Insider Ownership helps... or does it?

One of my hypotheses for buying Seaboard SEB and Columbia Sportswear COLM was that a very high insider ownership (about 70% for each of them) would provide the following attractive investment features:

• a strong incentive for management to align its interests with the minority shareholders
• a limit to the downside of the share price during general market downturns as insiders tend to hold on to their shares when they are considered cheap and sell them when they are expensive (or they really need the money)

These advantages are offset by the potential for a complacent management that doesn't have to worry about activist shareholders stirring things up. When a company outgrows the skills and experience of the founders that are reluctant to give up control of the company, that bodes poorly for the business' prospects. The other downside is a legacy curse: rampant nepotism in family owned companies often leads to bad governance as children or grandchildren of the founders do not possess the gifts to lead a company forward, yet they maintain control. Wrigley was a prime example of this issue you need to watch for.

SEB has mostly tracked the major indices pretty well-- particularly since Dec '08. It's price action doesn't support my hypothesis very well. On the other hand, COLM has definitely outperformed the markets. These are both family businesses that I believe are well run. I do wish SEB's executives were a bit more forthcoming with information, though. This is probably one of the main reasons it has been sidelined by Wall St.

Obviously looking at just 2 companies with a high degree of insider ownership over the short term is not even close to conclusive. I was impressed how well their stock prices held up compared to the rest of my portfolio and that's why I decided to look into it further.

Read this interesting and thought provoking study from Oxford that shows 9% excess returns v.s. the S&P 500 for firms where the CEO owns 10% of the outstanding shares or greater. This may indicate that choosing selected stocks with high insider ownership may also increase the upside potential in addition to limiting the downside.

IMHO, it's one of many important factors to consider when you're doing your research.

l