23 October 2019

Shareholding staff, an oxymoron

Every now and then we like to twist the neck of that most fashionable idea that shareholding staff is the future, as the romantic result of “aligned” stakeholders.

In the AlphaValue coverage universe, one can spot 34 stocks with at least 2% of the shares held by staff/employee/top management. Defining “staff” is unchartered territory starting with Bouygues’ whopping 25% ownership by its employees, a proportion which should be read as dominated by senior managers whose concept of alignment may not be that of the odd guy pouring concrete.

Putting together these 34 firms and adding the employees’ stockholdings would end up in a virtual c. €35bn fund with unattractive features that should trigger the attention of alignment of interests theoreticians.

One consistent observation is that employee ownership is a French singularity with 25 issuers wearing that flag out of the 34 “employee friendly” firms. This is about 25% of the current French coverage of AlphaValue, where the four British firms' part of that ownership profile would account for less than 4% of the British corporate universe. This French twist is partly taxed explained and thus a matter of subsidy as individual French investors are as risk-averse to direct equity as anywhere else.

Are these firms with “aligned” staff performing any better? This is less than clear. A spot reading of the aggregate universe shows that they are not great businesses with a combined balance sheet quality below the average in rating terms and an operating performance that is beyond par (F. Strength in table below). In brutal terms, employees invest in lesser quality opportunities or, cynically put, double up their risks (as staff and shareholders are exposed to the same asset base).

At least amongst the French universe of partly staffed-owned businesses, it is not inconsistent to spot below-average businesses. Staff has been asked to man the fort when such underperforming businesses were about to be taken over precisely because they were not delivering (Eiffage, Bouygues, Nexans, Vallourec …). Staff shareholding has then been used as protection.

This unpleasant observation is at the opposite of the well-intended talk that shareholding employees see the point of the shared effort, take a long-term view and will be happy to share magnified value. The reality is that they have been sometimes corralled in to help in less glorious designs such as providing protection to underperforming managers.

The vexed issue is whether such a universe eventually pays off invested staff. Here again it is not clear because it is highly dependent on the weightings used for tracking this performance.

If one assumes a universe where the 34 stocks are unweighted, exposing oneself to those stocks with a fair proportion of shareholding staff did pay off between 2014 and spring 2018 (see next 5-year relative chart). Then things soured, a bit.

Staff “owned” firms did relatively well (unweighted) - 5 years

A rather different result is derived from measuring performance with a weighting according to the value of the staff’s actual holdings (see chart and table below). This would be a portfolio dominated by Vinci (good pick and thanks to the negative rates for raising the value of its concession assets, a feat not owed to staff alignment), Total (say thanks to Brent swings), Bouygues, Axa, etc.

All perplexing thoughts indeed but with the overall conclusion that one remains hard-pressed to see value in stocks partly owned by staff.

Staff “owned” firms did not do well (weighted) – 5 years