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Skin in the Game: Why Directors’ Shareholdings Matter

03 June 2018  |  Oliver Schutzmann, CEO

An intriguing headline appeared in the UK business news last week: “BT Finance Chief Criticised for Tiny Stake in Company”. The story behind the headline contains an important lesson for board directors and senior management, and touches on the important role played by perception in investment decisions.

The facts are these:

  • Simon Lowth, Finance Director of BT, has been criticised for acquiring a total of £22,000 in BT stock since he took the role two years ago.
  • Directors of BT are required by the company to build a stake equivalent to 250% of annual salary over time.
  • Lowth, who was previously head of finance at the oil and gas explorer BG, has put just 3% of his £717,500 pay packet into BT shares since July 2016.
  • In a research note, broker Berenberg stated that “This remains a barrier to investment and many investors have said to us that they will not go long on BT until they see more insider buying from [Lowth]”. This comment appeared in an otherwise positive note on the company in which the broker repeated its “Buy” recommendation on the stock.
  • Defending Lowth against this accusation, BT pointed out that Lowth is a relatively new joiner (he joined the group in 2016) and has yet to collect any shares from his bonus scheme. 

What is going on here? Why do investors care about directors’ holdings? And why is Lowth being singled out for criticism? 

The answer is all about optics and investor perception. When asset managers buy a stock, they are making a decision for which their clients pay them well. Clients put their trust in their asset managers, and asset managers put their trust in the invested company. This circle of trust is a crucial dynamic in the ongoing relationship of investor, asset manager, and invested company.

So when one element of that circle of trust is questioned, the whole relationship network is damaged. In this instance, if the CFO is not prepared to risk his own capital in the company, why should investors? If the investor case is so strong, why is the CFO not putting his money where his mouth is? And if he isn’t, what does he know that investors do not? And is it appropriate that the CFO’s shareholding should come primarily from awarded (and therefore risk-free) shares?

This case provides an important lesson for IR professionals: In addition to the cold, rational, and financial reasons for investment decisions, an equally important role is played by a more emotional set of values. Empathy, Trust, and Likeableness are just as important in forming investors’ judgements as are EBITDA, balance sheet and dividend policy.

In the case of BT, investors perceive a lack of empathy from a senior director. If the management feels it is not important to invest, then we should perhaps take that as a cue to adapt our own behaviour and sell the stock, they say. If management feels it is appropriate to cite bonus shares at zero risk as a sign of management conviction, perhaps investors should display the same zero risk appetite and shift their attentions to a firm whose management really does have skin in the game.

Either way, IR professionals need to bear this in mind at every stage. When management succeeds in inspiring empathy, in being seen to be trustworthy and likeable, then investors have a barrier to investment removed. When management is perceived to be self-serving and lacking empathy for shareholders, a major impediment to positive perception is created. Investors, Directors and senior management are the living embodiment of their firms, and how they behave has a direct influence on investor perception.

Director dealings need to be managed just as carefully as any other signal to the markets: get it wrong, and as BT is learning, the company’s reputation will suffer. Getting it right, and displaying empathy and emotional connection to your shareholders can be worth its weight in gold. This is the conversation that IR teams need to be having with Boards and Excos. For directors of listed companies, personal wealth is a public matter.