Holding Stock And The Reins
Ever since the publication of the pathbreaking The Modern Corporation and Private Property in 1932, economists have bemoaned the separation of ownership from control of U.S. businesses. Authors Adolf A. Berle Jr. and Gardiner C. Means warned that corporate stock ownership had become so dispersed that control had passed into the hands of managers with little stakes in their companies and with private interests that often clashed with those of shareholders--and the economy.
Today, this issue is a primary concern of corporate governance experts. Particularly in recent years, they--and a growing number of shareholder groups--have been seeking ways to foster managerial ownership and to reinforce other mechanisms to hold management's feet to the fire.
But is overall managerial ownership really low, and has it actually declined over time? Not according to Clifford G. Holderness of Boston College, Randall S. Kroszner of the University of Chicago, and Dennis P. Sheehan of Pennsylvania State University.
Writing in the Journal of Finance, the researchers report that from 1935 to 1995, the ownership stakes of directors and senior officers of publicly traded U.S. companies rose sharply from an average 12.9% of their company's stock to 21.1%. And the average value of their combined holdings soared from $17.9 million (1995 dollars) to $73 million.
An intriguing question is what lies behind this rise in ownership stakes. One theory is that greater insider ownership has replaced other policies and economic trends that forced managers to focus on shareholder interests. In fact, the researchers note, such mechanisms appear stronger than ever. Performance-based pay, for example, is more common today, and corporate boards appear at least as vigilant. And com- petitive pressures and takeover threats are keeping managers on their toes.
What may be enhancing the trend toward managerial ownership is a significant decline in stock market volatility. With financial innovations helping to reduce volatility and the costs of hedging risk, the authors speculate that insiders have become more willing to hold larger stakes in their companies.
A key issue the study doesn't tackle directly is the possibility that rising managerial ownership could have negative effects. Indeed, past research focusing on the 1980s found that corporate performance tends to decline once the top brass' equity holdings rise above 5% (although it tends to improve as ownership increases from 0% to 5%). Presumably, many managers with hefty equity stakes in their companies begin to feel that they can pursue their private interests with relative impunity.
Interestingly, while the current study also found a positive effect on company performance as ownership approached 5%, it found no significant impact--negative or positive--of insider ownership above that level. So it may well be that the increase in other corporate control mechanisms in recent years is keeping many stock-rich managers in line.