Corporate boards are vital in helping companies maintain a longer-term focus while executing on shorter-term priorities. The board's position atop the organization gives directors a wide perspective on a company’s current path, and allows them to shape its future by influencing purpose, culture, and direction.
In The Long-term Habits of a Highly Effective Corporate Board, FCLTGlobal identified a number of steps directors can take to maximize their impact on the companies they oversee, one of which involves aligning directors’ interests with those of the company. Translating this intent into action means having directors accumulate, and lock up, company stock. Doing so helps bind the individual portfolios of board members to the fate of the companies they serve, providing greater incentive to focus on long-term strategic choices and adopting a true ownership mentality.
Since releasing our original paper, FCLTGlobal has uncovered further evidence linking director stock ownership to long-term value creation and firm outperformance. It comes from the UK, one of the rare locales that provides a rich record of director stock purchases.
As illustrated in the chart below, companies where directors collectively purchased more than £900,000 worth of stock over a 5-year span outperformed their peers on the FTSE 350 by 3% in terms of return on invested capital (ROIC). Larger stock purchases were linked to even bigger gains, with directors who purchase upwards of £1.8M in stock overseeing companies that outperform companies with low board stock purchases by 36%.
The numbers also show that:
- 94% of the FTSE 350 had at least one director buy company shares between 2008 and 2018. This dwarfs the amount of companies (17%) that awarded or granted shares to at least one director.
- The total amount of stock purchased by board directors was £1.1B during this timeframe.
- In terms of buying and holding, of the over 10,000 director deals between 2008-2018, 73% were buys and 6% sells.
Practically speaking, the evidence supports that a policy of stock ownership by board directors would benefit companies over the long term. The above results suggest that if each director invested somewhere between £150k-£550k of their own wealth in company shares it would maximize the likelihood of strong ROIC in the years ahead. (To reduce financial burden on individual directors, companies could allow directors to accumulate the required minimum over a period of years as a fixed percentage or multiple of their annual remuneration.)
Note, too, that the size of the investment seems to matter—many behavioral theorists contend that it is the act of directors investing in their own company that drives long-term performance. At least in the UK, the amount directors invest is important, and it seems like there is indeed a certain amount of “skin in the game” required to perform at a high level compared to industry peers.
Boards of directors hold considerable influence over a company’s long-term planning. There are many ways for them to apply this influence – instilling long-term strategies, actively engaging with shareholders, or recruiting a diverse roster of directors. Purchasing the company’s stock on the open market can accomplish this, too, with the added value of reaffirming their commitment to the company’s long-term objectives. According to the data, such an approach holds real value over the long term as well.
To learn more about building long-term oriented habits among companies’ boards of directors, read FCLTGlobal’s recent report on the topic: The Long-term Habits of a Highly Effective Corporate Board.
 For the purposes of this study, “director purchases” were those where purchases were made directly in the open market, as opposed to shares granted by the company as part of director’s compensation or other corporate purchase program