Insider ownership is great, insider control is less so.

As an investor, one feels comfortable when founders/executives have a significant portion of their net-worth in their company’s stock. This is because it indicates that they believe in the company’s future success. This also ensures that their interests are aligned with those of minority stakeholders. Indeed, the fact that Mr. Howard Marks’ income was entirely from his stock holding in Oaktree Capital Management was a source of comfort for me when I invested in the company.

However, in some companies (generally tech companies, and nowadays in other newly listed companies) founders are not only personally invested, but they control the company through controlling stakes, or shares with supervoting rights. This has its positives. Firms with such ownership can take a longer-term view and not succumb to the short-term performance pressures exerted by the capital markets, which tend to have shorter investment horizons than those required by businesses investing for the long term. However, total control is a double edged sword and can also be dangerous. This is because when one/few individual(s) has complete control over a company they cannot be held accountable. Thus, their decisions receive less scrutiny and less challenge. Furthermore, the controlling shareholders could act to serve their personal interest at the expense of minority shareholders. For example, they could engage in related party transactions that may destroy value, or even sell the company at low valuations, whilst securing a better deal for themselves. The latter may well have occurred in Oaktree’s sale to Brookfield, in which I feel that minority investors received less than intrinsic value, while the management team will be bought out over a longer time period, and appears to have a potentially more favourable deal. It was frustrating to have trusted the alignment of my interests with Mr. Marks’, only to realise that super voting shares meant interests were not completely aligned after all.

My conclusion is that controlling founder ownership by visionary entrepreneurs is often a positive attribute of an investment. However, we must be keenly aware of the risks as interests are not completely aligned.