In addition to the companies that Tom mentioned, Google, Oracle ( NAS: ORCL), and, yes, Facebook ( NAS: FB) are also examples of companies where the founder is still the CEO and owns a sizable chunk of the business. As Tom put it on Motley Fool Money: "That's a really good, simple screen: looking for companies where the founder is still the CEO." What's the best way for investors to use this to their advantage? One obvious way to handle this issue is to stick to companies where founders with a large ownership stake are in leadership roles. You just can't force that sort of attitude through board mandates. These are companies that those executives built, and they have a vested interest - monetarily and otherwise - to see their companies succeed over the long term. He was talking about companies whose executives have big ownership positions and think like owners precisely because they are owners. Notably, Tom wasn't talking about companies whose executives had hoovered up shares because their board made them. Same thing is true of John Mackey, same thing with Howard Schulz at Starbucks, same thing with Warren Buffett at Berkshire Hathaway.
What I love are the stories where Jeff Bezos could have stepped down from Amazon a long time ago, I mean he has more money than anyone would ever need. On the Motley Fool Money radio show a couple of weeks back, Motley Fool co-founder Tom Gardner touched on executive ownership and its significance for investors.Īs an investor, I love to find the founder/CEO who's put their entire life into their organization. The policies may not only fail to limit the unwinding of equity incentives, but also further reduce share retention." As the researchers put it: "While being below the minimum does not significantly reduce rebalancing, executives significantly enhance rebalancing and retain fewer shares when they are above the minimum. Korczak and Liu's research, however, found that a significant unintended consequence of this type of policy may be that once given an ownership minimum, executives tend to use that minimum as a ceiling for their holdings. Back in 2000, 12 of the FTSE 350 companies had minimum ownership guidelines for executives. University of Bristol researchers Piotr Korczak and Xicheng Liu found that this has been an increasingly common response from boards. The logical next step may be to require executives to hold a certain amount of the shares they're given. That total "substantially exceeded" the amount of stock that the group owned at the beginning of the period, so, as the title of the paper implies, despite being paid a significant amount in equity, these executives cashed in as shareholders were wiped out. The research team found that between 20, the executives at Bear and Lehman were able to pocket a total of $2.4 billion in cash bonuses and stock sales.
In their paper " The Wages of Failure," Harvard's Lucian Bebchuk, Alma Cohen, and Holger Spamann point out that though the commonly held view suggests that "the wealth of the two companies' top executives was largely wiped out with their firms," the truth is quite different.
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This could be seen as a shareholder-friendly shift - if executives have more skin in the game, the argument goes, they'll make decisions that will benefit all shareholders.īut consider the case of Bear Stearns and Lehman Brothers. After 2000, the proportion had risen to above 60%.
In the 1980s, CEO compensation was roughly 26% in stock and options. Share-based pay has had a meteoric rise over recent decades. Problem solved? Unfortunately, not really. So increasingly, boards of directors are requiring executives to retain a minimum number of shares. But that doesn't work if the executives turn around and sell those shares. Paying executives in stock and options has long been seen as a way to align the interests of executives and shareholders.