Public Company Management Teams & Boards Should Put Their Money Where Their Mouth Is
Here is a question to ask yourself as you perform due diligence on public companies as a passive investor: Have the CEO or any Board members purchased stock on the open market? Doing so is a different animal than equity-based compensation.
For a CEO or Board member to take a portion of his/her earnings and invest it directly in the company that employs them speaks volumes. On the M&A side I would take a similar approach with private company CEOs. I like founder CEOs who reinvest profits into the business as opposed to paying themselves fat dividends and underinvesting in the business.
On the public company side, stock buybacks do not count as reinvesting in the business. Share repurchases provide a quick exit to short-term holders while building a floor under a company’s equity value (including equity compensation) at the expense of robbing internal operations of investment that may pay handsome dividends in the future.
If a company wants to make a statement in the form of purchasing its stock, it ought to acquire all outstanding shares and take the company private if management believes its enterprise value is hopelessly undervalued.
CEOs that acquire a meaningful amount of shares in the open market relative to his/her compensation have more at stake and therefore are more driven than hired “manager”-type CEOs who simply collect a check.