AngeBlog by Basil Peters

Director Investment

Every director must make a meaningful investment in the company. The objective evidence supporting this is irrefutable. Just a few references are highlighted below:

University of Colorado study

Sanjai Bhagat, a professor of finance at the University of Colorado, analyzed the correlation between outside director share ownership and increases in company operating income.

His study, reported in Barrons on August 2, 1999, shows that "every 1% increase in the share ownership of the average outside directors corresponds with a 1.52% rise in operating income."

He concludes: "The more stock directors hold, the better the performance on average."

His study shows the sales growth of companies where directors have 'big stakes' is double the growth rate of companies where they have 'small stakes'.

National Venture Capital Association

In a public letter to the US SEC, on December 2, 2002 the NVCA stated:

 "The value of large shareholders as directors has been repeatedly demonstrated. Certainly the latest evidence shows that the presence of directors with large shareholdings correlates strongly with corporate performance and shareholder value."

Hambrick at Penn State SMEAL College of Business

Hambrick co-authored a study on the topic, "Outside Directors With a Stake: The Linchpin in Improving Governance," that appeared in California Management Review (Summer 2000).

He states on the SMEAL College of Business website :

"Giving directors an equity stake is not nearly as effective as if the directors have to reach in their own pockets and place some of their own cash on the line. Common sense and research by psychologists tell us that people tend to be more cavalier with 'found money' than with money they have worked hard to obtain."

[Please send me links to any similar references you've found valuable. Thanks very much, Basil]