Skin in the Game
What does it mean? A newly resurrected term from Warren Buffett refers to executives using their own money to personally purchase and hold large stakes stock in the company they run. Executive staff members can talk all they want about confidence in their future prospects and platforms, but the best vote of leadership is putting their a percentage of their net worth on the line just like their investors!
CEO, BODs, officers “direct” share ownership should be a factor of significance, but should not be confused with option or grant holdings. I have in quarterly reporting been breaking out management holdings as a percentage of fully diluted figures believing this figure resonates in the execution of management strategies and losses going forward. Base salaries are still considered high in a review of depreciated share pricing and increasing losses but, I have noticed “some” reductions in executive comp. Might deferments or cuts in percentage of compensation define their commitment to sustainability?
A few examples include; one CEO invested $800k in his company loaning the money from his own account; he even amended his “Note(s)” to increase the amounts available and then pushed-out their maturity date to keep “his” investment moving forward in these difficult times (note: I once “covered” this company but haven’t for a year). Another executive has directly purchased and participated in multiple preferred share financings to the amount of almost $3M. While one CEO deferred his “contract” compensation (taking only $5K per month) to affect a turnaround; a noted financier personally validated his commitment from his own checkbook with other investors.
In this market, management teams and BODs (with a percentage of net worth invested) that “think and act” like owners will be more aligned with shareholders. Also, if management teams have significant downside risk; their investment could ensure G&A and burn-rate discipline. Investors want more confidence in believing BOD’s and CEO’s commitment that shares the investment upside and downside. Measureable stakes could validate the success of future prospects and sustainability.
