Saturday, August 26, 2006

Insider Ownership & Long Management Tenure

When management and insiders have significant economic ownership and management has longer tenure ... (see illustration, left).

I recently recieved one of those ubiquitous The Motley Fool ads in my hotmail box recently, and I found the message they conveyed worth contemplating ...

10-Bagger Tenures
By Tim Hanson (TMF Mmbop)

More than 700 CEOs have already resigned this year, putting 2006 well ahead of pace to break the record (set in 2005) of 1,322 CEO exits in one year. That statistic, published in Fortune, should be worrisome for investors. Why? Because companies that do not have steady leadership at the top get lapped by companies who do.

Seriously. It's true ...
Need evidence? I found that of the 100 top-performing small caps from 1996 to 2005, 84 of them had either a founder at the helm or a CEO with more than five years of experience at the company -- far greater than the market average.

And the trend continues across the best-performing stocks of any size. Fully 164 of the 308 stocks that returned more than 20% annually, from June 1996 through June 2006, continue to have insider ownership of more than 5% today. That's 53% frequency. Now let's compare that to the broader market. According to Capital IQ, there are 21,959 companies trading on U.S. exchanges. Of that enormous number, just 3,550 have insider ownership of 5% or more -- a measly 16%.

Clearly, then, there's correlation between long-term shareholder rewards and insider commitment to the company they're running.
While I sometimes find the frequency of these ads irritating, it's worth thinking about this.

In fact, this is one of the things that I look at, when I analyze a stock in my small and microcap blog: a consideration of insider ownership. Perhaps I'll start considering the tenure of the CEO hereafter too ...


The Confused Capitalist

1 comment:

AJ said...

I was watching CNBC last week and they had someone on (can't remember) who said there is a correlation between the CEO buying a big yacht and company performance.. The researcher had said he look at a few hundred CEOs. Of course then they went on to give examples of it not being be true rather than giving any actual statistics or data. Very annoying.