CEO Ownership, Corporate Governance, and Company Performance
MAY 10, 2019
Ownership structure is perhaps among the most significant corporate governance factors, as it determines the balance of power within a corporation and can directly affect governance practices and company behavior. In our review of CEO ownership, we focus on corporate governance characteristics of companies with CEO ownership concentration, and we examine the effect of CEO ownership on company performance.
- 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.