It is Good for a Corporation if the Board Members Own Stock

The major role of a firm’s board of directors is effectively devising the company’s business strategy, policy and plan. They, in a big way, determine the success of a firm, hence the stock value.

Introduction

The Board of Directors works to see to it that the share holders get profit from the shares they hold in that firm. Therefore, being in such a position to influence the value of a company’s shares, it would be profitable and advantageous for a firm if the top management owned the majority shares because, as such, they will fight tooth and nail to see their value go up. They would never leave anything to chance.

The main responsibility of the board of directors is protecting the shareholders’ assets and ensuring they receive a decent return for their investment. It is usually not a great concern when a company’s management owns the majority stock. This is because, the more the management invests in its own stock, the greater part and dedication they have in the company’s success. It may be a problem only when the shares available for trading in the market are so small, such that the stock’s liquidity is an issue. Thin stocks tend to be avoided by institutional investors. It is more preferable to target stocks with an average daily volume of 200000 or more shares.

It is advisable for a firm’s board of directors to own the firm’s stock. This because they will work hard enough to improve the value of the stock especially when they have a large stock. A company with the capability of buying back its shares of provides advantages to its investors.For one, shares get raised by buybacks because when a company lowers its inventory of stock in the open market, earnings get divided between fewer shares. Still higher EPS, at least theoretically, usually means a higher stock price.

What’s more, excess cash get used up by buybacks, which, indeed, can be much of a good thing, if it is weighing down overall firm performance or sticking a bulls-eye on the firm’s back in takeover target.

Conclusion

It is clear that it works positively for a firm when the top management owns the majority shares. Such a company has a greater chance of succeeding because the management use everything in their exposure to see the value of their investment go up.