This is not investment advice. Do your research before taking a position in securities mentioned in the post below.
Overview of why better incentives don't always equal better returns
Academics and consultants write about the relationship between management incentives all the time. The below article is not meant to be such a study.
Today, I wanted to show that founder-led businesses or businesses with a lot of “insider buying” do not necessarily outperform. Whilst I agree that management ownership is worth considering, below is an example of two businesses; where arguably the one with a better incentive structure has underperformed
The two companies shown below are not the Best vs. Worst for Exec Pay & Governance but rather companies that are on my watchlist and have very different management incentive structures.
Practical comparison of two different ASX companies
NTD - Backing data on performance & incentives
Firstly – share performance shows that although NTD has had a good run from 2020-21... it has underperformed ALS (shown below)
That in itself is not very interesting, what is interesting is that NTD amped P&L in 2021 despite having large shareholdings and a longer-term incentive structure
NTD's historical performance - note the NPAT has been static for 5yrs before peaking & cash conversion has not been great.
NTD's recent earning miss - note NPATA is materially lower than 2021
This result happened despite strong insider ownership
Note
The CEO has 2.7M shares/350,000 options and the second Executive Director has over 27M shares.
The Chair of the Audit Committee and Chair of the Rem Committee are both Independent and own 280,000 and 403,000 respectively
ALS - Backing data on performance & incentives
Conversely, ALS has actually continued to push margin growth and strong conversion of earnings to operating cash flow
ALS' Performance - Growing Margins & payout c.40% of Op CF as dividends
ALS' Ownership - Management have 5yr tenure & yet shares are <1yrs of salary
ALS' EBITDA margin actually ranks 2nd highest in their sector
Conclusion: Although management's rem/ownership does not in isolation makes either company a BUY (e.g. I consider ALS Limited to be trading historical highs), it is clear that stock ownership does not necessarily equate to long-term management styles. In fact, there are other factors such as:
The relative strength of the market position (e.g. ALS is a global leader)
The ability of a profitable company to apply operational and financial leverage (e.g. ALS can grow margins whilst NTD generally achieved 6% EBIT margins)
Maturity of business (of course - it is easier for bigger businesses than small ones)
Always consider management incentives a good item for the checklist when investing but never a guarantee of good returns.
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