Why Director Holdings Matter

The job of a CEO is to work for shareholders to create shareholder value. Or so that is how it’s supposed to be. The real job of a CEO is to promote the company and sell shares. This is especially true of many AIM listed companies that are not self-sustaining and rely on equity placings to keep the lights on and the salary coming in.

Replace the word “CEO” with “sales person” and very often this will not change the meaning. We should always be careful of anything the CEO, or any director, says, because they will tell us what we want to hear.

Check how much stock they own

Directors will love to tell us how they are ‘aligned’ with us. However, very often when we drill down what they say is very often completely different to what they are actually are. A good example recently was a CFO animatedly telling how he was very aligned with shareholders because he’d taken ￡20,000 in the recent placing.

I asked him his annual salary, and asked him what this was after tax. As it turned out, this was just over two months’ work! The smile soon left his face when I told him this.

Another trick they like to try is to tell us they are ‘incentivised’. Management often likes to give themselves nil-cost options (free money at the expense of shareholders). They say this is to protect other companies from poaching the directors, but that doesn’t explain why the remuneration committee (often ran by the same directors who decide their own pay) does not at least tie these options to performance.

Empire building

One problem that arises for shareholders when management are not aligned is that the directors are keen to build up their own empires whatever the cost. Acquisitions are considered not on their value accretive merit but on their impact on director egos.

Another problem on AIM is that acquisitions do not have to be put before shareholders. This means that directors can make grandiose plans and act on them without needing General Meeting approval. Directors who did not buy stock with their own hard-earned cash will not be aligned with shareholders when it comes to doing what is best for long term shareholder value creation.

Check where those shareholdings came from

Sometimes directors can own a lot of stock, and be the largest shareholder in a company, but that doesn’t mean they necessarily paid for it. Someone could create a company in their own garage, list it on AIM a few years later, and very quickly become a multi-millionaire without putting a lot of their own capital in.

Their focus can then turn to promotion of the stock rather than progress, because they need retail appetite to support the stock as they still need to cash out!

CEOs that rapidly become wealthy can sometimes lose that motivation to become a success once they’ve cashed out a cool few figures. It’s always worth checking if that is true of the director in question.  

Entrepreneurial management

Management who do own stock and want to get rich by maximising shareholder value, rather than maximising their salaries they take from the company, are management worth researching and investigating. Always check director remuneration and director shareholdings, and ask yourself: are the directors working for themselves or is the company a vehicle to fund their lifestyle? There are no hard rules on this but you should be able to make up your own mind when looking at the facts. 

Michael Taylor is a full time UK stock trader, author, and founder of www.shiftingshares.com - a free educational website covering the UK stock market.

This piece originally appeared on https://www.valuethemarkets.com/2019/06/25/the-shifting-shares-view-why-director-holdings-matter/