How comfortable are you with your choice of ASX shares and their performance? There is one popular test of a company's prospects that is considered very reliable. It is known as 'skin in the game'.
Ask whether the directors and other senior managers of your chosen company have invested in its future and actually own shares in the entity they are managing.
The answer can give private investors a feeling of confidence and comfort in the share they have selected – but when it comes to share performance, is the benefit of having 'skin in the game' just a myth, or magic?
Managers who buy shares are motivated, but…
It is certainly true that most managers who take up shares in their own company have a focus on the wellbeing of their shareholders. And while this objective does occupy a prominent place in their minds, it is not their sole motivator.
Other issues, like achieving high performance from your employees, nurturing and increasing customer numbers and lifting your brand's standing in the marketplace contribute equally to a stronger share price.
It is the combination of these and more actions that help strong managers achieve successes for their investors.
Influential shareholders can have their own agendas
It is tempting to believe that the founder of a company or a dominant shareholder would share the motives of a private shareholder, but this is not necessarily always true.
A major shareholder can sometimes have their own agendas around company strategy, and these are not necessarily in line with the individual shareholder, who is simply looking for improved performance.
One classic example is when a corporation's founder decides to list 2 different types of share – voting and non-voting. This is an approach that allows the founder to pursue their own interests, which may be in conflict with shareholder interests.
From observation, major shareholders who choose to allow professional managers to make key strategic decisions seem to achieve significantly better outcomes for their investors.
Is the idea of 'skin in the game' a myth?
In the book Master CEOs: Insights from Australia's Leading CEOs by Matthew Kidman and Alex Feher, of the 13 CEOs interviewed, just 1 listed shareholders as their priority.
Each of these CEOs had been running their company for more than 10 years. Each company had comfortably outstripped share market performance. Some of the CEOs were paid well, some owned a decent number of shares while others owned just a few.
This evidence would seem to suggest that the jury is still out one the issue of 'skin in the game'. It certainly is a positive, but it's definitely not the magic answer that every ASX investor is looking for.
