Firms benefit from CEO’s long-term stock holdings

Firms whose CEO holds significant shares in their company outperform firms whose CEO is not similarly incentivised, according to London Business School’s Alex Edmans.

The Professor of Finance shared the finding during a panel on executive pay at the Financial Times’ Moral Money Summit Europe. He said the trend towards pay awards in the form of stock was broadly positive.

“If the stock were stock that you could sell in one year’s time, then you would push up the short term stock price,” he said.

“But increasingly these stock holding periods have been rising, because the new Corporate Governance Code recommends this extends from three years to five years as a minimum. There are many executives who are required to continue to hold stock in their companies even after their departure, which is important so their horizon extends beyond their tenure.”

“There’s some very nice evidence showing that companies with highly incentivised CEOs, who hold lots of stock in their company, outperform those with little stock by four to 10% per year. And there’s further tests to suggest this is causation, not correlation.”

Professor Edmans was joined by fellow panellists Tina Mavraki, Managing Director, Ingenios; Alexander Pepper, Emeritus Professor of Management Practice in the Department Management, The London School of Economics and Political Science; Ian Burger, Chair of the Board, International Corporate Governance Network (ICGN) and FT contributor and moderator Sarah Murray.

Asked to comment on the relationship between executive pay and sustainability, Professor Edmans said awarding CEOs long-term stock improved performance on sustainability metrics.

“If I know that my wealth is going to depend on the performance of the company in seven years’ time, I do have an incentive to invest in my workers, to invest in reducing my carbon footprint, to invest in my customers and so on.

“When you give … CEOs stock, when you make them buy stock, they become a co-owner of a business who’s there for the journey with investors and other stakeholders.”