The Advisors' Blog

– Liz Dunshee

Even as CEOs are paid millions of dollars in stock awards each year, the majority of Russell 3000 CEOs control less than 1 percent of the companies they work for, and only 2 percent have a controlling stake. That’s according to recent research by ISS Analytics, which also points out that there are some notable exceptions to this rule. The analysis considers the impact of CEO ownership structure on corporate governance – and company performance.

This blog summarizes the key findings on this subject. Here’s an excerpt (and for more work from ISS Analytics, check out Mike Melbinger’s recent blog about the seven incentive plan features & seven executive pay practices that John Roe has classified as “Sinful”…):

– We draw a distinction between CEO ownership concentration in terms of voting power and CEO ownership in terms of a dollar value in the company’s stock. Significant ownership in value does not necessitate significant voting power.

– CEO voting power concentration is more common at smaller firms, while CEO ownership value at large firms is much higher despite lower voting power.

– Controlling for size, we find that higher levels of CEO voting power concentration correlate with several negative governance indicators, including dual class share structures, diminished board leadership independence, classified boards, lower levels of gender diversity in the boardroom and in the C-Suite, and lower levels of board refreshment.

– CEOs with significant voting power at their firms do not necessarily lead to superior economic performance. However, high levels of CEO economic ownership appear to directly correlate with better company performance. The desired effect of interest alignment between executives and shareholders is thus achieved via economic ownership but without the need for significant control by the executive team.