“Having some skin in the game” describes directors having large chunks of the shares in their quoted company. A survey of the FTSE 100 suggests that this may not guarantee outperformance over the short term.
Banc De Binary, an options specialist, analysed the performance of shares in the ten FTSE 100 companies with the highest level of boardroom share- holdings and those with the lowest. The latter significantly outperformed the former over the past year.
Investors are encouraged by companies whose boards have a large stake, but the study suggests that this may not always prove successful. Shares in the ten with the biggest holdings rose by an average of 1 per cent over the past year, against a 6 per cent rise in the index. Those where directors were less inclined to self-invest were ahead on average by 20 per cent.
There are some complicating factors. Among the poor performers are a number in the natural resources sector, which has been affected by depressed commodities prices.
“The thinking traditionally has been that directors will be less likely to take reckless decisions if they have significant holdings in their own company’s shares,” Oren Laurent, the founder of Banc De Binary. “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.”
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However, on a five-year view, those companies with a heavy boardroom investment base significantly outperformed the second group, doing twice as well. Natural resources companies did well, as the Chinese economic boom drew in those same commodities and sent their prices rocketing. Meanwhile, the underperformers include BP, which was hit by the disaster in the Gulf of Mexico, and Lloyds Banking Group, hit by the banking crisis.
There is an alternative explanation. When markets have performed well, as over the past year, companies where the boards have plenty of skin in the game, and may be unwilling to risk their own capital by taking bold moves, will have underperformed those keener to take chances. Over a longer period, though, such caution may have served them well in more difficult markets.