Size Matters - Insider Ownership impact on Japanese Stocks

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Higher ownership by management removes socialist salaryman thinking

Is it any surprise that companies tend to perform better when board members (insiders) have a higher proportion of their remuneration linked to stock performance? Shareholders have traditionally been well down the list of priorities of Japanese companies, much to the chagrin of foreign investors. Stock incentives, especially in larger corporations, are often a miniscule part of total compensation for leaders. So much so that there is little incentive to focus on chasing real returns through more aggressive strategy. Many leaders in Japan would prefer to see out their tenure as CEO without blemish or scandal to avoid the risk of failure and the shame it would inevitably bring. 

In hindsight looking at Sharp’s (6753) desperate long term need for crisis management could we have honestly expected any substantial restructuring when the CEO has $33,000 in stock despite being at the company 36 years? Had Sharp’s board held more skin in the game they might have defended shareholders much better against Terry Gou’s constant renegotiations. Perhaps if Sharp had learnt from Carlos Ghosn style performance based compensation structures, they might have been able to defend their turf from Gou. As it stands now Sharp are mere whipping boys of Hon Hai and they’ll be dealt the wrong end of the Tarot cards and have no power to prevent it.

It also begs the question - do we really even need the rigid adoption of a Corporate Governance Code that encourages a minimum of two independent directors when the real way to drive shareholder returns (as we will discover) seems to be to dangle the carrot of stock options and higher insider ownership to achieve these targets? We have argued that Toshiba having a majority of independent directors will do virtually nothing to resurrect fortunes.

While there is no exact science around the right number what we can deduce is that on 1, 5 and 10 year time frames insider ownership under 1% shows consistently poorer returns than those above. The data speak for themselves. 

To those that worry about boards recklessly chasing short term targets there is no reason to suggest that long term targets are pushed by remuneration committees with clawbacks on failure.

Insiders seem to have a large bearing on share price performance, clearly providing a platform of engagement with the company’s fortunes and seemingly much more effective than just hiring two independent directors.

Enjoy the weekend.

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