so the level of share ownership is not surprising. Excluding these five individuals (just 3% of the sample) the average reduces to $4m.
The following graph illustrates the distribution of the value of shareholdings among the sample.
Of those holding shares, 44% hold shares valued in excess of $1,000,000 and 14% hold shares valued at more than $10,000,000.
The following graph illustrates the distribution of the value of shareholdings as a multiple of total fixed remuneration.
Of those holding shares, 77% hold shares valued at more than their annual total fixed remuneration and 35% hold more than ten times their total fixed remuneration.
The following graph illustrates the distribution of the value of shareholdings as a percentage of market capitalisation.
Of those holding shares, 13% hold shares that amounted to more than 1% of the market capitalisation of the company.
Relationship Between Shareholding and Fixed Remuneration
Overall there is a weak negative relationship between remuneration and the value of the stock holding. This relationship becomes stronger as the size of the holding increases. The correlation between fixed remuneration and the value of shareholding, for those holding in excess of $10m in shares, is –0.30.
It is worth noting that the individuals who own large proportions of the company stock are often company founders. They have a significant amount of personal wealth invested in the company and will sometimes forego market related levels of fixed pay in order to achieve the company’s goals.
Findings by Industry
Table 2 illustrates the variability of stock holdings by industry. The large differences between the median and average statistics are apparent for most industries.
The largest median shareholding is in the energy sector and the lowest is in the utilities sector. The utilities and consumer staple samples are quite small so the results should be interpreted with some care.
Findings by Market Capitalisation
Table 3 illustrates the variability of stock holdings by company size. The large differences between the median and average statistics are apparent for all size groupings. Of the five individuals with holdings in excess of $100m, three fall into the $400m-$1bn group and one falls into each of the larger groupings. This is why these samples are so heavily skewed.
There is no clear trend for shareholding to increase as the market capitalisation increases. Table 4 illustrates the dramatic changes to the average statistics if we ignore the holdings that exceed $100m.
© Guerdon Associates 2023
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