SKIN IN THE GAME
You’ve probably heard that the Twitter Board of Directors hasn’t taken too kindly to Elon Musk’s takeover approach. Having spurned his initial offer and, subsequently, taking drastic action to prevent further approaches, the board was consistently a thorn in Musk’s side until his $44 billion deal to acquire Twitter was struck. However, love him or loathe him, Musk does raise a valid observation regarding how effective a board can be in representing shareholders if their economic interests do not align.
“Good boards don’t create good companies, but a bad board will kill a company every time.”
Fred Destin, Venture Capitalist
A seat on the board comes with a great deal of responsibility. Elected to protect shareholder interests, decisions the board make can have a significant outcome on the direction of the company and, consequently, stock price. If the board has no skin in the game and doesn’t own any/a meaningful amount of stock, how can they represent shareholders when they themselves, are not shareholders. Shareholders, and the company, should not be subject to the whims of the board when they have nothing to lose. The board should incur responsibility for their decisions.
Generally, larger publicly traded companies require executives to own significant stock throughout their tenure. Ownership guidelines are considered an essential aspect of good governance. Boards should be held to the same standard. Without strong incentives, non-executive directors will not become involved in corporate governance.
Research has demonstrated that by aligning directors’ interests with the company and, thus shareholders, they can maximize their impact of the companies they oversee. Economic incentives are seen to be very effective so directors should make it a priority to accumulate company stock. By doing so, the board’s portfolios are intertwined with the future of the company they serve. By them owning stock means directors adopt an ownership mentality and are provided with greater economic incentive to make long term decisions.
When the world’s richest man goes to war with the board of one of the world’s most famous companies people are going to pay attention. Establishing share ownership guidelines for the board is not a requirement but seen as an indicator of good corporate governance. The most important thing is to find directors who look out for shareholder interests. The strongest objective signal of this is their ownership of a significant long-term stake in the company.
