FTSE 100’s entrepreneur CEOs struggle as companies with small board shareholdings outperform
FTSE 100 companies whose boards of directors have large holdings of shares in their own companies have underperformed both the index and companies whose boards have the smallest shareholdings over the last year, calling into the question the need for boards to have ‘skin in the game’, says Banc De Binary, the leading binary options trading firm.
Over the past year, share prices grew by an average of just 1% in the ten companies with the largest board holdings in their own shares, less than the index average of 6%. Both of these were outstripped by the ten companies with the smallest board shareholdings, which saw share prices increase by an average of 20%. This is a sharp reversal of the trend over five years, in which boards with large holdings in their own shares outperformed strongly.
Banc De Binary says that shareholders often look to invest in companies where the boards have large holdings of their own shares, in the belief that this helps to align the interests of directors with those of shareholders, and incentivise them to deliver growth. These figures, it says, casts doubt on that belief.
Over the past year, share prices in FTSE 100 companies with the largest board shareholdings lag those with the smallest board holdings and the index – a sharp reversal of a trend in which FTSE 100 companies with the biggest board shareholdings have outperformed both over the past five years
Oren Laurent, founder of Banc De Binary, said: “Some believe that it is important for boards of directors to have significant ‘skin in the game’, as it supposedly ensures that directors share the same financial interests as their shareholders – these figures suggest otherwise.
“The thinking has traditionally been that directors will be less likely to take reckless decisions if they have significant holdings in their own company’s shares. The past year’s outperformance by the companies with the smallest board shareholdings reinforces that it is possible for directors to deliver substantial growth without having to grant them huge numbers of shares and diluting existing shareholdings.
“The relative stagnation in share price growth of companies with single board members owning a high proportion of shares, such as some emerging markets resource companies, could suggest that the day of the buccaneering owner-manager may have passed for now.
“The outperformance of companies with large board shareholdings may also have been a result of the commodities supercycle peaking. Now Chinese demand has fallen, several emerging market resource companies with entrepreneurial CEOs have seen their share prices slide.
“Modern managers are now so highly trained and supported that being in the right sector with the right product mix at the right time should trump how heavily directors are incentivised.”